AT&T has agreed to buy DIRECTV for $48.5 billion to form a combined 26 million video subscriber entity to rival a Comcast/Time Warner Cable merger of nearly 30 million video subscribers.
AT&T will acquire the nation’s largest satellite provider, DIRECTV and its 20.2 million subscribers, resulting in a nationwide presence for AT&T to deliver video services where it cannot reach with its U-verse IPTV video platform that passes nearly 27 million homes. The resulting deal will have ramifications across the television industry that was already shaken up by the Comcast and Time Warner Cable $45 billion deal.
A merger of the nation’s largest wireless carrier, AT&T, with the nation’s largest satellite television provider, DIRECTV, (in terms of subscribers) will provide opportunities for the combined company that will make it well positioned in an increasingly competitive pay TV business. For DIRECTV this could be an opportunity to defeat the problem of lack of two way communication. Setting the stage for the merger, the proposed Comcast/Time Warner Cable deal may be opening the way for other large acquisitions, and it was only a matter of time before another mega merger was proposed.
The nationwide presence of DIRECTV’s satellite service is an attractive opportunity for AT&T. AT&T has a vast footprint across the nation reaching 27 million homes with its U-verse video platform, but it's relatively under penetrated compared to its peers, at 21%. IHS believes that AT&T is wells suited to achieve a penetration level of somewhere between 30% to 35% when it reaches maturity, this period likely coming well beyond our forecast period of 2018. If achieved, the result may be a nine million strong IPTV base and combined with DIRECTV, the potential to surpass Comcast in terms of video subscribers is enticing. Aside from future potential, there are hosts of other reasons why AT&T could be eyeing DIRECTV.
DIRECTV is a ripe fruit waiting to be plucked, it continues to grow video subscribers in the US, although at a pace which continues to slow. It also commands a monthly video ARPU of nearly $100, the highest video ARPU of any pay TV operator, it has been successful with its focus to attract high end consumers. Additionally, DIRECTV offers among the most in premium sports content, including the exclusive and successful NFL Sunday Ticket. A major boost in sports premium offerings is an area where AT&T will benefit greatly as its U-verse video services is lacking in sports premiums compared to other major operators. DIRECTV also offers the whole home Genie DVR which also makes it possible to download DVR content to mobile devices, a facet of TV Everywhere that AT&T currently lacks. Comcast has proven that embracing technological services has been a major factor in its video subscriber turn around and AT&T coupled with DIRECTV will be sure to put the heat on other operators.
The possible acquisition would also alleviate DIRECTV's current situation in the competitive pay TV market. While its video subscriber base grows slowly, it is able to offer only video services because it does not have a two way return path, and as a result has not been able to offer a High Speed Data (HSD) internet service, preventing it from offering attractive bundles like telco and cable companies. Cable companies have been able to offset video losses through gains in HSD and voice subs, something DIRECTV would not be able to do by itself if it begins losing subscribers on a regular basis, which very well could be on the horizon.
AT&T and DIRECTV already have experience working together as they currently have a partnership where AT&T sells DIRETV services where U-verse video is not available. AT&T has done a good job selling the services and has demonstrated that synergies do exists which will only be enhanced by the combination of the two companies. The bundle potential for AT&T will be enormous as it would no longer be restricted to the U-verse footprint. With its nationwide cellular and TV presence, AT&T will be able to offer a bundle nearly everywhere. In addition, AT&T would be gaining DIRECTV’s fast growing Latin America business, where it currently has more than 18m subscribers, leaving AT&T plenty of room for expansion into Latin America.
If the Comcast/Time Warner Cable and a DIRECTV/AT&T merger becomes reality, a radical shift in the pay TV landscape would be well underway. For the industry, the ramifications are centered around carriage fees and retransmission fees and further consolidation. The combined companies would be the largest operators in the business, and would be able to leverage their size, enjoying the opportunity for significant program cost savings. That may leave the rest of the pay TV operators to bear the brunt of network retransmission fees as owners look to secure carriage fee increases elsewhere. If both mega mergers go through, the two combined entities would control more than 55% of the pay TV market. As a result, the network owners may look to offset any potential losses in carriage fee gains by increasing the rates more for the rest of the operators, potentially leading to further consolidation.