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Here’s Why AT&T and Time Warner Is Worse Than the AOL-Time Warner Deal

October 24, 2016, 2:11 PM UTC

Now that the offer is official, many have drawn the obvious comparison between AT&T’s proposed $100-billion acquisition of Time Warner and the disastrous combination of Time Warner and AOL in 2000. But the current deal may actually make even less sense.

How is that even possible, you might ask? After all, AOL’s $164-billion takeover of Time Warner still stands as one of the worst deals of all time and for good reason.

But at least the combination of Time Warner’s media and cable assets with AOL’s online business was theoretically about trying to become part of the future of media and entertainment. Its influence was already waning at the time, but AOL had a foot in the emerging world of the Internet, and theoretically some knowledge about how it worked.

The collapse of that merger had more to do with a clash of cultures (something Time Warner CEO Jeff Bewkes was a part of) than it did any kind of inherent strategic error in the combination itself, although there’s no question that AOL was wildly overvalued.

When we look at AT&T and Time Warner, it feels like a deal that is being driven by a vision of the past, not the future. It seems like a desperation move by both, an admission that they don’t really know what else to do, except try to get larger and hope everything works out for the best. And AT&T is paying a huge price for an uncertain outcome.

In fact, this combination may be even more of a signal that certain markets have peaked than AOL-Time Warner, which marked the peak of the first digital bubble.

AT&T (T) is looking at slowing growth and/or future declines in both its core telecom business and its core cable business. Its proposed solution? Buy a content company and become vertically integrated. Time Warner’s (TWX) content business is aging rapidly, and innovation is in short supply. So why not get married to someone who owns the pipes?

There are serious flaws in both of these arguments. For one thing, vertical integration between distributors and content producers is no guarantee of success, and it’s not clear that even trampling all over the principle of net neutrality will make it work—although there’s no question AT&T will try.

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In fact, owning Time Warner content could actually make it harder for the content side of the combined business to prosper because potential partners may not want to sign deals with the telecom giant where they might have if Time Warner was a standalone company.

“When we combine Time Warner content with our scale and distribution… we’re going to have something really special,” AT&T CEO Randall Stephenson has said. But in what way is it going to be special? Is it going to somehow generate synergies that would never have been possible if the telecom and satellite provider had just licensed content?

Has Comcast (CMCSA) really seen much of a strategic benefit from owning NBCUniversal? It broadened the company’s lines of business, and provided a hedge against the decline of cable, but what hedge we’ve seen has mostly come the theme park and movie business—not the TV or web side. And very little synergy.

About the only bright spot in Time Warner’s portfolio is HBO, which is putting up a credible fight against Netflix (NFLX) in streaming, and could theoretically benefit from access to AT&T’s customer base. But is that really enough to justify a $100 billion deal?

On the Time Warner side, the fact that the company is so willing to sell to just about anyone just reinforces the fact that it is more or less out of ideas when it comes to figuring out how to survive in the current landscape. (It was rumored Time Warner also had discussions in the past with Apple (AAPL) about a potential acquisition, but Time Warner CEO Jeff Bewkes has insisted that’s not the case.) Might as well hook up with a pipeline company!

AT&T to buy Time Warner for more than $80 billion. Watch:

In fact, there’s a case to be made—as BTIG analyst Rich Greenfield did in a recent post at the research firm’s site—that the Time Warner sale marks a top for the traditional media market.

“As speculation around the AT&T Time Warner transaction built on Friday, legacy media stocks all surged. The initial reaction was who is next (to be acquired) as content and distribution vertically integrate,” Greenfield said. “In reality, legacy media stocks should have declined, as Time Warner’s sale is signaling impending danger for all.”

So if the proper response is to congratulate Bewkes for seeing the writing on the wall and knowing when to get out, what does that say about AT&T?

Even if you assume that content and the pipes to distribute it is a viable strategy, combining AT&T and Time Warner still doesn’t really make sense. For one thing, as Matthew Ball of Amazon Studios (AMZN) pointed out in a series of Twitter (TWTR) posts, Time Warner has already licensed virtually all of its content through long-term agreements, meaning there is little upside.

AT&T could push Time Warner forward digitally by moving aggressively to turn assets like CNN and Turner Broadcasting into more digital-first properties. But is that going to generate synergies that make a $100-billion deal worthwhile? If anything, it will merely keep the combined entity treading water.

Whenever there is a deal of this magnitude, there is almost always an unmentioned player on the sidelines whose influence pushes the two companies to combine, and this deal is no different.

In the case of AT&T and Time Warner, that player is Facebook (FB), the 800-pound gorilla when it comes to the media and entertainment business. Even after the two companies merge, they will only be worth about $280 billion to Facebook’s $370 billion. Facebook is also growing much faster, has more than 1.5 billion users, $20 billion in cash, and virtually no debt.

Combining a telephone and cable company with the owner of some websites and TV channels might seem like a great competitive response, but only if you misunderstand the problem.

On some level, AT&T probably assumes that control of major distribution pipelines and the content that flows through them will give it more bargaining power with advertisers and customers, and thus make it easier to compete with Facebook. And that would be a great move to make if Facebook was playing chess, but it’s not—it’s playing poker.

When it comes to distribution that matters in the current media environment, Facebook is holding face cards, and AT&T has twos and threes. Buying Time Warner and taking on $22 billion more in debt doesn’t even those odds. If anything, it will make it harder to succeed. But it probably seems like a good thing to do if you are out of ideas.