The Proposed WarnerMedia/Discovery Merger Is Likely To Cost You Money

Post by: Rick Ellis 17 May, 2021

I spent a few years as a financial reporter and covered a lot of mergers. Including the ill-fated one between Warner Brothers and AOL. So I approach every proposed merger with a great deal of skepticism. 

There are a couple of points to remember about every proposed merger,  even the ones that sound like an exceptionally great idea when they are proposed.  

First, nearly every merger is justified in part by citing "synergies" that will decrease costs. Synergies is a mushy term that basically means that the two merging companies will be able to combine their marketing, sales and promotional efforts in a way that will provide more value than would be obtained individually by the two entities.

If that sounds hard to define or value, then you see that danger in accepting the proposition that - as an example - the combined WarnerMedia/Discovery goliath will really be able to achieve the $3 billion worth of "synergies" cited by the two companies on Monday.

The second thing to remember about big mergers is that they almost always end up costing consumers more money. In part, because fewer competitors mean that it's easier for companies to raise prices. They might not doing it immediately, but it will happen. Increasing revenue is the point of nearly every successful merger and easiest target when you're looking for more revenue is the customer that has no other place to go.

So what are the ways that the proposed WarnerMedia/Discovery could cost you money? 

Here are some of the ways:

All Cable and Satellite providers (TV providers) pay each Network owner (Programmer) a fee for every household that receives a particular Network - regardless of whether anyone in the household actually watches it. John Malone (one of the biggest holders of Discovery Inc. voting stock) essentially invented the now common practice of bundling together a bunch of lesser networks with those that the TV providers consider to be "must have" networks in order to extract regular increases in subscriber fees from the TV providers. Increases which are passed directly on to the subscribers.

WarnerMedia owns several of the channels which charge the highest per-subscriber rates in the industry. And thanks to its acquisition of the Scripps Networks, Discovery owns some of the most popular general consumer channels in the industry (Food, HGTV). So the easiest way for this new combined entity to extract money from customers is to raise the subscriber fees when it negotiates upcoming carriage deals. These increases will be passed on to you, so don't be surprised when you monthly cable or satellite bill increases in a year or two.

Those increased programming costs also have a related impact, which brings us to the second reason why this proposed merger will cost you more money.

While the increased costs resulting from any consolidation of TV channel owners has an impact on traditional cable and satellite TV providers, it can be the death knell for smaller virtual TV providers. They have to pay the same subscriber fees as their more traditional rivals, which makes it difficult to compete on price. And because these large media companies generally refuse to unbundle their channels during negotiations, virtual TV providers are left with two equally bad choices: add a bunch of networks they don't want and raise their prices or have gaping holes in their programming offerings. This bundling has made it nearly impossible to offer a streaming service with just sports networks or only entertainment-oriented channels. Sports-oriented FuboTV was unable to get just sports nets from Disney, Fox, NBC or Turner, so it was forced to add all sorts of other channels to get the sports networks it needed. 

Entertainment-oriented Philo doesn't have any entertainment networks from NBCU, Disney or Turner because it refused to accept those media company's "take everything we own or nothing" proposal. But Philo does currently carry every Discovery-owned network. Which makes me wonder what will happen when that deal expires. If Discovery insists on including the WarnerMedia-owned networks in the deal, it's difficult to see how Philo survives. And that's bad news for the customers currently paying $20-per-month for Philo's impressive entertainment-oriented package.

While it's not yet clear how much debt this proposed entity will carry, I think it's fair to say the general answer is "a lot." Based on some the early reporting, it appears that AT&T will be able to pass much of the debt it acquired during its acquisition of WarnerMedia onto this new entity. And when any company needs to pay off at least some of a $50 billion or so debt, it does two things: slashes jobs and raises prices. So it's almost inevitable that every corner of this new media empire will see a lot of both. Thousands more people will lost their jobs, niche businesses will disappear and the prices will inevitably creep up on nearly everything else.

An astounding range of industries in the United States have undergone consolidation into semi-monopolies. Everything from the music industry to the companies that produce road salt have undergone consolidation to the point where only a few large companies dominate the market. And one predictable result is that as competition decreases, prices inevitably rise. And while many of the prices increases that result from this proposed merger will be indirect, they will nonetheless be increases that will result as a direct consequence of the combination of two already large media companies.

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Last modified on Monday, 17 May 2021 21:28