Time Warner Redux: Herding Cats Is Hard

Time Warner Redux: Herding Cats is Hard
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On paper, AT&T’s proposed $85 billion acquisition of Time Warner makes sense. AT&T executives most likely fear that the Company’s cable and cell phone access services are becoming commoditized. Now, by buying Time Warner, these same executives no doubt believe they will be able to offer subscribers bundles of content mixed with Internet delivery services at preferred prices. The combined company gains a competitive advantage by offering consumers a better priced mix of data and content.

Unfortunately, this simple vision is almost impossible to realize.

In 1989, I was thrilled to be hired by Time Inc., as the company’s first corporate Director of Marketing. Historically, Time Inc. had operated on Alfred Sloan’s famous model of independent divisions: Time, People, Sports Illustrated, Fortune and other iconic brands all competed with each other for advertising dollars. If a Time sales person shifted a $100,000 page to Time, from People, his or her bonus was increased, and the People salesperson suffered. My job was to find mechanisms for growing advertising dollars on the basis of total corporate strength, while the brands maintained their historic independence.

I was slated to start work on Monday, March 6th. Over the weekend, the merger of Time Inc. with Warner Communications was announced. As I walked into the Time Inc. building on Monday, it was the first work day for me, and the first work day for everyone at Time Inc. since the weekend’s announcement.

One of the public explanations for the value of the proposed merger was that Time Warner would be able to offer advertisers multi-media bundles, with content from magazines, cable spots, product placement in movies, licensing deals, and innovative opportunities which would inevitably develop. Within a few months, the responsibility for making it happen had fallen to my new department housed within Time Inc.

There was one central problem: The executives that manage the bottom lines of their products almost never want to discount their offerings to be part of corporate bundles. The problem of herding cats must be solved before you can even begin to raid the hen house.

Moreover, this problem increases exponentially when the individual brands, like those in today’s Time Warner, have a long history and culture of independence.

Indeed, As Kara Swisher notes in her article on the merger: Jeff Bewkes, now Time Warner’s CEO, was running HBO at the time of Time Warner’s earlier failed merger with AOL and was a vocal opponent of the merger with AOL. Of equal significance, Bewkes was also vocal in his lack of belief in corporate synergy in operating HBO after AOL and Time Warner did combine. According to the Hollywood Reporter, Bewkes once “told the Wall Street Journal that talk about synergy within TW is nothing more than "bullshit."’ Ultimately, the merger between AOL and Time Warner failed because historically independent brands remained fiercely independent.

Moreover, Time Warner’s, earlier 1993 failed semi-merger with U S West, which was built on a similar theory of convergence, is an additional reason for skepticism. Time Warner is now heading into its third marriage.

To succeed, AT&T management will need to convince executives with bottom line responsibility, that discounting their individual brands, as part of corporate bundles, will help not hurt their overall revenues. Then, AT&T’s distribution competitors will demand similar discounts from these same content companies, as a condition for continued distribution.

If history is any guide, the ultimate result will be that executives at HBO, Warner Brothers, and CNN will tell corporate management that if they want these content companies to continue to deliver the same profits, then the content companies themselves must be free to determine their pricing to everyone, including corporate siblings.

Perhaps, AT&T will succeed where others have failed. However, a younger Jeff Bewkes, and the historical record, both suggest its unlikely.

My prediction: If the merger happens, look for a spin-off of the content companies at some point in the next five to ten years.

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