It’s official: AT&T plans to plunk down nearly $50 billion to purchase DirecTV in a deal that, on the face of it, is a head-scratcher. Why exactly would AT&T be interested in the satellite TV business when u-Verse delivers a next generation solution? And at a time when the cable companies are seeing most of their growth come from broadband services, not new TV subscribers. Simply put, the deal is primarily about content and size: as a result of the deal, the new AT&T TV business will encompass 26 million subscribers, up from just 5.7 million with u-Verse today. That makes the new entity the second largest, just behind Comcast/Time Warner’s 30 million Pay TV subscribers. The theory is that the bigger size will give AT&T far more leverage when it comes to content negotiations. And at the same time, AT&T gains exclusive content, such as the NFL Sunday Ticket option that DirecTV currently offers.
That’s the almost immediate benefit of the deal, but the more interesting story is where this merged entity could go moving forward. Firstly, there’s the future of content. Clearly, all entertainment-related parties are moving towards a non-linear, non-fixed future, also known as TV Everywhere. The goal is to provide the content the consumer wants, when they want it, wherever they want it and whatever device they choose to use. That covers everything from the smartphone and tablet through to the big screen in the home. By combining the new content assets with an LTE wireless solution, AT&T is well positioned to benefit from this migration – and more importantly, is well positioned to help drive this consumer demand beyond the home and into the mobile market.
And it’s important to note that what could eventually evolve from the acquisition is a national over-the-top streaming solution, rather than just a larger footprint for a linear service. In other words, something closer to Hulu or Netflix rather than the current TV mass-market model.
Of course, AT&T is not alone in this desire: Verizon is also moving in this direction, via the FiOS-based TV solution, combined potentially with the OnCue service purchased from Intel at the beginning of the year. And both of these moves come against a backdrop of cable company consolidation, with the proposed merger of Comcast and Time Warner. But importantly, AT&T now has a national video solution, rather than the previous regional footprint. Only Dish Network can also claim such a footprint.
The second potential advantage of the proposed AT&T/DirecTV merger relates to AT&T’s Digital Life solution. Once the merger is approved, AT&T will gain roughly 20 million additional subscribers that it can target with bundled Digital Life products. In turn, these products significantly increase a customer’s loyalty, not to mention average revenue. So all-in-all, we can look at this deal in terms of maximizing AT&T’s share of the consumer’s wallet spend both now, and in the future, as video solutions evolve and the need for advanced home automation improves. And let’s not forget the out-of-home experience: AT&T is making a strong investment in Connected Cars, and what is a connected car without a steady stream of entertainment for the backseat travelers. Even planes are not outside the potential scope: a couple of weeks ago AT&T announced plans to build a competitive broadband solution for planes, and a satellite-based solution is ideal – especially as DirecTV already offers plane seat entertainment today.
And a final benefit comes in the shape of potential bundles: while DirecTV and AT&T have partnered in the past, there will be a much stronger ability to offer compelling bundles once the deal is complete.
So what does this do to the competitive landscape? On the one hand, this merger will clearly face significant scrutiny from the Government, especially as it comes on the heels of the Time Warner/Comcast deal. The two proposed entities account for roughly 60 percent of TV watching consumers, which will clearly be a concern for some. On the other hand, consolidation is inevitable in the TV market, just as we have seen consolidation in other areas, such as mobile.
And speaking of mobile, AT&T’s proposed merger does certainly create a clear delineation point: Verizon and AT&T have strong entertainment solutions; Sprint and T-Mobile are fundamentally wireless providers only. Is a combination of T-Mobile and Sprint the best way forward, or will Dish come back into the mix as a way of expanding beyond a mobile-centric solution into one of an entertainment service provider. Mobile operator moves will be interesting to watch in the next six months…