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Cable Technology Feature Article

June 05, 2014

How Smart is AT&T Purchase of DirecTV?

By Gary Kim, Contributing Editor

At least so far, equity analysts seem far more unified about the upside from a Comcast (News - Alert) acquisition of Time Warner Cable, and possibly a Sprint acquisition of T-Mobile US, than they are of one mind about the value and wisdom of an AT&T purchase of DirecTV.

The thinking is that the Comcast and likely Sprint deals simply increase scale in core business activities. The AT&T deal, on the other hand, puzzles some because it does not help AT&T with spectrum or other on-network assets.

In fact, some argue there are no long-term synergies, as the deal adds no new spectrum, and gives AT&T a provider of linear TV in an increasingly on-demand world, even if the deal provides subscriber heft and free cash flow.

But necessity and feasibility are issues. Recall that AT&T has grown primarily by acquisition, gaining subscriber mass, and secondarily by organic revenue growth. By culture, AT&T will likely continue to grow primarily by making acquisitions.

But feasibility is a key issue. Regulators already have signaled that AT&T will not be able to grow any bigger in the mobile business by acquisition, as Comcast would not likely be allowed to get any bigger after acquiring Time Warner (News - Alert) Cable.

Oddly enough, virtually any provider of voice services would be allowed to make acquisitions, if voice services could be separated from other components of a standard triple play. The reason is the high degree of fragmentation of fixed network voice services supply.

But voice cannot be separated from video entertainment and high speed access.

As a practical matter, either AT&T or Verizon could grow fixed network share in the urban markets both prefer only by buying CenturyLink (News - Alert) and then spinning off much of that company’s rural assets, if willing and financially able buyers could be located. That is not likely.

In principle, any acquirer would gain markets in Seattle, Portland, Denver, Salt Lake City, Boise, Omaha, Phoenix and Minneapolis-St. Paul. But, the acquisition would come with huge rural and small town assets that do not fit the profile of AT&T and Verizon (News - Alert) “ideal assets.”

The essential point is that AT&T arguably does not want—much less is able to expand—In the fixed network business.

Barred from expansion in mobile, and leery of “fixed voice” acquisitions, DirecTV (News - Alert) offers a fast way to gain huge scale in video entertainment, which remains a growth driver for fixed network telcos.

Image via Shutterstock

Some argue linear video is a mature product destined to be displaced by over the top video. That line of thought suggests AT&T should not acquire assets destined to wane.

But the countervailing thought is that the largest providers of linear video (Comcast, Charter, DirecTV, Dish Network, AT&T, Verizon) might also be best positioned to leverage those assets for online delivery, despite the notable success new providers such as Netflix have achieved.

The point is that, barred from mobile acquisitions, and unable and unwilling to make fixed network acquisitions, DirecTV remains the one “simple” acquisition AT&T still can make in the domestic market. 

Edited by Maurice Nagle

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