AT&T (NYSE:T) is hoping a more streamlined structure at WarnerMedia will allow it to invest enough in content to take on Netflix (NASDAQ:NFLX). After HBO chief Richard Plepler and Turner President David Levy left, WarnerMedia hired Bob Greenblatt to oversee both HBO and Turner's entertainment networks, as well as the company's planned over-the-top service.
WarnerMedia CEO John Stankey wrote in a memo seen by Reuters:
At a time when we must shift our investment focus to develop more content for specific and demanding audiences on emerging platforms, we can't sustain a model where we invest one dollar more than necessary in the administrative aspects of running our business.
Other changes included separating CNN from the rest of Turner and putting chief Jeff Zucker in charge of sports. Additionally, Kevin Tsujihara will continue to run Warner Bros. studios and add kids' and young adult programming to his plate.
Quantity over quality?
AT&T wants to take a page out of Netflix's book. Netflix released around 700 original films, series, and specials in 2018, and it spent about $14 billion total in cash on content last year. In comparison, HBO spent about $2 billion annually on content prior to its parent company's acquisition.
WarnerMedia already announced plans to expand HBO's original programming lineup to Monday nights. That's despite objections that HBO is already profitable with a curated selection of high-quality shows airing on Sunday nights. Netflix is notably unprofitable.
But this is about more than HBO -- hence the restructuring to include all of WarnerMedia's television entertainment under Greenblatt. Stankey is looking to substantially increase engagement among viewers. At an HBO town hall meeting last summer, he said:
It's not hours a week, and it's not hours a month. We need hours a day. You are competing with devices that sit in people's hands that capture their attention every 15 minutes.
A big ramp in scale might be difficult for AT&T, which is working to pay down the massive debt it incurred when it acquired WarnerMedia and DIRECTV before that. It's not like AT&T can scrounge up another $10 billion overnight to take on the scale of Netflix's content spending. WarnerMedia already has some extremely valuable media assets it could use to attract viewers to its forthcoming over-the-top service, but management seems split on how they intend to use them.
Why does AT&T need more engagement anyway?
AT&T bought a profitable company. And it should be able to see benefits from its integration with its video distribution services, DIRECTV, U-Verse, and DIRECTV Now. It's also been bundling video packages with its wireless service, taking advantage of its Turner properties to make its wireless service more appealing.
But more engagement can provide AT&T with something extremely valuable in this day and age: data.
More data can feed AT&T's new digital advertising business, Xandr. Xandr generated just $1.74 billion for AT&T in 2018, but produced an extremely high operating margin compared to the rest of AT&T's businesses. AT&T is investing heavily in the digital ad space, most notably buying AppNexus last summer.
AT&T wants to transform the way marketers buy television advertising. As cord-cutting grows, improving advertising efficiency on Turner networks is a way to offset subscriber declines. Continued increases in carriage fees are unsustainable, not to mention rate increases might come under more scrutiny as anticompetitive under AT&T.
Additionally, the growth of AT&T's digital video platforms, which currently operate at extremely low (likely negative) margins, necessitates a more efficient ad sales platform. If AT&T can supplement subscription revenue with higher average ad revenue per hour, it could grow its service profitably. When it raised subscription prices, it saw subscribers abandon its services.
So AT&T needs more content and more engagement from WarnerMedia properties. Not because it will generate more profits from those properties directly, but because it feels it can support its much larger businesses via better customer data.