The future of TV

IMAGINE a television which, as in the old days, has only a handful of channels to choose from instead of hundreds, as a typical cable set-up might offer today. In a decade or so TVs will once again have only a few channels, but each will run miles deep, with content that can be viewed on demand. Netflix might be one such offering; Amazon another. Both firms are spending billions of dollars making and buying TV shows and films to sell directly to viewers to watch when they like, and on devices other than the box in the corner of the room. And other rich tech firms may join them.

It is this vision that is now driving the direction of television and media. Broadcasters are willing to pay more to show live sporting events, and to invest more in producing TV shows, to make their networks the must-see choice for viewers. This trend has spurred the largest-ever merger of a telecommunications company with a media firm. AT&T, America’s wireless and pay-TV giant, announced on October 22nd an offer for Time Warner, the owner of HBO, CNN and Warner Brothers studio, worth $109bn. In doing so AT&T is betting that a few vertically integrated platforms will dominate the future of viewing. This huge deal follows the $30bn purchase in 2011 by Comcast, a cable-TV company, of NBC Universal.

If approved, it would not be the last such merger. And the next buyers could be content companies buying distribution platforms. At 21st Century Fox, Rupert Murdoch might go after the rest of Sky, a British pay-TV firm, that he does not already own (Sky is a cheaper target with the fall of the pound). At Disney, Bob Iger mused recently about the need to reach consumers directly in an increasingly uncertain media landscape, leading many to speculate that he wants to buy Netflix, which has a market value of $54bn (almost one-third of Disney’s). At present such a mammoth deal appears to be unlikely, but were it to happen it could trigger a bidding war with Apple and Google weighing in as well.

Some analysts describe AT&T’s strategy as diversification or empire-building, not integration. AT&T is the second-largest wireless carrier in America, behind Verizon Communications. Last year AT&T completed the $48.5bn purchase of DirecTV, a satellite provider, making the company the largest pay-TV distributor in America with 25m subscribers. The new deal adds the biggest available prize in film and television (as Disney is not for sale), with a vast library of films and TV shows including hits such as the “Dark Knight” movies and “Game of Thrones”, besides multiple cable channels.

The backdrop to this is that Americans are watching 11% less television than six years ago, and those aged 12 to 24 see more than 40% less (see chart). In recent weeks a vital bulwark of pay-TV, live sports, has shown unusual weakness; ratings for American football have declined compared with a year ago. Last year traditional pay-TV lost more than 1m subscribers, about 1% of the total in America, as more viewers “cut the cord” to expensive cable and switched to streaming video services.

In the near term AT&T’s business logic for buying Time Warner is not obvious. Cord-cutting will continue to put pressure on profit margins at the combined company, which will also become highly indebted. Nor will AT&T be able to offer Time Warner content exclusively to its customers. It will license it to as many distributors as possible to boost revenue—just as Time Warner does now. And AT&T will not be able to get that content at a lower price for DirecTV because clauses in pay-TV contracts prevent that and regulators would not permit it. Randall Stephenson, AT&T’s chief executive, and Jeff Bewkes, Time Warner’s boss (who would leave under the deal), argue that benefits will come from being able to target advertising better to viewers of Time Warner content, thanks to AT&T’s knowledge of what people are watching. It is unclear how much that will help the bottom line.

Despite all that, regulators will be wary about AT&T wielding a competitive advantage from owning a combination of content, delivery and wireless spectrum (as well as broadband). In a display of the company’s muscle, on October 25th Mr Stephenson announced that a new internet-streaming service in America, DirecTV NOW, will offer more than 100 TV channels (including Time Warner networks) for $35 a month, far cheaper than existing packages. Speaking at a conference in California, Mr Stephenson said he would not have been able to strike such a deal if he did not have DirecTV: “we cannot get the media companies to participate in this until we have scale.” AT&T wireless customers will come off best as they will be able to stream the service without data charges. The Federal Communications Commission, a regulator, is already looking at AT&T and Verizon’s practice of not charging mobile customers more to stream certain video content—called zero-rating. Mr Stephenson has said that the ability to drive down prices shows AT&T’s big acquisitions are good for consumers. Trustbusters might see things differently.