AT&T and the Netflix streaming crack-up

But if you’ve been waiting for a sign from the stock market that the separation would actually be value creating, you’re still waiting. AT&T and the nominal acquirer, Discovery Communications (of which AT&T shareholders will end up owning 70%) have exhibited largely flat stock prices since the still-dragging deal was announced last year.

I was never a believer, seeing the unmerger mainly as a case of corporate governance chaos. Why transfer the Warner caboodle to a modest and ill-suited player like Discovery instead of auctioning its valuable holdings to the likes of Amazon, Apple, Disney, Comcast or others? Unsurprisingly AT&T management has admitted that it grabbed the Discovery deal because it appeared to have the least regulatory risk.

And why break up the marriage at all? Because the stock market hadn’t given the combined company the valuation management had hoped for, though here AT&T seems to have assumed investors infatuated with Netflix and Disney should have unlimited desire to support other entrants in an increasingly crowded market. Investors usually aren’t insane and apparently aren’t about become so now judging by their cool reaction to Discovery CEO David Zaslav’s plan to use Warner Media to throw large sums at a Johnny-come-lately attempt to win the streaming wars.

This is where Friday’s Netflix wipeout is a harbinger, with a 20% drop in the streamer’s share price, worth $44 billion, because investors questioned whether subscriber growth can justify the billions Netflix keeps investing in new content.

In the year just ended, a record 559 scripted series were produced, most of which were not worth watching or did not sustain interest past the first few episodes. Unlimited dollars may exist to produce such shows but not unlimited talent to make them good, or to sustain the number of subscription streaming services competing to be among the likely handful of survivors.

What AT&T could have brought to this scrum is a different approach, not another Netflix wannabe. AT&T is giving up a chance to brand itself permanently with HBO Max while also letting HBO Max remain a premium collection of streaming content, rather than desperately running out a new show every day for fickle streaming customers. Much of the Warner Studio system could then be devoted to milking Netflix and others by selling them shows rather than competing with them.

AT&T insists, even after the sale, it will continue to use HBO Max as an enticement to reduce customer churn in its wireless and broadband businesses. This generates real value—it’s why T-Mobile was quick to say a recent Netflix price increase wouldn’t affect its bundling of Netflix to recruit wireless subscribers. But gone will be any chance of building deep and lasting value from a relationship between AT&T and its soon-to-be-former streaming property.

Oh well, it seems truer than ever that the real reason for unraveling the tie-up was AT&T’s unwillingness to resolve a corporate governance conundrum. It could not make the necessary investments in both its telecom and its Hollywood properties while continuing to pay the large dividend that a certain class of AT&T shareholder had to come to expect. Fifty years of Nobel Prize-winning financial economics provides an answer: So what? Cut the dividend and AT&T will attract new shareholders who value its growth opportunities. But it’s hard also to escape a suspicion that AT&T management recognized that new investors would want new managers for new opportunities, not a bunch of telecom veterans. In short, AT&T is proceeding with its chaotic unmerger so AT&T can go back to being a company that the market will let AT&T’s current leaders keep running.

When the original Warner Media deal was proposed five years ago, it would have broken every precedent if the merger had turned out to be a big winner for shareholders, but neither was it AOL and Time Warner, to which the deal was wrongly compared.

AT&T’s telecom business and Warner’s entertainment business are good businesses, with good futures. They may have only one strategic overlap, but that overlap is genuinely useful to both, to lock in customers and reduce costly churn. The original deal may have been overpriced. Its strategic genius may have been overstated. But AT&T shareholders won’t be freeing themselves from their decision to invest in the Warner assets, they’ll be rolling them into an inferior Discovery opportunity. If either company’s prospects were really improved by this deal, the stock market would have noticed by now.