Market Insight

AT&T and DirecTV merge to form the largest pay TV provider in the USA

July 30, 2015  | Subscribers Only


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AT&T’s $48.5 billion acquisition of the largest satellite provider in the U.S., DirecTV, was officially completed on July 24. The approval – with conditions – was issued by the Federal Communications Commission (FCC). The newly formed company will be comprised of more than 26.3 million domestic video subscribers, surpassing Comcast as the largest pay TV provider in the U.S.

The AT&T/DirecTV deal, first proposed in May 2014, finally got the green light after going through a lengthy regulatory approval process. The deal survived while Comcast’s bid to acquire Time Warner Cable failed. However, the deal did not go through unscathed as the FCC put several conditions that AT&T must abide by.

The following are concession AT&T will have to follow through for the next four years:
•    AT&T will offer its all-fiber internet access service to at least 12.5 million customer locations
•    AT&T will offer 1Gbps service to any E-rate eligible school or library within its all-fiber wireline footprint
•    AT&T will offer affordable and low-price standalone fixed broadband to low-income households
•    AT&T’s fixed broadband internet service will have non-discriminatory  usages-based practice and not favor its own online video services over competing services
•    AT&T will abide by FCC’s new interconnection agreements
•    AT&T will retain an internal and external compliance officer that will report and monitor the compliance and conditions of the merger

The first glimpse of what the combined entity can offer consumers will be coming soon as AT&T also announced that in the coming weeks it will launch new integrated bundled offers.

Our analysis

The merger between AT&T and DirecTV now form the new AT&T which now counts 26% of all pay TV video subscribers under its umbrella. The combination is exciting for several reasons: new bundle options will make both companies plays more attractive, DirecTV customers will have greater access to true two-way communication, current U-verse subscribers will likely gain access to NFL Sunday Ticket, DirecTV customers will likely gain access to the plethora of AT&T TV Everywhere deals, and the new company will be better suited to negotiate carriage fee increases with its programming partners. Another reason the merger seems to work is that both companies have adopted the practice of focusing on higher value customers, rather than those interested in saving a buck.

What’s different about the AT&T/DirecTV merger and the Comcast/TWC merger is that DirecTV is not the major ISP (Internet Service Provider) that Comcast is. Where the Comcast/TWC merger would have created a near monopoly in broadband subscribers with greater than 25mbps, DirecTV’s dearth of broadband services was not the same stumbling block.

AT&T has announced that it will formulate new bundles in the coming weeks. IHS believes that the company will have more success selling both video and broadband products to rural households. For both DirecTV and DISH Network (the other major satellite pay TV provider in the USA,) the lack of a two way return path has hindered growth as cable and IPTV operators have been able to significantly expand their suites of offerings. For its part DirecTV may now have a leg up when it comes to competing with DISH Network. 

It is plausible that AT&T won’t directly transition U-verse IPTV customers to satellite, nor will the company be likely to transition high-ARPU DirecTV customers to lower ARPU U-verse TV. What is interesting is the possibility to offer NFL Sunday Ticket to U-verse TV subscribers. Since U-verse TV launched, through the first half of 2014, its video subscriber growth was staggering, with the majority of quarters from 2008 through 2013 achieving growth of more than 200,000 subscribers. The addition of Sunday Ticket could allow the company to better compete with cable, turning around Q2 2015’s loss into growth.

It’s true, content is king, and while TV Everywhere may not be the savior of pay TV video, the addition of AT&T’s TV Everywhere products into DirecTV could be appealing. As of May 2015 AT&T U-verse TV subscribers had access to more than 200 live streaming channels in-home and nearly 150 out-of-home. DirecTV customers have been given more TV Everywhere access in recent months, but their live streaming options are significantly less than what U-verse TV customers receive.

Relationships with programming partners are likely to change as a result of the merger, and not just on the TV Everywhere front. Greater size means that the company will have a better position to negotiate carriage fees. When AT&T and Verizon introduced their IPTV products, IHS believes that they capitulated to significant carriage fee premiums, when compared with their cable rivals. It makes sense that programmers would seek and receiving a premium, they were diluting the business after all.  Now AT&T has a chance to recover a significant portion of their program costs, the benefit could be as high as 25%.

Both AT&T and DirecTV were looking for new paths and ways to innovate. Their combination will allow both companies to expand their video offerings, and reach out to customers who may not have been receptive to their messages previously. Bundling is going to be a key strategy for the new company, if they do it wrong they risk their current customer base, however, if they do it right and the potential upside is huge.

Geography
USA
Organization
AT&T DirecTV
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