Fear the FAANG. That was the refrain of AT&T CEO Randall Stephenson last month as he testified in a Washington, D.C., courtroom about why his company should be permitted to acquire media giant Time Warner. He was speaking about the five tech companies—Facebook, Apple, Amazon, Netflix, and Google—that have claimed Hollywood as their latest domain of disruption. Netflix sneaked in through the back door first, using legacy studios’ own beloved shows to build an audience of loyal customers. But now even richer tech companies are simply waltzing through the front entrance, claiming whatever they like: a Reese Witherspoon vehicle (or three) for Apple, a $400 million Lord of the Rings show for Amazon, a Karate Kid sequel for Google’s YouTube. The disruptors in Hollywood’s rearview mirror are much closer than they appear.
Hence the musical-chairs scramble of the old guard, who argue they have neither the capital nor the technical know-how to properly compete with the digital insurgents. It’s not just AT&T and Time Warner (whose merger may be blocked by the Justice Department). In December, Disney announced a bid to acquire 21st Century Fox for $52 billion, but that deal may also be scuttled since Comcast declared on Wednesday that it will offer a larger, all-cash deal for Fox. Meanwhile, CBS and Viacom are in the midst of highly fraught merger talks that could lead to a union later this year.
According to the Hollywood narrative, the FAANG companies are taking bites out of every part of the pay-TV business model. Netflix and Amazon spent a combined $10.8 billion on content last year, driving up the cost of shows and talent for everyone. Television advertising is on the decline, but Facebook and Google hold a duopoly over the digital advertising market, making it tough to translate TV ad sales online. Apple is rich and ubiquitous enough to build a viable streaming competitor whenever it pleases, as it did in music. All five companies have a massive head start in crafting reliable digital platforms that people enjoy using. “We don’t have the tech platform, don’t have the engineers, don’t have the infrastructure,” Time Warner CEO Jeff Bewkes said during his courtroom testimony. Woe is the executive who stands to make up to $200 million if the merger is approved.
No company will emerge from these corporate realignments as a victim. The media and communications giants are themselves conglomerates that bulldozed over all sorts of industries to achieve dominance. Time Warner’s origins lie in a 97-year-old newsmagazine. The last “T” in AT&T used to stand for telegraph. Like their new rivals in Silicon Valley, these are firms that know how to leverage power, which is why the Justice Department believes a combined AT&T–Time Warner would lead to higher pay-TV prices for consumers and reduced competition. Internet-based “skinny bundles” of channels, offered by companies like Google and Dish Network, could be especially threatened. “With the merger, all the incentives change, and we have one of our most important licensers [Time Warner] teaming up with our biggest adversary [AT&T],” Warren Schlichting, the director of Dish’s Sling TV, said in his testimony. “I just don’t know what incentive Time Warner would have to get a deal done.”
The decision in the AT&T–Time Warner case, expected by mid-June, will have serious implications for the rest of the entertainment world upheaval. Because AT&T and Time Warner have few overlapping business lines, their type of merger is rarely challenged by the Justice Department. If it’s blocked, that would spell trouble for tie-ups between Disney and Fox or Comcast and Fox, since all three companies own television networks and movie studios. But even if one or more of these mergers is deemed illegal, the companies will just try a different permutation. Comcast made a failed bid for Disney in 2004, and a Fox overture toward Time Warner in 2014 was rebuffed. It’s in their DNA to gain power via M&A. (When the AT&T–Time Warner deal was announced in 2016, Netflix CEO Reed Hastings expressed pride that his company had grown organically rather than through acquisitions.)
Still, the Silicon Valley firms have taken over television at a speed that’s disorienting for incumbents, and in a way that doesn’t raise all boats (and customer prices) like the emergence of cable did. Building up a defensive bulwark has more urgency now than it ever did. AT&T–Time Warner is actually one of the tamer options on the table. A combined Comcast and Fox would give America’s largest internet service provider a second movie studio and an expansive lineup of cable networks (Comcast already owns NBC and Universal Pictures). An analyst called it “a content and distribution superpower like we’ve ever seen” in an interview with The New York Times. In the long term, both of these pairings could provide an opening for an abuse of power thanks to the rollback of net neutrality. Comcast or AT&T might one day decide to make it easier to stream the shows it owns rather than the ones being offered by tech companies.
The one combo that might truly challenge Netflix’s dominance is a tie-up between Disney and Time Warner. With HBOGo and HBONow, Time Warner has created the most streamlined and successful standalone streaming apps of any cable network. Disney is attempting the same in the sports world with its new ESPN+ app. Between them, the two companies control a huge amount of the culture-consuming content that dominates the lives of internet denizens—Star Wars, Game of Thrones, Pixar, Adult Swim, CNN, Westworld. The combined company would also own all the television rights to the NBA and could continue to expand our debilitating dependence on superheroes via the Marvel-DC Combined Cinematic Universe. Every Twitter trending topic would be a promotion for a Disney–Time Warner property.
That’s the real path to Netflix-style dominance—a never-ending abundance of content that keeps people sated, if not exactly satisfied. In an entertainment world split between sequel-ready mega-franchises and hyper-specific niches, quantity is quality. The question now is which companies the government will allow to compete on those terms.
Disclosure: HBO is an initial investor in The Ringer.