19 May 2014

AT&T Buys DirecTV: Some Macro and Micro Thoughts

A few thoughts on the day after the big merger announcement:

Unlike the Comcast-Time Warner Cable-Charter proposed deal, AT&T's purchase of DirecTV "would eliminate a choice for pay-TV customers in some markets." In those areas where AT&T offers U-Verse service, a consumer likely has a choice of four competitive providers: the incumbent cable operator, Dish Network, DirecTV, and AT&T. If this merger goes through, the four choices go down to three and the new company includes one of the giant providers (as opposed to a combination of two of the smaller ones). While antitrust is far from my area of expertise, it appears that this is exactly the same outcome that doomed AT&T's attempted acquisition of T-Mobile.
While having AT&T and DirecTV under the same ownership would appear to facilitate bundling services for consumers (e.g., in non-U-Verse areas the combined company could offer phone plus DSL plus DBS plus cellphone), unless the DirecTV brand goes away, it would still appear to be the sort of shot-gun marriage that all current and prior telco-DBS "synthetic bundles" are and have been. It's not an elegant solution and "people are abandoning DSL in droves, and buying cable broadband".

When I've read of DirecTV's strong cash flow, but otherwise difficult strategic position (a TV-only provider in an increasingly bundled bustiness) and how AT&T could really use the DirecTV cash to fund its dividend, the story sounded suspiciously like Viacom's 1994 acquisition of Blockbuster to fund the acquisition it really wanted, Paramount Pictures. How did that one work out? Not that well.

Would AT&T apply the DirecTV brand to U-Verse video offering? Maybe that's a better idea. As AT&T's press release on the deal states: DirecTV is "the premier pay TV brand with the best content". The U-Verse brand is probably meaningless. Why anyone has a brand with a hyphen in it is beyond me. It is clunky and not web-friendly (the URL for the service is uverseonline.att.net, although u-verse.com does redirect to it -- why have consumers wonder if they include the hyphen or not. DirecTV's URL is simply directv.com).

This deal should seem like a homecoming for Dan York, DirecTV's chief content acquisition executive. It was just 2 years ago that he left that same role at AT&T.

Programming savings will not be as easy to come by as they are in a typical cable acquisition. DirecTV's distribution rights may be limited to its single DBS system and, if that's the case, would not have the right to simply add AT&T's systems to its affiliation agreements (and take advantage of DirecTV's greater purchasing power). Comcast, by comparison, would very likely have the right to do exactly that with the Time Warner Cable systems. It is always simpler if one does not have to negotiate. DirecTV already has relatively low programming costs as it is a giant pay-TV distributor; the programming cost savings would largely come for the much smaller base of AT&T U-Verse customers.

Could the NFL allow DirecTV to sell Sunday Ticket on U-Verse as well as DBS, but not provide it to other distributors? That could be interesting, but it would have to be negotiated. It is very unlikely that DirecTV would have the right to extend Sunday Ticket to additional platforms under its current (and expiring) deal. Would give U-Verse a leg up that it has never had before, but only a limited footprint in which it could take advantage of it. It would be an odd decision for the NFL: Sunday Ticket would be available from two providers in a minority of the country and one provider in the vast majority of the country. That's not an obvious thing to explain to consumers.

NFL Sunday Ticket is clearly on AT&T's mind. From its 8K filing about the deal: "The parties also have agreed that in the event that DIRECTV’s agreement for the 'NFL Sunday Ticket' service is not renewed substantially on the terms discussed between the parties, the Company may elect not to consummate the Merger, but the Company will not have a damages claim arising out of such failure so long as DIRECTV used its reasonable best efforts to obtain such renewal."

Packaging differences: Would DirecTV try to make the DBS and U-Verse packages of services more similar. Or would the combined company enjoy the dealmaking flexibility of having good-better-best on 2 different platforms and now have more ways to split the baby. In any event, the companies say they don't plan any large packaging changes.

Other perspectives:

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