AT&T’s Deal With Discovery Was Done Out of Weakness

It’s another shark week in the media world. Photo: Discovery

AT&T and Discovery are not two companies that most people associate with each other, but now they’re combining forces. On the latest Pivot podcast, Kara Swisher and Scott Galloway discuss the wisdom of the unexpected deal, and AT&T’s very mixed record in the media business so far.

Kara Swisher: AT&T is spinning off Warner Media and merging it with Discovery in a new standalone company. The abrupt move will combine the reality-TV-streaming power of Discovery, which includes networks like the Food Network and HGTV, with Warner’s HBO Max, Warner Brothers Studios, and CNN, in an effort to compete with heavy hitters like Netflix and Disney. Discovery CEO David Zaslav will run the combined business, which is interesting. AT&T will unwind its 2016 deal with Time Warner, the $85 billion deal that included the phone company’s debt. The new company will receive $43 billion in a combination of cash, debts, and securities, but it will still start with $55 billion in debt.

You know what this says? John Stankey is a shitty media strategist for this company. And I don’t know what to say. I like David Zaslav, but, again, he’s an old-media type personality. What do you think, Scott? You must have a lot to say here.


Twice weekly, Scott Galloway and Kara Swisher host Pivot, a New York Magazine podcast about business, technology, and politics.

Scott Galloway: Yeah. So look, the most expensive trip ever taken was Verizon and AT&T’s trip from New Jersey and Dallas to Los Angeles.

Swisher: Yeah. To go to the Oscars.

Galloway: Yeah. Verizon leaves $5 billion less rich. They bought Yahoo and AOL. Tim Armstrong sold it for $10 billion. It’s worth $5 billion just a couple of years later.

Swisher: And you think it’s worth more.

Galloway: It’s the fourth most-trafficked internet site. And then Time Warner — it wasn’t $85 billion with the debt, it was more like $110 or $120 billion. It makes Jeff Bewkes look like a genius. He sold at the top, and then AT&T supposedly gets $44 billion of debt relief from the new entity, or they’re taking $44 billion. And they’re going to own 71 percent of the new company, which to make this a wash — that means the new entity would have to be worth $100 billion in equity, which it will not be. So this also looks like it’s going to be something that acknowledges the valuation has been cut in half.

Now, having said that, a step back when you’re on the wrong path is a step in the right direction. And to Stankey’s credit, he said, “This isn’t working. And how do we have some sort of peace with honor here and make this mistake — or the exit wounds — the least damaging as possible?” Putting it into an independent unit, and then bulking up with Discovery, is the right move because it creates arguably the third or fourth player — the consolidation is happening. This will be a company with $20 billion in original-content budget. I don’t know how that synergy is going to work — I don’t know if Don Lemon is going to be on Naked and Afraid or Anderson Cooper is going to be hosting Shark Week. I don’t know how these things play together, but Zaslav’s challenge is that he will be given what very few traditional media executives, other than Bob Iger, are given license to do. He’s going to have to walk through the valley of death and make such extraordinary investments and take its EBITDA down in order to move people from analog cable — where they don’t have access to consumer data, to streaming, where they have access to it — and hope that the market, similar to what it has done with Disney, tolerate that decline in EBITDA because they see the great world of streaming. But this was strategically, in my view, a very, very smart move.

Swisher: Well, who else could have bought it? I was trying to think.

Galloway: What did we say? We said AT&T is going to spin this thing and they have. AT&T needed to reduce debt. They’ve done that. They want to get the most money they can. This is what happens in conglomerates. Investors, unless they see immediate synergy, they find the shittiest business and they value the whole business at that multiple. And that’s what they were doing with AT&T. And AT&T and Verizon have these amazing businesses.

Swisher: They do — 5G.

Galloway: And can you imagine the culture clash there? A bunch of Dallas Republicans and a bunch of New York Democrats.

Swisher: Well, when Richard Plepler left, you were like, “Oh yeah.” He couldn’t stand Stankey and the rest of them. And he didn’t want to be lectured. Listen, Stankey lectured me about media. He’s real tall and I was like, “I can’t hear you up there.” It was really astonishing, the lecturing that went on by these phone people about media to media people. And I know media people can be obnoxious, but literally they knew nothing and it was all such nonsense, the stuff they were spewing. They were on stage at Code a number of times, whether it was Randall Stephenson or Stankey. And I kept thinking in my head, “Bullshit, bullshit, bullshit.” the whole time. They’re competing with these tech companies and Netflix, which have done a fantastic job and have tons of money for content creation. That said, last night I watched two HBO shows. The Nevers, which is  all about badass women, and Mare of Easttown. She’s so good.

Galloway: HBO still has some of that secret sauce.

Swisher: They do, but to have Plepler take his Gucci loafers and go is a real blow.

Galloway: Well you know who the next exit is — Jason Kilar, because Zaslav came out on top.

Swisher: Someone pretty high up said, he’s at one of these restaurants looking for a job right now.

Galloway: But look, I had a different experience with John Stankey. I haven’t had a lot of interaction with him, but he basically called me and said, “What should we do?” And he seemed very humble and very thoughtful and listened a lot.

Swisher: Not to girls, not to ladies.

Galloway: Again, a mistake is bad. Not acknowledging the mistake is worse. And I think this is probably as I think about it, a bulking up and a spin. No one was going to pay the money they wanted in an asset purchase.

Swisher: They’ve already made the wrong decision. I don’t mean to insult David Zaslav, but he’s just not the future leader of media. It’s like you put him against Ted Sarandos and Reed Hastings? Give me a break. They’re going to just dunk on him over and over again. I like him, but he’s so old-media.

Galloway: You know what we never talk about though, is a lot of this is dictated by your shareholder base. AT&T has a shareholder base that wants a dividend, and was never going to let Stankey make the types of investments they need to make. Keep in mind the cable bundle does three times the profit of the streaming video companies now and has a third of the valuation. And people buy AT&T stock to get a 5 percent dividend. So they’re never going to let Stankey make the requisite investments he needs to make to compete with the Netflixes of the world.

Swisher: I guess. They’re letting him off — he should’ve been fired. You make this many mistakes? See you later.

Galloway: I want to be clear. You want to talk about foul balls? Talk about DirecTV. They purchased that thing for $55 billion and they basically sold it for $15 billion. They will claim they’re cleaning up Randall Stephenson’s mess, but Stankey was the head of strategy. He has to own this too. So you’re right, but look, a bad decision is wrong. Not fixing it is worse. This was a self-inflicted wound. They’re trying to heal themselves. They had to do this. They did this from a position of weakness, quite frankly — my guess is they were shopping all these assets around and they realized we’re not going to get the price we wanted. And they’ve been very cagey around valuation. I think with the numbers, when people actually get their pencils out, I think what this is going to show is that a $120 billion acquisition was turned into a $60 billion company. And so I think they’re going to have to take a fairly substantial write down. But just in terms of the future of HBO and CNN, which I adore, I think they’re just incredible assets. I think this gives them a chance at getting the pure play. And Zaslav, I don’t know him at all.

Swisher: The people in Hollywood love him. He’s not Jason Kilar, who pissed everyone off telling them the truth. Jason was just telling them the truth and just did it in a way they didn’t like to be petted. It will be interesting if Jeff Zucker stays now.

Galloway: I think he will. I read he’s Zaslav’s friend.

Swisher: Oh, I bet. Oh, I bet they hang out and do cigars and brandy all the time. I could see that.

Galloway: Well, that’s what all white guys do. All we do is just drink brady and smoke cigars.

Swisher: John said he gets to be CEO. Everyone moves up and to the left after losing all this money.

Swisher: We’re having Code and you and I are going to grill him, if he comes. He has no guts to come. John Stankey, do you have the  guts to take Kara Swisher? Remember I was the short girl biting your knee at the last event.

Galloway: What about girls biting my knees? What are you talking about?

Swisher: When we were at an event, literally he ignored me.

Galloway: Is this a Bill Gates party? What are we talking about?

Swisher: No. We were at the Vanity Fair event or whatever, and Stankey and Randall, they’re so freaking tall. They’re ridiculously insanely tall. And I was talking to them and they treated me like — It never really happens to me,  but these two were lecturing me on media. And I literally was like, “I gotta get out of here.” Like who’s this annoying girl? I could just see it. It doesn’t usually come out quite so clearly. But I got to tell you. John, come to Code and me and Scott have a few questions for you.

Pivot is produced by Rebecca Sananes.

This transcript has been edited for length and clarity.

AT&T’s Deal With Discovery Was Done Out of Weakness