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Here’s why it doesn’t make sense for AT&T to own Time Warner

Randall Stephenson, CEO of AT&T
Getty Images
Randall Stephenson, CEO of AT&T

AT&T wants to buy Time Warner, and Wall Street, predictably, obliged, sending Time Warner shares up and AT&T stock down. (Bloomberg reports AT&T is offering $110 a share, a 24 percent premium to today's closing price, pegging the total value at about $86 billion.)

Too bad the deal doesn't make much sense. (Similarly, it doesn't make sense for Apple to own Time Warner, either, which we'll get to further down.)

Here's why: A company that owns pipes, whether over the air or through the ground, doesn't actually benefit from owning the content flowing through those pipes.

Time Warner, which owns HBO, CNN, Warner Bros. and a lot of sports rights via Turner, loses its value if it can't sell its content to every possible distributor, including AT&T's main rivals, such as Comcast and Verizon.

AT&T knows this (or should), but since the company's been saddled with a price war (thanks to T-Mobile and Sprint), it's been looking for new ways to increase growth.

As part of that effort, it completed its $49 billion acquisition of DirecTV last year, a deal that actually makes sense since it allows AT&T to upsell both services to the respective customers, as well as potentially making both stickier.

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Time Warner building, New York.
Scott Mlyn | CNBC
Time Warner building, New York.

Even then, fewer people today are buying TV subscriptions from satellite providers (long known as the cheaper option to cable), since they can now get a lot fromNetflix and Hulu and Amazon.

One of the ironies of this acquisition (if it goes through) is that Time Warner CEO Jeff Bewkes spent most of the last eight years unwinding what was once the largest media company in the world.

The 64-year-old executive spun off Time Warner Cable in 2009 (yes, it's a different company) and that same year he also separated AOL. He unloaded mag publisher Time Inc. just two years ago.

Bewkes knew a decade ago that owning Time Warner Cable didn't help either the pay-TV operation or the content divisions, since as we pointed out earlier, he wants to sell HBO and CNN and Turner toevery cable distributor. He also couldn't sell the channels to Time Warner Cable at a discount since contract clauses (called most-favored nation) prevent programmers from doing so.

But now, somehow, Bewkes is willing to sell AT&T CEO Randall Stephenson on the idea that it's different this time, and that he'll be able to sort it all out.

There is the idea that since Time Warner may get deeper into the game of selling directly to consumers (a la HBO Now), selling to other distributors may be less of an issue. But online subscriber numbers are still way too small to make up for what would be lost in selling to cable, satellite and telecom. It's not there yet, in other words.

The counterexample everyone is going to cite isn't really a counterexample.Comcast owning NBCUniversal (an investor in Vox Media, which owns Recode), hasn't really boosted their respective value.

Comcast, the cable company, does well because it operates its business like a cable company, increasing broadband speeds as well as tapping into new business lines like selling services to small- and medium-sized business.

NBCUniversal does well because it operates like a content company, which means making shows and owning sports rights that distributors like AT&T and Verizon and Time Warner Cable and Comcast will want to pay for and that advertisers will want to support.

There's scant evidence either business has materially improved the other, but since both businesses are run fairly well, both are doing fairly well, and that has added to Comcast's top line as well as its profits. So there is a nominal benefit, but only a nominal one, meaning it's about adding up more numbers.

So let's get back to Apple.

Apple's hardware (iPhones, iPads, Macs, Apple TVs, even Watches) is so widely propagated, Apple effectively owns a distribution network. So if it were to own HBO and CNN and rights to NBA games, it would have to make them available on Roku devices and Amazon Fire devices and Comcast's set-top box, or any other device or distributor. So it wouldn't benefit from owning the content either.

But it would be interesting if it did, since it would finally see firsthand just how expensive and difficult it is to create good content.

By Edmund Lee, Re/code.net.

CNBC's parent NBCUniversal is an investor in Recode's parent Vox, and the companies have a content-sharing arrangement.