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In The Big Leagues: AT&T Seeks DirecTV Merger to Decrease Costs, Compete with Google

Written on
Jun 26, 2014 
Author
Peter Koeppel  |

ADOTAS – As you likely know by now, AT&T has reached an agreement with DirecTV to purchase the satellite content provider for a deal valued at $67.1 billion. Pending FCC, shareholder and local government approval, the deal would help AT&T make its mark on the video and TV business as well as provide DirecTV customers with a high-speed Internet access option.

The background. Currently, DirecTV has 20.2 million subscribers in the U.S. alone, with another 18 million in Latin American nations. AT&T has 5.7 million subscribers to its pay TV platform – U-Verse. The purchase agreement comes in the wake of Comcast Corp’s $45.2 billion deal with Time Warner Cable – a deal that will consolidate 30 million subscribers under the Comcast banner. According to AT&T, its potential customer base could be 70 million once DirecTV is built out to capacity.

Sweetening the deal for regulators. The Comcast-TW Cable merger has been under extensive consideration and criticism, and AT&T’s deal will likely go through the same. To sweeten the deal for regulators, AT&T’s announcement included several stipulations designed to meet their concerns. For example, the company pledged to adhere to the 2010 FCC rulings on net neutrality, even while those rulings are being hotly debated. It also promised to invest in new infrastructure in order to expand service to 15 million households in rural areas. Another consumer-friendly move was a promise to offer a broadband-only version of its service for those who would rather not pay for satellite channels.

“DirecTV is a great fit with AT&T and together we’ll be able to enhance innovation and provide customers with new competitive choices for what they want in mobile, video and broadband services,” AT&T chairman Randall Stephenson said in the merger announcement.

Reducing programming. In addition to the expanded service area for AT&T, the company will also reduce programming costs by 20% with the purchase. It expects to save $1.6 billion per year within three years of the deal closing, and that’s a conservative estimate. Currently, AT&T’s U-verse content costs take up nearly 60% of the subscriber revenues. After the agreement is completed, DirecTV’s 20.2 million U.S. subscribers will significantly lower the per-subscriber content costs.

That’s the Sunday Ticket. DirecTV’s National Football League Sunday Ticket may cause some issues in terms of closing the deal. Sunday Ticket is a premium DirecTV service that allows consumers to watch out-of-market games on Sunday afternoons. Currently, the deal only allows the service for people who pay for satellite TV – but AT&T would like to expand that.

While AT&T is confident that it will be able to continue offering its new DirecTV customers the NFL Sunday Ticket, the deal expires after 2014 – meaning it’ll re-enter negotiations. The new deal could cost the telco provider as much as $1.4 billion – which is 40% higher than last year’s contract. Although DirecTV has had the distribution rights since 1994 for out-of-market games, there’s no stopping a competitor from bidding up the price on the rights to the Sunday ticket.

Offering the service to wireless customers. If the new AT&T and DirecTV combo can hold onto the NFL service, AT&T has plans to offer the service to their wireless customers. This unique format for sports event watching – through tablets and smartphones – could help AT&T secure its position in both the mobile and broadband markets. It’s not clear whether AT&T wants to use the Sunday Ticket service as a standalone service to AT&T wireless customers or offer it in some type of bundle. Either way, it would be poised to go head-to-head with Verizon Wireless, which currently has exclusive live streaming rights for Sunday, Monday and Thursday night football games.

Verizon isn’t the only major company that the AT&T/DirecTV deal will go head-to-head with. Filing papers for the deal underscore the threat posed by Google Fiber – a high-speed broadband provider. According to the filing, Google Fiber is considered to be the “most ambitious and potentially disruptive” provider in the competitive market.

The technological race continues. Providing high-speed connections in key markets across the country has become a bit of a technological arms race. Google is poised to build a profitable network of 20 to 30 million U.S. homes and businesses over the next few years, and AT&T’s U-verse is a direct competitor. U-verse is the fastest growing portion of AT&T’s business, and the DirectTV purchase will make it easier for that portion to grow.





Peter Koeppel is Founder and President of Koeppel Direct, a leader in direct response television, online, print and radio media buying, marketing and campaign management. With a Wharton MBA and over 25 years of marketing and advertising experience, Peter has helped Fortune 500 companies; small businesses and entrepreneurs develop direct marketing campaigns to increase profits.

Peter started Koeppel Direct in 1995 and has built it into one of the leading direct response media-buying firms in the U.S. Follow me on Twitter.

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