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; 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.
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 US$99 billion loss just two years later. But it wasn’t all that bad a deal for AOL executives and shareholders.
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, 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 this 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 reflected that, hitting all-time high after all-time high.
Something changed in 2015. 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.
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.
Fox is a Bloomberg View columnist. © 2016, Bloomberg View