CEO Daily: Wednesday 25th October

Oct 25, 2016

Good morning.

I listened carefully as Jeff Bewkes and Randall Stephenson made the TV rounds yesterday, explaining why they thought their planned merger of Time Warner and AT&T was a winning idea.

It has nothing to do with giving AT&T customers preferential access to Time Warner content, Stephenson told CNBC. "That’s nonsensical. We're buying Time Warner for $100 billion, including debt, and they have built this amazing franchise, distributing their content broadly and deeply all over the world. The idea that we're going to come along and start to constrict the distribution of this content makes no economic sense. That would be a crazy idea.”

Stephenson didn’t directly address the notion that AT&T might “zero-rate” Time Warner content – meaning let its users watch without counting against their data packages. The company has already said it plans to “zero-rate” Direct TV. It’s that kind of uneven treatment that will put the “net neutrality” advocates on the warpath.

Let’s assume Stephenson has no intention of favoring Time Warner content, even with zero rating. Then what’s the benefit of the deal? Bewkes claims the two companies can innovate together better than they can alone. “We realized that if we had ourselves together that we could create more innovations for consumers so they can have more choices of packages. They are going to end up with more competition therefore lower prices.” (Not clear why this sort of innovation wasn't possible with Time Warner Cable, which Time Warner spun off five years ago.)

Can a giant combo-company really win the innovation race better than, say, two smaller, more focused ones? Just the process of integration will consume both behemoths for months. And my experience in the media world leaves me convinced that deals between divisions of the same company can be every bit as difficult, if not more so, than deals between separate companies – especially when they disrupt existing revenue streams. (The disastrous AOL-Time Warner merger was a case in point.)

So count me skeptical. And count the markets skeptical, too. Yesterday, Time Warner stock was trading at around $87, well below the $107.50 offer price.

Incidentally, if the deal does go through, Jeff Bewkes should be celebrated by his shareholders as one of the great media titans of our times. Fortune's number crunching shows that at the deal price, he will have delivered shareholders an annualized return of 17% since becoming CEO in January of 2008. That would top Disney CEO Bob Iger’s return to shareholders over the same period, and roughly match Comcast CEO Brian Roberts’.

More news below.

Alan Murray
@alansmurray
alan.murray@fortune.com

Top News

Apple’s Share of the Pie
Sales of smartwatches fell nearly 52% year-on-year in the third quarter, according to research firm IDC, as Apple, Samsung and Google all struggled to roll out new-generation products. Last year’s figures were boosted by the full roll-out of the Apple Watch, but the new iteration only hit the stores in the second half of September. Elsewhere, research from eMarketer showed Apple solidly defending its share of the key smartphone market but losing ground in tablets and struggling to stay competitive in TV streaming. Concerns about Apple’s exposure to short-lived fads or its failure to dominate some product segments may be mitigated by the rapid secular growth in mobile proximity payments, which will more than double next year to $62.5 billion, according to eMarketer. Fortune
PayPal Strikes a Deal With Facebook
No-one should think Apple is going to have the mobile payments market to itself though. There was an eye-catching development in an (admittedly different) segment of that market Monday when PayPal teamed up with Facebook to expand the possibilities for conducting transactions through the Facebook and Messenger apps. Facebook’s recently-launched “Buy Now” function gets some robust payments infrastructure and PayPal gets a distribution channel with potential to rival, or even surpass, Ebay, its first true love. Fortune
China’s M&A Wave Rolls on
China’s HNA Group, which owns assets from shipping to supermarkets and airlines, bought a 25% stake in Hilton Worldwide Holdings from Blackstone Group for $6.5 billion. That brings the total amount of Chinese outward M&A activity to nearly $200 billion this year, as eloquent a statement as you could wish for about the narrowing scope for profitable investment at home. The biggest of those deals may be in trouble though. ChemChina missed a deadline to explain how it will assuage antitrust concerns in the EU about its $43 billion bid for Syngenta, meaning it will now face an in-depth probe. WSJ, subscription required

How to Secure Cars Against Hacking?
Federal regulators issued new cybersecurity 'guidelines' to automakers, in a move that comes (accidentally) only days after the widespread attack on the Internet that disabled many popular websites for hours. The National Highway Traffic Safety Administration recommended that companies develop layers of protection for vehicles, capable of securing them against hacking throughout their life. They also urged automakers to share information about cybersecurity threats, something that the industry is already doing—at least in theory—through he AUTO-ISAC body. Lawmakers fretted that recommendations and guidelines would not be as effective as mandatory standards in guaranteeing cybersecurity. However, the market penalty for using inadequate systems in future is likely to be extreme, and the legislative process is going to struggle to keep up with the pace of innovation on both sides of the cybersecurity divide. Fortune

Around the Water Cooler

Black Friday Creep Continues After All
When the Mall of America and mall operator CBL Associates decided to stay closed on Thanksgiving this year, we dared to express the hope that ‘Black Friday Creep’ was being reversed. We were wrong. The two largest U.S. mall developers, Simon Property Group and General Growth Properties, are opening their shopping centers on Thanksgiving Day. Only five years ago, it was a shopping-free day. In a world where Amazon never sleeps, the malls can’t stand on ceremony. Fortune
Tesla: Long-Term Vision Vs Short-Term Cash Flow
Tesla Motors announces its third-quarter earnings later today. Every public company does, of course, but few are in such a high-pressure existential race against time to prove that their visionary and disruptive business models can succeed before the money runs out. Elon Musk told staff earlier that these results will be “critical” for the company. Sales are expected to have doubled (of interest will be how much margins suffered under the pressure to meet shipment targets). But cash flow will arguably be the most important metric, given the massive ramp up in capital spending on new facilities for the Model 3. Look out too for any updates on the SolarCity merger and related capital requirements. Fortune
Solar - the World's Favourite Power Source
Solar now accounts for more installed capacity than any other form of electricity generation, the International Energy Agency said Tuesday. A record amount of new capacity was installed around the world in 2015, equivalent to half a million solar panels every day. The IEA revised up by 13% its forecasts for renewable generation over the next six years, with “center of gravity for renewable growth…moving to emerging markets.” But while renewables are essentially replacing conventional generation in advanced economies, they are still covering only half of the expected rise in demand in countries like China, according to the IEA. IEA
Upheaval at Tata
Tata Group, one of India’s biggest business empires, ousted Cyrus Mistry, the outsider brought in as chairman in 2012 to manage the conglomerate’s main holding company after the retirement of patriarch Ratan Tata. The board was reportedly dissatisfied by the performance of a number of assets in the portfolio, including the high-profile and loss-making steel business in the U.K. (now unsellable thanks to the Brexit vote). Ratan is returning to steady the ship as interim chairman while a new boss is found. Mistry, meanwhile, will keep his board seat. Fortune
Summaries by Geoffrey Smith, geoffrey.smith@fortune.com
Twitter: @geoffreytsmith

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