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Cable Technology Feature Article

May 02, 2014

AT&T-DirecTV Merger Would Shift Video, Broadband Markets

By Tara Seals, TMCnet Contributor

Even as Comcast (News - Alert) continues to plead the case to regulators and the American public for its $45 billion takeover of Time Warner Cable, AT&T is eyeing a mega-merger of its own. The telco has reportedly approached No. 1 satellite provider DirecTV (News - Alert) about a possible acquisition in a move that would create a massive video and broadband provider.

The Wall Street Journal, citing “people familiar with the situation,” said that an AT&T (News - Alert) and DirectTV deal would likely be worth at least $40 billion. The WSJ said that it is “unclear whether the companies are in detailed talks,” but sources said that DirecTV would be “open” to a deal. 

The relationship between satellite and telcos like AT&T, Verizon (News - Alert), CenturyLink and others is well broken in; In tandem, historically telcos have lacked video infrastructure, leading them to ink video resale agreements with satcasters. That has started to change as telcos trench fiber and roll out IPTV, but DirecTV’s incumbency in the video market would nonetheless be an instant advantage to AT&T.

DirecTV is the second biggest pay-TV operator after Comcast, serving about 20 million customers domestically. AT&T is much smaller in size, serving just 5.7 million, but together their 25+ million subscribers would be on par with the Comcast-TWC entity, which would serve 30 million subscribers.

And aside from giving AT&T instant competitive video parity with its cable nemesis on the traditional front, AT&T would also be able to boost the video proposition for its mobile broadband customers. AT&T’s LTE (News - Alert) deployment is aiming to cover 300 million people by the end of 2014, something it expects to accomplish by the summer.

According to its latest earnings data, mobile data is now a $23 billion revenue stream for AT&T and is growing at 17 percent. U-verse is more than $13 billion of annualized revenues and is growing at 28 percent.

“With smartphone penetration beginning to hit some impressive levels, we have seen new business models emerge around LTE in the cloud and our case that includes things like connected homes, connected cars, video and mobile business solutions,” AT&T CEO Randall Stephenson said on the Q4 2013 earnings call in January.

DirecTV could certainly go a long way to help AT&T expand its mobile business models.

Meanwhile, satellite’s inability to provide decent broadband cost-effectively has led to a series joint marketing deals over the years with telcos. In fact, AT&T already has a partnership with DirecTV to sell a package of AT&T broadband in areas where it doesn't offer the U-verse TV service.

Because the merger would offer up all of DirecTV’s existing subs to AT&T in order to drive its broadband proposition, plus additional resources with which to expand its fiber footprint, regulators are likely to focus on the ISP aspects of the deal when weighing the public interest of the two getting together.

Stephenson is on record as saying that the Comcast-TWC deal has shifted his priorities, considering that outside of its formidable video base, it will be a goliath of a broadband provider, with a footprint as wide-ranging as AT&T’s, which has penetration nationwide thanks to its Ma Bell legacy.

"It's an industry redefining deal from our standpoint," Stephenson said at an investor conference earlier in the year.

So, creating a stronger broadband competitor post-Comcast-TWC could be seen as positive for the market. A source familiar with antitrust reviews told the WSJ that regulators would likely be particularly concerned about the impact on markets where AT&T already offers both high-speed broadband access and pay-TV—i.e. its U-Verse markets. There, AT&T may be required to divest DirecTV subscribers to rivals.

Edited by Stefania Viscusi

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