When it’s done buying Time Warner, AT&T wants to be like Comcast, only better.
Speaking at the Goldman Sachs Communacopia Conference Tuesday, AT&T CEO Randall Stephenson crowed what a great idea it was to combine a big distribution company with a media company, something Comcast did when it acquired NBCUniversal.
“The deal logic is more compelling today than it was we came out and announced the deal,” Stephenson said. “I think we are going to see more and more of this in this industry.”
Combining a distribution company like AT&T with a media company like Time Warner "results in significant value accretion to the media company, and that’s the part that a lot of people miss,” he said. “This value accretion comes from taking an incredibly rich trove of data that exist in these communication companies, and taking advantage of that in the media company, and this data is all centered around viewership data. And we have some amazing viewership data.”
The first opportunity to employ that data is to use it to raise the rates Time Warner charges for advertising by making it more targeted.
“We are building an advertising capability that gives the same degree of targeting using this viewership data that an advertiser can get on the digital side, targeting a programmatic capability that allows them to build a comprehensive campaign on a very targeted basis with complete measurement of what advertising is being delivered,” Stephenson said.
“There is an element that we can do in the world of premium video that's hard to do in digital, and it's a friction point and even a sore point for lot of advertisers, and that is you can do this with transparency in the world of premium video,” he added. “Meaning, you can determine if you are an advertiser where your brand shows up. You can control where your brand shows up. It won't appear next to content that you find objectionable and you did not intend for it to appear next to.”
Building the ad technology business will take 12 to 24 months, but some elements can be started up immediately.
Stephenson says that AT&T currently sells about 200 billion ad impressions annual. Time Warner has 750 billion ad impressions. Using technology, including addressable advertising, AT&T’s is selling its impressions for two or three times what Time Warner is able to charge.
“So, using this data, can Time Warner begin to get yields that begin to look like what we are seeing in DirecTV and in AT&T? That's a sizeable number. And it's a very, very sizeable opportunity. And so, this is something we're going after very aggressively,” he said.
Generating extra ad revenue will help Time Warner businesses including HBO invest more in original content. “We have a much higher level of interest in owning creative, unique content than just renting content like sports content. You just have a lot more flexibility to build brands, to build penetration, and so forth.”
Beyond advertising, AT&T data should help Time Warner executives make better decisions.
“I don't think data replaces creativity. I don't think Steven Spielberg is replaced by Big Data,” Stephenson said. “I do think an executive in the media industry has an opportunity to think differently and use the data to influence their investment decisions, how much are you willing to pay for certain content, how much are you willing to invest to create certain content because you have this unique data?”
Stephenson said owning a media company will also help the distribution company. Additional add revenue will help reduces subscription costs, which could increase share and reduce churn.
Reducing the cost to consumers of video programming is part of the AT&T playbook as it reacts to the decline in pay-TV subscribers.
“When the average revenue per video subscribers well over a $100, it's a price issue,” Stephenson said. “And when you look at who it is that is opting out, it's 20 million households that have opted out of the cable bundle. And they tend to be younger, they tend to be lower-income, and they tend to be millennial and which means they tend to live in apartment complexes, in MDUs [multiple dwelling units] and so forth.”
Part of AT&T’s plan to reduce video subscription costs is to make bundles skinnier by eliminating networks people don’t watch. But AT&T is also looking to reduce distribution costs by going to a software and wireless based approach as opposed to the facilities based approach cable operators employ.
AT&T’s DirecTV Now, uses a wireless centric approach, Stephenson said. “It’s a software-based solution for cable TV for want of a better descriptive terms. That is going to be the platform for how we deliver all video in the future, software centric. We’ll be ambivalent as to whose broadband the television service traverses and so a software-based platform will not require a satellite dish on the roof and a very thin client in the home rather than a big set-top box.”
Stephenson said a beta version of software-based distribution will launch in the fourth quarter and will get rolled out in 2018.
AT&T’s strategy since acquiring DirecTV now has been to get its wireless customers to add video products. Stephenson said the percentage of people who walk into an AT&T store for wireless and add video is a significant number. At the same time the company is having success getting DirecTV customers adopt AT&T’s wireless service.
“And the whole point of this is multi-product households churn dramatically lower than single product households. And the lifetime values are obviously far greater for those kind of customers as well. What's been the byproduct of this? You saw it last quarter, we had record low churn. Locking down the customer base has really happened,” he said.
AT&T’s communications business is “putting in place plans now for do we take advantage of this multi-product capability premium content and a ownership position in premium content to really begin to influence market share and begin to move to share needle,” he said.
Already AT&T is using HBO as a lure to subscriber. On Tuesday it said customers of its AT&T Choice, which sells at a relatively low price point, will get HBO included in the package. “After we close the Time Warner deal, we have some stuff queued up, but I think it's going to be very interesting for that end of the market as well,” Stephenson said.
Stephenson sees AT&T and Time Warner being able to cross-promote their products.
AT&T has 5,000 retail points of presence around the United States, millions of door swings every single month. Justice League gets launched into the marketplace by Warner Brothers. Can you envision you walk into an AT&T store and it is Justice League, that it is Wonder Woman, that it is season seven of Game of Thrones, you pick it. That’s how we can leverage cross promotional opportunities to really drive value again into this media company with our distribution.”
At the same time, there will be saving on marketing costs. The combined company might be the largest ad spender in the U.S. “The ability to generate cost synergies out of advertising just by bulk of scale and procurement synergies is pretty mechanical, where we feel really good about that,” Stephenson said.
Some of this is stuff Comcast has already done. It has marshalled assets companywide to push projects including movie and TV shows in a way it calls Symphony.
Speaking later at the Communicopia conference, Comcast CEO Brian Roberts noted that Comcast bought NBCU when it was going through a rough patch and paid about $26 billion. “Today AT&T is paying over $100 billion and I think the cash flow with NBCUniversal and Time Warner are pretty comparable,” he said.
And just as AT&T jumps into content, Comcast is getting into the phone business, offering the new iPhone 8 at its stores.
Comcast and NBCU have been working on data-driven targeted advertising, but it hasn’t been easy.
“I think it’s a great opportunity and I think that even if other companies are embracing that opportunity, I think it’s kind of okay because –- and maybe even good, better than okay -- because you want advertisers to shift how they’re judging, how they’re advertising,” Roberts said.
“It’s very hopeful, it’s hard and we’ve made real progress. Part of our upfront success is that we offer targeting and we offer time shifting and different commercials and a real-time insertion in some cases, but we have a long way to go to make progress,” Roberts said. “And I think it’s a journey but with a good outcome for anybody who can get to that journey and it’s not one take all, because they have great properties, they’re going to sell ads on, so do we.”
But Roberts did not seem to think that cutting costs for video would be a successful strategy for Comcast.
“Our platform is our real asset, but video has been the heart and soul of that platform” Roberts said. YouTube is now available in all homes with Comcast’s X1 platform, which he described as “the best in the world.”
“We need to segment that product,” Roberts acknowledged. “it may not be for everybody with all of our content, that maybe too expensive for some people and so we’ve gone to college campuses and we have a product that you don’t need a cable box for that we’re trialing and we have a lot of other segmented ways -- segmented ways to appeal the different video markets. But at the core of it, we want the profitable end of the video spectrum and that’s the market that we focused on.”
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