HBO: Chipping the Crown Jewel?

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.

Given the major challenges of business model clarity and psychological leakage, most bets are currently against WarnerMedia getting anywhere near the iron throne of streaming. WarnerMedia needs some new dragons to suddenly appear.