AT&T-Time Warner decision could be sign for T-Mobile/Sprint deal

Time Warner Center. Image courtesy of Time Warner, Inc.
AT&T and Time Warner find out today if a federal judge has approved their merger. (Time Warner)

If Senior United States District Judge Richard Leon approves AT&T’s purchase of Time Warner today, analysts and investors are likely to read it as a positive sign for the proposed merger of T-Mobile and Sprint.

Judge Leon has said he will issue his decision on AT&T’s proposed deal today. The ruling comes one day after the repeal of net neutrality, meaning that AT&T now has more freedom to prioritize the delivery of select content on its network. (AT&T, however, said it is in favor of limited net neutrality laws and has advocated for a national policy).

AT&T has demonstrated considerable optimism about the deal in recent weeks. At the beginning of June, the carrier staged an industry conference at Warner Bros. Studios in Burbank, California. Attendees heard about the myriad of opportunities presented by the marriage of content and cutting-edge technology.

If Judge Leon approves the deal, it is expected to close before the end of the month. If he does not approve the deal, AT&T is expected to keep fighting. The company could offer to sell off assets that the government says could contribute to anti-competitive practices. 

It is worth remembering that the Justice Department is reviewing the T-Mobile/Sprint combination, and the Justice Department did not approve AT&T's purchase of Time Warner. The decision now rests with Judge Leon because the Justice Department sued AT&T to block the merger. In addition, T-Mobile and Sprint are direct competitors, so their merger is perhaps more likely to be seen as anti-competitive than a union of AT&T and Time Warner. 

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With or without Time Warner, AT&T is very focused on its media business. The company is telling analysts that it wants to segment its video offerings into different tiers.

"We believe AT&T’s strategy to segment its video products (away from just the big bundle, and into four different linear/streaming-based tiers) is a very practical one that could open the door to new potential customers," said Deutsche Bank analyst Matthew Niknam in a research note. "With that said, this shift is likely to continue serving as a near-term headwind for segment growth and profitability. The company did cite opportunities to improve OTT profitability via newer product functionality looking forward (i.e.: cloud DVR, more streams)." 

Nonetheless, Niknam thinks AT&T's transition to more streaming services could weigh on profitability this year. He wrote that "an ongoing shift in its customer base (from high-ARPU linear customers towards lower-ARPU streaming services) is likely to weigh on Entertainment Group revenue/profitability (30%/20% of total 2018E) in upcoming periods."

If AT&T is successful in its bid to buy Time Warner, it will almost certainly find itself competing in a media market dominated by other large, integrated providers. CNBC is reporting that Comcast will try to buy Twenty-First Century Fox if AT&T buys Time Warner.