On October 22, 2016, AT&T Inc. (AT&T), the second-largest U.S. wireless provider, and Time Warner Inc. (Time Warner), one of the world’s largest producers of TV shows and movies and the owner of HBO and CNN, announced an agreement whereby AT&T intends to acquire Time Warner for $85.4 billion. After the announcement, share prices of other media companies, including Discovery Communications Inc. and AMC Networks Inc., rose immediately. While the AT&T / Time Warner deal remains subject to regulatory scrutiny, analysts predict that the potential deal may kick-off of another round of industry consolidation, where more combinations of content and distribution may be observed.

One may wonder what triggers the surging interests in the M&A between content providers and distributors? The most popular explanation is that technology development has changed the way people enjoy media products. Media firms have seen more and more of their younger audience cutting their cable cords and switching to mobile devices. Meanwhile, acquiring content allows distribution companies to diversify their revenue. As summarized by Julius Genachowski, the former U.S. Federal Communications Commission Chairman and a partner at the Carlyle Group, the current M&A trend in media industry “reflect[s] [a] landscape that’s changing dramatically from wired to wireless with big changes in consumption of video particularly among millennials.”

This argument is challenged by Professor Bharat Anand in his recent article published online in the Harvard Business Review. Professor Anand raised an interesting question: if the incentives behind the M&A between content providers and distributors are to gain access to wireless channels for the former and to diversify revenue sources for the latter, why do they not simply enter into contractual agreements rather than strike an expensive merger deal? In other words, what is the real synergy in the merger?

Professor Anand thinks that the value of the merger can be explained by the term complement. Complement is a concept in economics which refers to a product or service that, when cheap and widely available, can benefit the company’s core product. For example, ornaments are a complement to Christmas trees, as cheap ornaments can boost Christmas tree sales. Professor Anand argues that content is an increasingly important component for tech companies, which provides new methods to attract users. For instance, the new video services on Amazon helps bring in more consumers to the online stores. The live videos and instant articles from traditional publishers on Facebook provide users another reason to go on Facebook besides sharing photos with friends.

Professor Anand noted that Amazon is an e-commerce provider and Facebook is a social networking provider and neither is a distributor. Thus, the trend in media industry should not be labeled as “combination of distribution and content”. The bigger picture, or the “real battle” in his own words, is businesses competing on networks and connections, where content is not the core but serves as a critical complement.

Therefore, if content is the king for distributors, as phrased by many analysts, then complement is the emperor for connectors. Investing in the complement by acquiring the content, which is much cheaper than buying the entire media powerhouse, reveals the new trend of M&A in the media industry.

The author would like to thank Jaray Zhao, Articling Student, for her assistance in preparing this legal update.

Stay informed on M&A developments and subscribe to our blog today.