AT&T (NYSE:T) could sell its Warner Bros. Interactive Entertainment gaming division for about $4 billion, according to a recent CNBC report. Interested parties reportedly include Activision Blizzard (NASDAQ:ATVI), Electronic Arts (NASDAQ:EA), and Take-Two Interactive (NASDAQ:TTWO).
AT&T inherited WB Games after its $85 billion takeover of Time Warner in 2018. Selling the unit would help reduce its total debt of $164.3 billion -- which was mainly accumulated from its acquisitions of DirecTV, AWS-3 spectrum licenses, and Time Warner. It would also free up more cash for the expansion of its streaming media services.
A sale makes strategic sense, but AT&T could be prematurely dumping a promising business. Let's discuss four simple reasons AT&T should keep WB Games instead of divesting it for some quick cash.
1. WB Games is still growing
WB Games is included in the "Games and Other" segment of AT&T's Warner Bros. business. Revenue from the unit rose 86% to $2.01 billion, or 14% of WB's total revenue and 1% of AT&T's total revenue, in 2019.
In the first quarter of 2020, WB's "Games and Other" revenue dipped 9% year over year to $365 million, or 11% of WB's top line, as it released fewer games during the COVID-19 crisis.
That slowdown doesn't mean WB Games is destined to fade away. It still owns a broad portfolio of game franchises, including Batman, Harry Potter, Lego, Mortal Kombat, and Hitman, and the business could easily perk up with new releases -- especially for next-gen consoles like the PS5 and Xbox Series X.
2. It's an extension of its media business
Prior to AT&T's takeover, Time Warner operated WB Games as an extension of its media business, which complemented WB's comic book, TV, and film franchises.
The Lego Movie series supported the launch of new Lego video games, the Batman: Arkham series (2009–2015) overlapped the theatrical releases of Christopher Nolan's Dark Knight trilogy (2005–2012), and its broader portfolio of DC Universe games complemented its blockbuster DCEU films.
AT&T might believe it's not worth keeping a business that generates just 1% of its revenue, but it would be neglecting the valuable synergies between WB Games and its other media businesses.
3. The video game market is still growing
Unlike AT&T's slow-growth wireless business and its fading pay-TV business, the video game industry is still growing at an impressive rate.
The global video game market could still grow at a compound annual growth rate of 12.9% between 2020 and 2027 to $151.1 billion, according to Grand View Research. It's also been a resilient industry throughout the COVID-19 crisis, as people stayed indoors and played more video games.
Staying in the gaming market would require AT&T to plow more cash into WB Games, but those investments could pay off over the long run.
4. It should sell DirecTV first
If AT&T wants to streamline its business and take a meaningful bite out of its debt, it should sell DirecTV instead. AT&T bought DirecTV for $49 billion to become the world's largest pay-TV provider five years ago, but it's now the weakest segment of its pay-TV business, which lost another 897,000 subscribers last quarter.
DirecTV's satellite TV service is losing subscribers to streaming services, while the streaming version of DirecTV (now known as AT&T TV Now) is expensive and offers too many mediocre channels compared to streamlined OTT services like Netflix and Walt Disney's Disney+, as well as its own HBO Max and Watch TV services.
AT&T will probably need to sell DirecTV at a loss, but dumping this dead weight is arguably a bolder and smarter move than selling WB Games.
The key takeaways
If AT&T sells WB Games, it would be forfeiting long-term gains for short-term cash. Meanwhile, companies like Activision, EA, and Take-Two -- which are willing to invest fresh cash into venerable franchises like Batman: Arkham and Mortal Kombat -- could profit from AT&T's lack of foresight and patience.