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It's crucial for entertainment ecosystem that AT&T's Time Warner deal goes through

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AT&T's US$85.4 billion acquisition of Time Warner - the owner of HBO, Warner Bros, CNN, TBS and TNT - was blocked by the court in November.

New York

BEGINNING this week, AT&T and the Justice Department will lock horns in court to determine if the telecommunications giant will be allowed to absorb entertainment powerhouse Time Warner.

For the better part of a year and a half, the US$85.4 billion acquisition was regarded, more or less, as a fait accompli. That changed completely in November, when the Justice Department moved to block the deal.

Now the talk in media circles revolves around what will happen if the acquisition is stopped and Time Warner - the owner of HBO, Warner Bros, CNN, TBS and TNT - is made an orphan. And what will it mean for the old-guard entertainment companies in the streaming age?

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Market voices on:

"I think it's important for the ecosystem, the media ecosystem, that this deal goes through," said David Zaslav, chief executive of Discovery Communications. "For the first time in the history of this business, you have these massive global companies - Facebook, Netflix, Amazon, Google - of a scale we've never seen. They're like massive transformers.

"They're transforming this entire industry, and they've decided they love content, and they're sucking it up and disrupting the current ecosystem. In order to have real stability, the great cable companies, mobile and satellite companies need to be able to compete with these global-scale companies."

The media industry has undergone significant change since the blockbuster deal was announced in October 2016.

Rupert Murdoch, who pursued Time Warner just 31/2 years ago, has gone from buyer to seller, and made a deal to hand over much of his 21st Century Fox empire to Disney for US$52 billion. Discovery made a bid and has now closed on an US$11.9 billion deal for Scripps Networks Interactive, the home of cable channels like HGTV and Food Network. Viacom and CBS are exploring the possibility of joining once more.

All the while, digital rivals keep tossing money around.

Netflix is spending up to US$8 billion a year on content, up from US$6 billion in 2016. Its market value has skyrocketed to US$139 billion from roughly US$54 billion since the Time Warner-AT&T deal was announced.

Apple is competing directly with HBO, TBS and TNT by pouring what will soon be in excess of US$1 billion into original programming, building relationships with Hollywood stars like Reese Witherspoon, Kristen Wiig, M Night Shyamalan and Steven Spielberg. Amazon has appointed a new leader, and Hulu is beginning to find its sea legs. And even Facebook and Google's YouTube are offering Hollywood tens of millions of dollars to buy original content.

And while Netflix, Amazon, Facebook, Google and Apple have opened their wallets, Time Warner has been sitting on the sidelines.

"It's bad in the sense that that's a lost year and a half from business planning perspective," said Brian Wieser, a senior analyst at Pivotal.

A Time Warner spokesman said the company was "confident it would prevail at trial". He would not speculate on what would happen should judge Richard Leon of US District Court for the District of Columbia rule for the government.

The Justice Department argues that since AT&T has such a wide distribution network (it owns DirecTV), a deal could spell disaster for consumers. AT&T has countered that costs for consumers would likely go down.

Although Time Warner has been in a state of limbo for the past 18 months, analysts agree that its core businesses have been performing well.

"The wheels certainly haven't fallen off," said Mr Wieser.

And while some think the deal being blocked will scare off potential suitors, there are many analysts who are convinced that Time Warner is too attractive to remain untouched. For example, could HBO and Warner Bros be sliced off and sold to companies like Apple or Amazon? The networks TNT and TBS to an entity like Viacom?

"If there is a demand for other media assets, there is nothing on the scale of Time Warner anymore," said Kannan Venkateshwar, an analyst at Barclays Capital. "That gives it a scarcity value."

He also pointed out that Time Warner would benefit from the new tax law, which would give the company even more runway if it has to go another year or two by itself.

Another analyst, Amy Yong of Macquarie Group, said: "You can't really dismiss how powerful HBO is. And Warner Bros the studio. And, even to some extent, Turner and CNN. These are great consumer brands."

HBO continues to be a juggernaut, producing hit shows like Westworld and Game Of Thrones. The network's annual revenues exceed US$6 billion. It also has five million digital subscribers, proving that it has made a steady transition into the over-the-top world.

Warner Bros, propelled by the blockbusters Wonder Woman and It, had a strong year at the box office, and the studio had revenues of nearly US$14 billion. And since Donald Trump announced his presidential run nearly three years ago, CNN has set ratings records.

Still, HBO's long-time spot in the pole position of the television industry isn't so certain. In 2015, Netflix had 92 fewer Emmy nominations than HBO. Last year, the gap was just 20. Netflix and Amazon now spend more on content than HBO, and it could simply be a matter of time before Apple does as well. Indeed, HBO executives now speak about the network more as a high-end boutique - curators of content, they like to say - than as the free-spending New York Yankees of the industry.

Warner Bros, among its slate of hits, also had several misfires, like Justice League and King Arthur: Legend Of The Sword. And although CNN's revenue has grown, it hasn't been at the rate of MSNBC and Fox News, which draw more viewers in prime time. TBS and TNT, and Turner's slate of cable channels, continue to experience ratings declines as more consumers cut the cord.

Nevertheless, research firm MoffettNathanson has told investors that Time Warner's upside "has been overlooked because it is tied up in deal hell". The firm believes that if the AT&T acquisition falls apart, Time Warner could be split up and sold to the highest bidder - and perhaps even thrive as a result.

"The separation of Time Warner would likely draw two distinct sets of bidders into the marketplace," it told investors. "On the content side, we would expect to see interest from current film entertainment competitors like Sony and CBS/Viacom and even new scripted digital entrants like Apple or Amazon. As for Turner, we would think there would be interest from existing cable network operators like Viacom or Discovery."

But what would the ripples be if the deal collapses?

"Let's just say they also block the Fox-Disney acquisition for some reason, that would all of a sudden make you go, 'Oh, there's actually an active effort to restrain the size of business,'" said Mr Wieser. "That'd have an effect on all industries, not just media."

Most analysts regard that outcome - both the AT&T-Time Warner and Fox-Disney deals being blocked - as unlikely, but the question becomes far more existential for Time Warner and its direct peers if the AT&T deal goes down. If they aren't allowed to scale up to compete with Silicon Valley, how long could they be around?

"You suddenly have, from scratch, for the last six or eight years, US$15 billion being spent by Amazon or Netflix," said Mr Zaslav. "That could soon be US$20-25 billion. It's important for the ecosystem to not allow these transformers to turn out the lights on all these important creative businesses." NYTIMES

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