AT&T delivered its post-merger pitch to a roomful of Wall Street analysts, and shedding new light on its direct-to-consumer OTT service launching in late 2019.
CEO Randall Stephenson opened the two-hour event at Time Warner Center, walking out onto the screening-room stage after a sizzle reel played. The short piece climaxed with a special-effects shot of a Game of Thrones dragon flying directly over the head of a young AT&T mobile phone user.
“Lots happened over the past year,” Stephenson deadpanned in his trademark drawl, alluding to the nearly two-year odyssey (which is still not over) of fending off President Donald Trump’s Department of Justice, who sought to block the $81 billion Time Warner merger. “That caused us to put on hold a lot of our plans. … We’re now in a place where we’re ready and we want to share those plans with you.”
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The still-unnamed WarnerMedia streaming service will include three levels, the company said. It will have an entry-level movie-focused package; a premium service with original programming and blockbuster movies; and a third service bundling content from the first two plus an extensive library of WarnerMedia and licensed content. Pricing or exact launch plans have yet to be revealed.
Financially, the company expects earnings-per-share growth in the low-single digits in 2019 as it absorbs the new content operations. It is forecasting total WarnerMedia synergies reaching a run rate of $2.5 billion by the end of 2021. About $1.5 billion of that will be cost synergies, with the remaining $1 billion resulting from additional sales opportunities, lower subscriber churn and higher advertising. The company expects to reach a run rate of about $700 million by the end of 2019, increasing to $2 billion by the end of 2020 and ramping to $2.5 billion by the end of 2021.
In a press release, Stephenson summed up the company’s main message about adding entertainment assets to its traditional telecom base. “We are well positioned for success as the lines between entertainment and communications continue to blur,” he said. “If you’re a media company, you can no longer rely exclusively on wholesale distribution models. You must develop a direct relationship with your viewers. And if you’re a communications company, you can no longer rely exclusively on oversized bundles of content.”
The analyst day gave the company the chance to show off and explain its new structure to the investment community. Hollywood also got an expansive view of WarnerMedia’s path when the unit’s CEO, John Stankey, delivered a presentation and took questions.
Wall Street has been skeptical of some aspects of the acquisition of Time Warner, for a few reasons. First, the deal substantially increased the company’s debt load and some analysts have wondered how the company will reach new heights when it is more concerned about paying off debt. Executives say by the end of 2019, net debt will be at two-and-a-half times adjusted earnings. CFO John Stephens said the company would arrive at that level through several initiatives including asset sales, including a potential disposal of its 10% stake in Hulu.
Many analysts and media watchers are wondering how WarnerMedia’s streaming plans will shake out, especially with rival Disney gearing up for its own OTT milestone in 2019. On the pay-TV side, subscriber losses at DirecTV have not been compensated by gains with skinny-bundle service DirecTV Now, leaving some uncertainty about how quickly that longtime bulwark will fade and harm the balance sheet.
The legal status of the merger also remains under challenge. The D.C. Circuit of the U.S. Court of Appeals will hear oral arguments December 6 in the government’s appeal of the antitrust lawsuit it filed last year. A U.S. District Court judge issued a decision in the case last June, siding firmly with AT&T and allowing the $81 billion deal to officially close.
One condition of the closing is that the Turner Broadcasting unit is being kept siloed from the DirecTV and other pay-TV distribution holdings of the company, which would enable it to unwind the merger if the courts ultimately block it. While that outcome is seen as unlikely, the appeal still casts somewhat of a shadow over AT&T.
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