Time Warner consisted of three divisions before being
acquired by AT&T last year: HBO, Turner Broadcasting and Warner Bros.
Entertainment. HBO was widely regarded as the crown jewel of the company.
Would this jewel be polished and preserved in the hands
of AT&T? Or would it be damaged and diminished?
In Managing
Acquisitions, a classic M&A reference, Haspeslagh and Jemison identified
four styles of integration, one of which was preservation. Preservation should prevail when the target’s culture
must remain intact lest a “buy and crush” dynamic destroy key organizational
elements that made the target attractive. Warren Buffett’s Berkshire Hathaway is
renowned for preserving (and then nurturing) acquisitions.
Even in markets with tight controls demanded by customers
(such as defense contracting) sometimes preservation is the right move. As a
practice Honeywell Aerospace quickly absorbed the people, assets, and systems
of companies it acquired into the corporate parent. But when it discovered a
superb center of excellence in an acquisition, Honeywell realized that it would
be a mistake to dismantle its creative talent and distinctive technology.
Rightly so, Honeywell not only preserved the unit, but nurtured and spread its
capabilities throughout the entire company.
HBO has been an artisanal brewer of entertainment. For
example, Game of Thrones was reportedly cultivated for four years before
launching.
After AT&T completed its acquisition of Time Warner
last year, Jeff Cole argued that HBO is a special asset that should be left
alone to create. See here.
(Cole, a former UCLA colleague, is a media expert highly adept at providing
perspective that informs future market directions. He is now founder and
director of USC’s Center for the Digital Future.)
Last September, AT&T CEO Randal Stephenson provided some
hope for crown jewel preservation by characterizing HBO as “the Tiffany of
media and entertainment.”
But communications about HBO’s future were mixed, as John
Stankey (now head of WarnerMedia) told Richard Plepler (then head of HBO) at an
employee meeting: “I want more hours of engagement.” Although Stankey also
implied additional resources would be made available, the image of an HBO
sweatshop was conjured up in the minds of employees.
With this backdrop, let’s examine a critical dimension that
has characterized HBO in the media over the past few months.
We used Word2Vec to process 1206 articles that appeared
on Dow Jones/Factiva between March 1 and June 15, 2019, in which the word HBO
appeared at least twice. (Word2vec processes raw text and positions words in a
high dimensional vector space where semantically similar words are placed at
nearby points. Factiva is a global news resource with over 32,000 premium
publications.)
Here are some words/bigrams appearing closest to HBO (a
score nearer 1 indicates a word is closer to HBO):
('bob_greenblatt', 0.701),
('david_levy', 0.696),
('kevin_reilly', 0.694),
('resignation', 0.686),
('longtime', 0.684),
('exit', 0.681),
('richard_plepler', 0.677),
('reorganization', 0.675),
('overhaul', 0.651),
('spadaccini', 0.648),
('kevin_tsujihara', 0.627),
('veteran', 0.620),
('stankey', 0.616),
('leave', 0.610),
('departure', 0.607)
The press has been featuring a two-way turnstyle at
HBO.
For example, Richard Plepler, the veteran head of HBO has
exited as has David Levy, a longtime Turner executive. Stankey, an AT&T
lifer, and Bob Greenblatt, an HBO outsider, have entered to run the show. Kevin
Reilly is the new head of content strategy for the streaming service
WarnerMedia plans to launch next year.
Resignation, departure, leave, exit, reorganization and overhaul
are all huddled close to HBO in our vector space.
Not a picture of preservation.
Although final design of WarnerMedia’s streaming offering
is in flux, Greenblatt has stated that the service will consist of some 10,000
hours of curated content, blending classic movies such as Gone with the Wind, the
libraries of Warner Bros Television. original programming, and all of the “great”
HBO programming.
Pricing is a conundrum. WarnedMedia has preliminarily
rationalized a target price of some $17/month, boxed in between Netflix ($13) and
a combined Disney+ and Hulu pricing (7+12= $19).
Apparently there’s not much pricing power in the new
combined offering, given that HBO currently costs $15/month.
Under Time Warner, HBO enjoyed autonomy as it hit revenue
and EBITDA targets and garnered Emmy after Emmy. Under AT&T, the company is
now under pressure to move in the direction of a Netflix-like content firehose.
And Randell Stephenson has dogmatically stated to
investors: “Our discretionary cash flow is going to go to one place. It’s going
to be paying down debt.” (Reduction of some $165B in debt is a challenge. In
April, AT&T sold the Warner-Media headquarters for $2.2B as well as its
stake in Hulu for $1.4B.)
The extent to which HBO will receive a substantial
increase in resources to feed its new firehose is questionable.
To its credit, AT&T intensely studied the shortcomings
of the AOL/Time Warner 2000 merger, widely regarded as the worst deal in
corporate history, to avoid mistakes of the past. Not wanting to repeat AOL’s fiefdom
frustrations as it tried to get divisional silos to cooperate, AT&T
reorganized Time Warner’s media properties.
But in reacting to the AOL debacle, the pendulum has swung
too far. With the departure of Plepler and others, AT&T must now deal not
only with executive exodus, but also the psychological leakage of the talent
that remains.
Although restructuring might have been the
right move for other Time Warner units, the crown jewel should not have been
disturbed so quickly. Far better to have preserved HBO for the time being and
only move to amalgamation after a deeper layer of trust was built.
