AT&T's (NYSE: T) CEO Randall Stephenson recently presented at the 45th Annual JPMorgan Technology, Media and Telecom Conference. In his interview with JPMorgan's Phil Cusick Stephenson revealed several key attributes to the Time Warner (NYSE: TWX) acquisition that I have not seen covered. The massive debt load of the combined entity has been the primary attribute of the transaction covered by the nattering nabobs of negativism. In this piece, we take the glass half full approach to the transaction. Stephenson states AT&T has a significant opportunity to lever Time Warner's massive advertising inventory. Here is how.
DirecTV integration provided content proof of concept
AT&T's long-term goal to fully integrate content and distribution was underpinned by the tremendous response to the company's DirecTV recent initiative. CEO Stephenson stated the DirecTV deal provided a key tell that content ownership would be the key to AT&T's future growth prospects. CEO Stephenson stated:
"There were no promotion, no advertisements, so even hardly pay the reps to sell it and the thing just caught fire. We put 200,000 subscribers up in December, which was much faster than we are wanting to go and so we kind of pulled back, but the reality was that the demand for premium content integrated with the mobile experience was really, really high, which gave us the conviction that we probably ought to just go ahead and go the full - the full distance and just own a position in premium content."
So integrating DirecTV provided the proof that the demand for premium content anywhere and anytime was huge. What is even more inspiring is the opportunity for AT&T to lever Time Warner's current advertising inventory.
Advertising monetization "orders of magnitude" higher
CEO Stephenson states in no uncertain terms the monetization of Time Warner's massive advertising inventory of over 750 billion impressions will provide a massive and immediate jolt to the company's top and bottom lines. Stephenson states:
"I get really enthusiastic as I think about distribution affecting the entertainment because the easiest place and I would say the quickest benefits will come from the idea that Time Warner through Turner networks primarily has a massive inventory of advertising. Think about Turner networks and how many ad, what their ad inventory looks like in there? It's like 750 billion plus impressions per year. On the AT&T side through DirecTV primarily, but also through our mobile business, we have 150 billion 200 billion impressions per year."
So the combined entity will hold nearly one trillion ad impression per year. This is incredibly astounding to me. Here is the kicker. Stephenson states AT&T will be able to monetize Time Warner's 750 billion ad impressions at two to three orders of magnitude higher.
But why you ask?
When Stephenson was asked… "How does adding a content business drive revenue growth opportunities in the distribution side?" His response made me feel much better about the combined entities future prospects. Stephenson stated:
"On the AT&T side, we monetize those impressions at a significantly higher yield than your typical media company we're getting revenues per impression that are not (just) percentages higher than a traditional media company, (they are) orders of magnitude higher, two and three times higher than what you're getting in a traditional media company."
I must say this is a point I had not considered. Now that Stephenson has brought this fact to my attention, I'm much less concerned about the two companies' combined debt load and how AT&T is going to continue to pay the juicy current dividend payout. Yet, how will AT&T attain this exponential increase in ad monetization you ask? By targeting the ads as Stephenson explains:
"On the DirecTV side and our mobility side, we are very targeted in how we deliver advertising and we have a significant amount of unique viewership data on our customers and by virtue of targeting using addressable advertising and even getting cross-platform, device-specific, (and) set-top box specific targeting advertising."
Stephenson goes on to say:
"To what extent can this information and data, the viewership patterns influence and drive these higher yields on the 750 billion impressions that are within Time Warner and Turner Network specifically, we think is significant."
I have been behind the AT&T/Time Warner acquisition from the start simply because it looked like the right thing to do from an operations perspective. If AT&T is going to pay billions of dollars to build out the network so everyone everywhere on any device can access and consume content, AT&T might as well own it and reap the lion's share of the profits. I had no idea AT&T had the potential to monetize the ad revenue two to three magnitude of orders higher the Time Warner. I say this opportunity will go a long way to decreasing the debt load that so many have espoused will be the end of AT&T's dividend.
The Bottom Line
CEO Randall Stephenson has provided me and other current AT&T shareholders another solid reason to sleep a little easier at night. What's more, this newly revealed revenue boosting characteristic of the Time Warner acquisition will be easy to implement. The increased revenue streams could come online in short order after the acquisition is finalized. AT&T expects that to happen prior to the end of 2017. Add to this the opportunity for corporate tax reform and regulatory relief in 2018 and you have a recipe for success. I say the negative pieces out recently harping on the combined entities massive debt load is short sighted. These authors are myopically focused on the debt and not the big picture. The combined entities' ad revenue will be significant and orders of magnitude higher than before with little or no effort. If the debt load remained the same and the combination of the company had zero synergistic aspects, I would be worried as well. Yet, this simply is not the case. The stock remains a solid long-term buy. Those are my thoughts on the matter. I look forward to reading yours.
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