‘Change is coming. It’s about to get rougher before it gets smoother’: Why AT&T is combining HBO and Turner

This is because HBO may be a hallowed brand in TV — and both HBO and Turner might be cash machines with a combined $19.6 billion in revenue in 2018 — but AT&T wants to play a more ambitious game. The phone company is focused on building a media, entertainment and technology business that rivals tech giants ranging from Netflix to Google. And if that means being less precious about certain parts of the Time Warner legacy, so be it.

“Change is coming,” said a WarnerMedia insider. “And it’s going to get rougher before it gets smoother.”

What happened
The departures were not entirely out of the blue. Shortly after the AT&T-Time Warner deal was cleared by a federal court last week,  The Wall Street Journal reported that former NBC Entertainment exec Bob Greenblatt was likely to take on a role at WarnerMedia overseeing HBO, Turner and the upcoming streaming service. Sources said that AT&T had roles for Plepler and Levy inside the new, merged business, but that they would likely report to Greenblatt. For two company lifers, it would have been tough to report to a former rival, sources said. Ultimately, WarnerMedia employees across the group are in a state of limbo, with very little information being provided on what AT&T plans to do with its media and entertainment assets.

AT&T and WarnerMedia CEO John Stankey are expected to share more information about upcoming changes to HBO and Turner this week, according to a company email shared by a source. Other WarnerMedia sources are suggesting that this info could include information about layoffs, which several insiders expect to come down sooner rather than later.

Until then, most employees are only left to speculate about what AT&T is planning; only AT&T CEO Randall Stephenson, Stankey and Stankey’s direct reports have any concrete ideas on what might happen, these sources said.

What’s clear is that AT&T is looking to find $2.5 billion in savings over the next three years by combining assets and eliminating redundancies — especially in administrative departments. Merging HBO and Turner would help cut costs. (Warner Bros. film and TV studio businesses are expected to be left alone for now, outside of eventually producing programming for the upcoming WarnerMedia streaming service.)

There could be some mergers between WarnerMedia and Xandr, too, sources speculated. “If you’re trying to pay down the debt, why not go beyond Stankey’s remit?” said a source.

With Plepler and Levy leaving, a picture is emerging on what a combined HBO and Turner could look like, based on conversations with WarnerMedia insiders.

It’s a high possibility that HBO and Turner’s entertainment assets, which include TBS, TNT and Cartoon Network, becomes one larger division. The HBO brand and its TV network and other key assets stick around and become the centerpiece of the upcoming streaming service, which is expected to launch by the end of the year. Once onboard, Greenblatt would run this group, which will likely include oversight of the streaming service, as well as the content group headed up by WarnerMedia head of content Kevin Reilly.

With Greenblatt overseeing entertainment networks, this leaves news and sports, which will reportedly be run by CNN president Jeff Zucker.

The futures of certain networks within the Turner portfolio are also up in the air; for instance, TruTV could pivot to sports as TBS and TNT focus more on entertainment, sources said.

What it means
Time Warner viewed HBO and Turner as separate and distinct entities, but AT&T doesn’t.  AT&T’s position is that HBO and Turner have become hugely profitable, but in this era where competition comes in the form of streaming video giants that spend more than $10 billion per year on content — and rack up a ton of debt — volume is necessary. If WarnerMedia’s streaming service is to become one of the handfuls of media services people are willing to pay for, it needs to post a competitive challenge to Netflix, Amazon, Disney and others. Here, volume helps.

But so does a brand like HBO, which people have already proven they’re willing to pay for — both through linear TV and through HBO Now, which has more than 5 million subscribers. The question is in whether HBO’s brand is elastic enough where it can be the “front door” for WarnerMedia’s streaming service, which then can introduce users to a broader variety of content, some of which is HBO-level scripted and unscripted shows, and a lot of which is not.

It’s reasonable to understand why some HBO employees are frustrated that this could diminish HBO’s brand. But that’s not entirely accurate as while many people go to HBO for “Game of Thrones,” plenty of people also go to HBO for licensed films. (Also, HBO made “Entourage.”)

Plepler’s departure is a huge loss for WarnerMedia. But in the same aforementioned stage interview between Stankey and Plepler, Stankey also indicated that increasing the volume at HBO means producing more of the top-level original series the brand is known for. And if WarnerMedia is able to retain other key HBO executives such as Casey Bloys, the quality of the original series should remain intact. (This does not include the fact that Greenblatt and Reilly have greenlit shows for NBC and TNT in the past that could arguably live on HBO.)

Ultimately, the departures of Plepler and Levy have created a very uncertain environment at Time Warner Center and other WarnerMedia offices across the country. But one thing is clear: change is coming as AT&T tries to truly take on the tech giants.

“We’re all making money, but they [AT&T] want to make more money,” a WarnerMedia source said.