AT&T wants to fast-forward into the streaming future after completing Time Warner merger

DALLAS — For AT&T, the long fight to buy Time Warner may be over, but in many ways, the show is just starting.

Analysts and shareholders will now watch to see whether AT&T can execute its aspirations to become a mover and shaker in a fast-paced media world increasingly populated by companies born in the internet age. Facebook, Google, Apple, and Amazon are spending billions of dollars on original content and stealing away viewers who are cutting the cord on traditional pay TV.

For almost 20 months, AT&T waited to get the green-light to combine the telecom company's mobile, pay-TV, and broadband businesses with Time Warner's entertainment empire that includes networks like TNT, CNN, and HBO. The government sued to block the merger, but lost decisively on Tuesday, June 12, when a judge ruled that the merger should go forward without conditions. Although the government could still appeal, it chose not to stop the deal from closing.

The telecom giant must now tackle its next challenge: integrating two companies with distinct cultures and technology systems to create a superior customer experience. It has already announced plans for a new "skinny" bundle and hinted at new ways to package popular Time Warner content such as HBO's Game of Thrones for a mobile audience.

And it must show that the combination will save money and drive up profits while holding onto the talent that made Time Warner worth its high price of nearly $109 billion, including debt.

But ultimately, customers will vote with their dollars as the company debuts new video packages and customized content. It will have to overcome its reputation as a buttoned-up legacy telecom that's a novice in entertainment and a dinosaur compared to the hip, digitally-minded companies with whom it now competes.

When AT&T completed the deal on Thursday, June 14, one of chief executive Randall Stephenson's first actions was sending an email to all employees. In a CNBC interview, he said he reassured them that the management team would not pull back on investment or step on creativity. In the email, he "committed that they would have all the resources and the flexibility and the freedom to do what they have been doing so well for so long."

"They are different cultures. And you want to preserve the different cultures," he said in the interview on Friday, June 15. "It's really important. This is a business we're buying that is all about creativity and talent and how can we ensure that we don't disrupt or interfere with that creative capability."

It is sometimes the little things that customers notice first. Just ask Elise Eberwein, executive vice president of people and communications at American Airlines.

Nearly five years ago, American Airlines merged with US Airways and became the world's largest airline. They consolidated their headquarters in Fort Worth, Texas, and adopted American's name.

American Airlines prioritized quick wins to calm unsettled employees and frequent fliers and show the merger's upsides, Eberwein said.

When commodity prices went up after the merger, American decided to cut costs by having fewer almonds in a warm mixed nuts snack that's served in first class with wine, beer, and other beverages, she said.

Passengers took it as a sign that the combined companies were cutting corners and cheapening the quality of service, she said. The airlines reversed course and added more almonds back into the mix, along with the cashews, pistachios, and pecans, she said.

Eberwein said the decision taught American it had to strike a delicate balance of rushing to get employees and customers "to the land of certainty" without running over people.

She said putting employees at ease about the merger was a tough challenge, since many had worked at the company for decades. The average tenure is 20 years, and many employees have family members who worked at the airlines before them. AT&T also has many long-tenured employees.

"You have to be so cautious not to disrespect what's been built in the past, but you have to point people toward a better future together," she said. And, she said, companies that merge must be "cognizant that the people you need to integrate are the same people who built the things you are rethinking."

Next week, the AT&T executive tapped to lead Time Warner, John Stankey, will hold town halls with Time Warner employees, he said in a CNN interview. AT&T will retire the Time Warner name — and the division will be known as WarnerMedia.

With the merger, AT&T will have major business hubs on both coasts. AT&T will have to manage an employee base that's spread around the country. Its headquarters will remain in downtown Dallas, but Time Warner's former headquarters are in New York City. Its entertainment companies, such as Warner Bros., HBO, and Turner, hire actors and produce TV and films in Hollywood. Turner, including CNN, is based in Atlanta.

Time Warner's former CEO Jeff Bewkes will serve as a senior adviser during the transition.

AT&T has argued the merger will allow the companies to offer new video products, boost advertising dollars, and benefit from synergies. For example, consumer data from AT&T's mobile, TV, and broadband customers will be used to serve up targeted ads to viewers on Turner networks and video products, such as AT&T's streaming service DirecTV Now. The merged companies have a new division focused on building out that new ad platform.

With the Time Warner acquisition, AT&T becomes the most indebted company in the country, except for financial companies, with a debt load of more than $180 billion. But it has promised shareholders the merger will amount to $2.5 billion in synergies annually by the end of the merger's third year — $1.5 billion of that will come from cost savings and $1 billion from a boost in revenue.

Some of those cost savings could come from layoffs of employees in redundant positions or budget cuts to certain divisions or departments — decisions that could spark tension or unhappiness within the ranks.

Stankey, the CEO of AT&T's media business, said in a CNN interview that frontline employees in news and entertainment should expect few major changes. He said they are "going to keep doing exactly what they were doing the day before the transaction closed."

And he said he won't meddle in the hiring of actors or the making of TV shows and movies. Instead, he said, he'll focus on the company's long-term strategy.

One of the first new products that AT&T plans to roll out is its cheapest streaming service yet, designed for mobile devices. The streaming service, which will cost $15 a month, will be a "skinny bundle" made up of Turner programming, but no sports. It will be free for all of AT&T's mobile customers with unlimited plans.

And Stephenson said AT&T plans to make a merger and acquisition deal to accelerate the build-out of its new advertising platform.

One of the toughest constituencies may come from within AT&T's new ranks: skeptical and nervous Time Warner employees, who wonder if management will squelch the creativity that inspires hit TV shows and movies.

Unlike some other companies, Time Warner is made up of a family of brands from HBO to CNN, which each have their own flavor and fan following. And some of their employees aren't shy about sharing their thoughts.

Turner CEO John Martin was less than impressed when he spoke about AT&T's entertainment offerings at a tech conference in February. He dismissed AT&T's streaming service, DirecTV Now, which has a cable-like lineup of channels distributed over the internet, saying it doesn't make money. And he said programmers have been "let down" by telecom, cable, and satellite companies that have given customers a poor experience.

"I have DirecTV," he said. "I live in Beverly Hills. It's not that good."

And though Stephenson and Stankey have promised not to meddle, they have floated some ideas. Last year at a J.P. Morgan conference, Stephenson said the companies might change the format of content for viewers. For example, he said, an HBO Game of Thrones episode could be trimmed down to a more mobile-friendly length of 20 minutes instead of 60 minutes.

When he made the remark, he acknowledged the idea might cause HBO's chief executive Richard Plepler "to panic."

"Can you begin to curate the content — let the content geniuses and creative geniuses think about this — but curate the content uniquely for a mobile environment?" Stephenson said.

Larry Downes, a researcher at Georgetown University who studies the intersection of technology and public policy, said companies often underestimated another challenge of mergers: combining information technology systems. He called it "the biggest underappreciated risk of any merger."

He said it's crucial to quickly integrate customer databases, email systems, and data-analytics systems — especially since AT&T has already lost about 20 months waiting for the merger's approval. "In this business, a year or two could be deadly," he said.

That technology infrastructure will also underpin AT&T's plans to launch new streaming services with different channel lineups and price points.

Its first streaming service, DirecTV Now, has grown to about 1.5 million customers. But it has had some technical glitches, it has acknowledged in tweets to customers. In one case, DirecTV Now crashed while some customers tried to watch it during an NBA Finals game.

The technical troubles, even when limited, can cause headaches for companies since customers can quickly broadcast their frustrations on social media. Without the contracts of cable or satellite TV or the need for equipment like a cable box, they can easily switch to a competitor.

AT&T will also have to persuade customers who buy the government's arguments — though rejected by a federal judge — that the merger will create a giant company that's indifferent to customers' concerns and eager to raise their monthly bills, said Kara Alaimo, an assistant professor of public relations at Hofstra University.

She said she'd advise AT&T to get out front and communicate with customers, knocking down misinformation that might hurt its reputation, such as rumors of layoffs, poorer customer service, or price hikes.

"There will be a lot of fears that customer service will decline, and the best thing AT&T can do in this case is show by example," she said.