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The last Time Warner deal was the worst deal in history. What is AT&T thinking?

AT&T CEO Randall Stephenson is busy, so we’ll answer for him.

House Judiciary Committee Holds Hearing On Proposed Merger Of AT&T And DirecTV Photo by Win McNamee/Getty Images
Peter Kafka covers media and technology, and their intersection, at Vox. Many of his stories can be found in his Kafka on Media newsletter, and he also hosts the Recode Media podcast.

More than 16 years ago, AOL bought Time Warner for $160 billion in a deal that is now commonly cited as the worst merger in history.

Now AT&T wants to buy Time Warner.

What the hell is it thinking?

The Wall Street Journal thinks the deal could close within days, so we may hear a rationale from AT&T CEO Randall Stephenson shortly. In the meantime, here are some educated guesses about why he thinks the deal is worth doing:

  • AT&T doesn’t want to be a dumb pipe — or at least, not just a dumb pipe. This one’s as basic as it gets. AT&T already owns tens of millions of internet connections, via its wireless business and its much smaller U-verse broadband business. That’s a pretty good business to own, since most U.S. customers only have a handful of wireless choices and little to no choice when it comes to broadband. But Stephenson thinks selling content on top of those data connections will make his business even stickier, so he can keep his existing customers longer.
  • AT&T knows DirecTV is a shrinking business. This one makes less sense, since AT&T spent $49 billion on the satellite TV company just two years ago. But AT&T is hoping to wring a good five years out of DirecTV, and gradually transition that customer base to one that gets their TV over the internet instead of from dishes and boxes, which cost a lot to install and maintain. Owning a content company that makes TV (HBO, CNN, Turner, etc.) and movies (Warner Bros.) could help AT&T get to the future that much faster.
  • This deal makes more sense than taking on Google and Facebook. That’s what Verizon is trying do with the $9 billion (maybe less) it is spending on Yahoo and AOL, in the hope of creating a digital advertising business that can compete with Larry Page and Mark Zuckerberg. Even if Verizon is able to turn around those two slumping web companies — something no one has ever done with a consumer-facing digital property, ever — at best it will have a tiny fraction of the digital ad business. Better to wade directly into the content business — one that both Google and Facebook have yet to dominate.
  • AT&T isn’t AOL. Neither is Time Warner. Among the many problems with the first mega-Time Warner deal was that AOL’s value was preposterously overvalued by the first dot-com bubble. Its core business at the time — providing dial-up access to the internet — eroded quickly, and it transitioned to an internet portal just before the concept of an internet portal disappeared. You can argue about the merits of both AT&T’s and Time Warner’s valuations, but both of them are in businesses with a much longer window.

Is any of that enough to justify a deal that will cost AT&T $80 billion or more? Here are some obvious counterarguments:

  • Synergy sucks! See: Failed AOL-Time Warner merger.
  • Being a dumb pipe is a great business. See: Lack of broadband competition. The content business, meanwhile, is hard and getting harder, because the competition for consumers’ time and wallets keeps expanding, and it’s never going to stop. HBO, for instance, used to own the premium subscription TV business; now its competition includes Netflix and Amazon, and there’s more coming.
  • Washington is going to step in. Regulators allowed Comcast to buy NBCUniversal (that’s the company that has invested in Vox Media, which owns this site). And AT&T can argue that it has less power than Comcast did when that deal went through, so it should be able to do this one, too. But Washington also forced Comcast/NBCUniversal to give up some rights to make it happen: NBCUniversal has been forced to become a passive owner in Hulu — a condition that continues to irk Comcast/NBCUniversal — and it is required to license its content to any digital provider that can structure deals with its competitors, which takes away considerable bargaining power. So what will AT&T have to do to make this deal work?

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