On today’s show we are taking a look at a failure that has attempted to ignore what the underlying market data has been showing for years. The world of business follows the laws of supply and demand. But sometimes you see large companies making large investments hoping that large investments will somehow overwhelm the market and change the course of history.

Imagine for a moment if you went out and bought a poor quality shopping mall with high vacancy. You got a discount to the value from a few years ago and figured you would turn things around by offering some deals to entice new tenants. When that doesn’t work, you then go out and buying the gas station across the street to give you more control over the area. Yeah, that will help fix things.

The world of media has been constantly evolving over the past 20 years, and even longer. But since the 1990’s more and more people have spent more time interacting with the internet and less time with television. That is a clear trend with no doubt. Falling viewership has changed the economics of TV. The number of TV households in the US, Canada and Europe have consistently fallen year over year for the past decade. Our family cut the cord to cable TV back in 2007. 

Therefore it’s no surprise that AT&T’s foray into the world of media has failed.  Three years ago ATT was in court trying to defend their $80B purchase of Time Warner.  We saw a foreshadowing of this outcome earlier in the year with the divestment of its stake in satellite distributor DirecTV.

The spin-off includes HBO, CNN, TNT, TBS and the Warner Bros. studio, into a new venture with Discovery Inc. Discovery’s CEO will be the CEO of the new venture and AT&T shareholders will own 71% of the new venture with Discovery shareholders owning the remaining 29%.

They’re wiping out tens of billions in shareholder equity in the process.

The folks at AT&T made a simple fundamental mistake. They forgot to understand what would add value in the eyes of customers.

This is the second time that the sale of Time Warner failed. The first time, was the $106 billion merger in 2001 with AOL Inc. which was one of the biggest flops in business history. Time Warner eventually spun off AOL.

What is striking about the entire Time Warner acquisition by AT&T is that much of the focus of the merger was internal. There were numerous reorganizations over the past four years. Each time, another wave of experienced people left the company. In the last round, they let go about 2,000 people including some of the industry’s best and brightest creative people.

This left rookie people running the show. They forgot that Time Warner was an entertainment company.

At this point you’re probably wondering what this has to do with real estate.

AT&T, or any business needs to remain relevant to its customers and fulfill its mission. When the business focus shifts to financial engineering of a profit, you can improve the numbers for a quarter. Some investments take longer to realize. So you can make a company profitable for the short term while taking the eye off the future profitability of the company. This kind of corporate shortchanging of shareholder value is rampant in corporate America.

In real estate, you can buy an obsolete asset for a discount and squeeze out a profit. You can buy a property in a shrinking market with falling values. If you buy it cheap enough, you can make a short term profit.

Buying DirecTV was like buying the Titanic after it had hit the iceberg. You could spend a lot of energy re-arranging the deck chairs and selling more drinks at the bar. But the ship is still going down. Buying Time Warner was a way of doubling down on the DirecTV purchase. If AT&T owned both content and distribution, then somehow it would wield more power in the marketplace and multiply its profits. At least that was the theory.