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Smaller screens’ rise cues AT&T deal for Time Warner

People walk by an AT&T retail store Monday, Oct. 24, 2016, in New York. AT&T plans to buy Time Warner for $85.4 billion. (Mark Lennihan / Associated Press)
By Meg James and Ryan Faughnder Los Angeles Times

LOS ANGELES – AT&T has worked 140 years to perfect phone service, while Time Warner Inc. has spent decades churning out popular magazines, television shows and movies for the big screen.

But the two companies, which both are laboring to hold on to customers, confront a similar challenge: how to deliver content to younger consumers who are turning away from traditional media.

AT&T’s proposed $84.5 billion takeover of Time Warner is the most dramatic example yet of the shift in the balance of power in Hollywood from the big screen to the small screen. Thanks to the rise of high-speed internet and smartphones, consumers increasingly are getting their entertainment not from the multiplex or traditional TV outlets but from the internet and their mobile devices. Advertisers also are gravitating to smaller screens.

“This deal further solidifies the fact that mobile is king and content is king,” Peter Brack, a venture partner at the Los Angeles investment firm Mucker Capital and a former Time Warner executive, said Sunday.

The proposed merger is designed to patch weaknesses in both companies’ businesses. For AT&T, growth in mobile phone customers has stalled, and there is more competition than ever, particularly from Sprint, Verizon and T-Mobile. The company hopes it will gain an advantage by owning content that will keep users on their mobile phones longer.

AT&T Chief Executive Randall Stephenson, in announcing the deal, told reporters Saturday: “We believed premium content was always going to win, and it has been true when you think about the big screen, it has been true on the TV screen and we are seeing that it is also true on this mobile screen.”

The mega-merger underscores the blurring of lines between technology and entertainment industries, where streaming services such as Netflix and Amazon are aggressively creating their own original programming and Snapchat and Twitter are streaming entertainment content.

Verizon, meanwhile, has loaded up on web content, spending $4.4 billion to buy AOL last year. The phone carrier is in the midst of another deal, worth $4.8 billion, for Yahoo Inc.

For AT&T, buying Time Warner furthers the bet on television it made last year, when the Dallas phone company spent $49 billion to purchase satellite TV service DirecTV. That made AT&T the nation’s largest TV provider with more than 25 million customers.

The Time Warner deal would enable AT&T to diversify its mix of businesses by owning – not just distributing – the channels.

“There is just no growth anywhere in their portfolio,” said prominent telecommunications analyst Craig Moffett. “And I think they’ve come to realize that DirecTV is facing significant growth challenges, and much sooner than they had anticipated.”

Meanwhile, media companies such as Time Warner face their own set of difficulties. Confronted with the threat of lower advertising revenues and declining fees from cable service providers, they are grappling with new ways to reach younger audiences.

Studios such as Warner Bros., owned by Time Warner, no longer can depend on the box office and DVD sales to drive profits. Theatrical attendance in the U.S. has declined for much of the last decade, in part because younger audiences aren’t going to movies as frequently. Nor are they watching traditional TV like their parents did.

“Time Warner Chairman and CEO Jeff Bewkes and his senior management team can see where the entire legacy media world is headed: secular decline,” BTIG Research media analyst Richard Greenfield said in a research note.

Instead of relying so heavily on traditional pay-TV operators, Time Warner’s content would get pushed out through AT&T’s mobile network. CNN videos or Turner e-sports would have more exposure to mobile users, enabling Time Warner to capture a bigger slice of the fast-growing mobile advertising pie.