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Cable Technology Feature Article

May 21, 2014

AT&T-DirecTV Deal Could Be Good for Video Competition

By Tara Seals, TMCnet Contributor

AT&T (News - Alert) agreed over the weekend to buy No. 2 U.S. pay-TV operator DirecTV for about $48.5 billion, adding to the consolidation frenzy that’s shaping up in the industry. The announcement of course comes as Comcast attempts to win approval to buy No. 2 cable MSO Time Warner (News - Alert) Cable for about $45 billion. Conventional wisdom holds that if the Department of Justice and other regulators say yes to Comcast then it will be forced to also say yes to AT&T. And that leaves many wondering: if both deals go through, what will that do to the competitive landscape?

For one, it will mean that two companies, Comcast and AT&T, control about two-thirds of the pay-TV market. The consumer advocacy response was typical here: This wave of mergers is “about eliminating the last shred of competition in a communications sector that’s already dominated by too few players,” said Free Press CEO Craig Aaron.

Harold Feld of consumer advocacy group Public Knowledge (News - Alert) said on NPR’s Morning Edition that this could lead to a domino effect across the industry, knocking out smaller players in a giant snowball of consolidation and sparking a rise in pricing.

"It's kind of like trying to find a date before the prom,” he said. “The more people get picked off, the more desperate everybody else becomes to try to find somebody they can go to the dance with.”

He added, "As you get fewer and fewer bigger and bigger players, there is less pressure on any of them to pass on any of these savings to consumers."

However, some say that AT&T’s move is a normal competitive response to entrenched cable players getting, well, more entrenched, as well as to over-the-top uptake—both of which will keep the mega-companies honest when it comes to raising prices on subscriptions. “Together, the deals show how the biggest companies in television and telecommunications are bulking up to deal with a changing media landscape,” the Wall Street Journal offered. “Growth is slowing in some markets, like pay-TV and wireless subscriptions, and there is explosive growth in others, like streaming video.”

AT&T itself is already spinning the “more for consumers” aspect of the deal, stressing that DirecTV in particular will emerge as a much better competitive player thanks to better broadband accessibility, and will thus be capable of acting as a counterweight to Big Cable. In other words, the deal will give AT&T a nationwide video install base to which it can sell broadband, a service DirecTV doesn’t have.

And, it won’t significantly change the video choices that end users already have: Unlike in the Comcast-TWC deal, AT&T is not a welterweight in video. In its existing U-verse IPTV (News - Alert) markets, the telco only has about 5.7 million video customers in 22 states. DirecTV on the other hand has about 20 million customers nationwide and is the second-largest pay-TV provider behind Comcast. If the merger goes through, DirecTV as a company will act as a subsidiary rather than be merged into AT&T itself, thus keeping its customer relationships intact.

So, in short, AT&T will have more flexibility in bundling services domestically.

"This is a unique opportunity that will redefine the video entertainment industry and create a company able to offer new bundles and deliver content to consumers across multiple screens," said Randall Stephenson, AT&T's chairman and CEO, in a statement Sunday.

The acquisition surprised some who expected the telco to quest instead after DISH Network, which holds valuable nationwide spectrum that AT&T can use to further its LTE (News - Alert) ambitions. But the DirecTV move seems to be all about the triple-play. DirecTV also has 18 million customers in Latin America, a region AT&T has no existing business in. The sector is a profitable one, making it an attractive financial plum for the company.

AT&T and DirecTV’s boards both approved the merger on Sunday, with AT&T agreeing to pay the satellite leader’s shareholders $95 per share--$28.50 per share in cash and $66.50 per share worth in AT&T stock. Including DirecTV's debt, the total value of the transaction is actually about $67.1 billion. If approved by regulators, DirecTV will operate as AT&T's subsidiary and continue to be based in its current headquarters in El Segundo, Calif.

Edited by Maurice Nagle

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