AT&T, Time Warner deal shows VI trending in opposite directions: analyst

A potential merger between AT&T Inc. and Time Warner Cable Inc. highlights a move by United States-based companies toward vertical integration, just as developments in Canada suggest the opposite is happening north of the border, according to an analyst. “While the U.S. is becoming more vertically integrated, Canada is moving in the other direction,” Jeff Fan, an analyst at Scotiabank, said in a note Monday. The deal, which would see AT&T acquire Time Warner for $85 billion US, would see a telecom company attempt to integrate the content-producing properties of Time Warner, which includes the HBO brand. In 2009, Comcast Corp. acquired NBC Universal in a similar deal. But while that takes place, some operators in Canada are shedding their media properties, though Rogers Communications Inc., Quebecor Inc., and BCE Inc. remain vertically integrated. Fan cited examples including Shaw Communications Inc.’s recent sale of its media division to Corus Entertainment Inc. (the two are separate publicly traded companies, though they are both owned by the Shaw family and treated as vertically integrated by the CRTC) and the discontinuation of over-the-top service Shomi, which was jointly owned by Rogers and Shaw. Part of it has to do with the regulatory landscape that takes away the ability of companies to use exclusive content for competitive advantage, according to Greg MacDonald, an analyst at Macquarie Capital Markets. He said in an email that revenue synergies for vertically integrated companies “have been and will likely remain elusive,” given the “regulatory restriction on tied selling” put in place by the CRTC. “With these restrictions, there are no revenue synergy opportunities,” MacDonald said. “What is the purpose of a carrier owning content then unless it is simply to act as a hedge against content cost escalation?” Fan said that another part of it is that Canadian operators lack scale, and that “Canadian operators have realized that they will never have sufficient scale to compete against the global digital video competitors that they expect to eventually operate in Canada.” Those competitors include Netflix Inc. and Amazon.com Inc., as well as Netflix rival Hulu, Alphabet Inc. and Apple Inc. “To succeed as a Canadian TV media company, we believe firms have to create content and export it,” Fan said, suggesting Canadian cablecos and telcos should “just focus on distribution.” He said Telus Corp. and Shaw “are on the right side of the ledger without the burden of media.” Both MacDonald and Troy Crandall, an equity specialist at Raymond James Ltd., told the Wire Report Monday they don’t see the AT&T and Time Warner deal really affecting the Canadian market, though Canaccord Genuity’s Aravinda Galappatthige said the deal could trigger a trickle-down effect. The elevated pursuit of content, especially for digital video, could benefit some companies here, namely DHX Media Ltd., according to Galappatthige. “The transaction is likely to spur further activity in the digital video market, with more and more players vying to carve out a share of this sizable and growing space,” Galappatthige said in a Monday note. “DHX is a key beneficiary of these trends. It represents essentially the largest independent library of kids content,” he said, noting that he has seen companies like Scripps Networks Interactive Inc., Discovery Communications Inc. and AMC Networks Inc. “strengthen” in light of speculation of the deal as “attention turned towards future targets in this space.” CLARIFICATION: This story has been updated to note that Shaw and Corus are considered to be vertically integrated by the CRTC. — With reporting by Ahmad Hathout at ahathout@thewirereport.ca and editing by Anja Karadeglija at akarad@thewirereport.ca

AT&T, Time Warner deal shows VI trending in opposite directions: analyst

Broadcast | October 24, 2016

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AT&T, Time Warner deal shows VI trending in opposite directions: analyst

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