He is the least sentimental of the media moguls, known for being a dispassionate judge of a business’s worth. And now he wants to sell Time Warner. Maybe we should be listening to what Jeff Bewkes is telling us.
Sure, there are lots of other things one can discuss regarding the AT&T-Time Warner deal: AT&T’s plan for a 5G-wireless world in which anybody can watch anything they want from anywhere on their mobile devices, the chances that antitrust regulators will decide that enough is enough, AT&T’s giant debt load, Dallas’s prospects of becoming a glittering media capital.
But there’s a lot to be said for just keeping it simple. Bewkes is the guy who at Home Box Office in the 1990s pioneered the business model that every big media company has since been trying to follow: make original programming so compelling that you can get millions of people to pay for subscriptions to watch. After taking over as chief executive officer of HBO parent Time Warner in January 2008, he got rid of almost everything that didn’t fit that video-content-plus-subscription model — Time Warner is now a bunch of cable networks (CNN, TBS, TNT, HBO, Cinemax etc.), with a production studio (Warner Brothers) that accounts for less than 20 percent of operating income. If Bewkes wants out, it’s only reasonable to wonder whether the cable networks — and the media giants that have become increasingly reliant on them for their profits — have seen their best days.
This pessimistic take gains resonance when you think about what happened the last time Time Warner did a big merger. Remember that?
The AOL-Time Warner deal of 2000 has gone down in business history as possibly the worst merger ever, with the combined company posting a $99 billion loss just two years later. But it wasn’t all that bad a deal for AOL executives and shareholders. As former AOL CEO Steve Case put it in a conversation with TechCrunch’s Michael Arrington in 2010:
“It was really the peak of the Internet boom, and it felt like a good time to trade what we had for what we would get. So I can’t really say I regret that.”
AOL and other Internet stocks were trading at insane valuations in 1999 and early 2000. If you could take that bubble currency and use it to buy into a company with durable earnings power, as Case did, that was a smart thing to do.
This time around there’s little evidence of a stock bubble. Cable networks make lots of money. Time Warner’s price-to-earnings ratio — even with the merger-talk-induced run-up in the stock price — was still under 18 Monday morning. In 1999, AOL’s PE ratio was 700.
The issue this time is whether cable networks can keep making so much money. The past decade or so has been the best of times for them, as rising subscription fees and steadyish subscriber numbers drove profits ever higher. The stock prices of the U.S.-based entertainment giants — most of which get most of their profits from cable networks — reflected that, hitting all-time high after all-time high.
In 2015, something changed. As the entertainment companies reported their earnings early that August, investors suddenly began obsessing over the threat of cord-cutting — customers abandoning cable subscriptions for over-the-top streaming services such as Netflix. Since then things have settled down a bit, and cable and satellite TV providers such as Comcast and AT&T have actually seen their stocks keep rising. The entertainment companies, though, haven’t recovered the lost ground. Their cable TV businesses aren’t falling apart, but in a world inhabited by such rapacious beasts as Netflix and Amazon, investors aren’t crazy to worry that they may never again be quite the cash cows they were.
Which brings us back to Jeff Bewkes. Again, there are lots of other ways to look at the merger. But the simplest one seems to be: Smart guy wants to sell.