AT&T Makes Bid For DirecTV

AT&T logo

Image courtesy of Google

AT&T Makes Bid For DirecTV
| Published May 19, 2014 |

By R. Alan Clanton
Thursday Review editor

In the narrowing world of content creation and distribution, no single company wants to be left standing without a chair when the merger music stops.

Only months after Comcast announced its intention to purchase Time Warner Cable, an enormous deal which would take the already huge Philadelphia-based Comcast to within striking distance of being a de facto monopoly for a large swath of the United States, AT&T has taken the final steps in its long-rumored desire to buy DirecTV. The marriage of AT&T to DirecTV will take North America’s largest telephony, internet and long distance provider and meld its operations with the largest satellite company in the U.S.

Cost of the deal: $48.5 billion. We had not even gotten used to that last large number—the $45.2 billion which Comcast will spend to buy its stake in Time Warner. Now AT&T has topped that with an even larger merger.

Why such a big purchase by the company that in 1985 became the reincarnation of much of the old Bell system? Because AT&T does not want to find itself—in the near or distant future—outflanked by Comcast when it comes to the delivery of content into your home, your television, your desktop or your laptop. What used to be called convergence as recently as the start of the new millennia, is now conmergence, a term which describes the nuclear arms race between some of the biggest players to assure that they will each have a footprint in the world of digitized content.

For AT&T, the melding of DirecTV’s massive operations gives the Dallas-based telecommunications giant something it has always coveted (and, once briefly possessed): direct access to your television and your viewing habits. Americans on average spend about 4.5 hours each day in front of that television. Comcast and its competitors among the titans (Walt Disney, which owns ABC, ESPN and A&E; News Corp, which owns Fox Television Network, Fox News, Fox Sports and 27 TV stations in the U.S.; CBS, which owns Showtime, The Movie Channel and FLIX) already understand that those four hours are among some of the most valuable ad hours of the day.

Comcast understands this better than any of the majors (see Kings of Content: Why Comcast is Inevitable; Thursday Review; February 28, 2014), which is why is has consistently sought to bring into its fold content technologies and distribution operations which represent how people will watch or receive entertainment in the future. Over the years, its acquisitions of smaller cable companies has demonstrated Comcast’s determination to maximize its footprint in the big markets—thus its grand masterstroke buyout of Time Warner. Comcast has also had its eye on content, and its big ticket purchase of NBC Universal is evidence of its desire to be a gatekeeper for much of what you watch—television, movies, sports.

When consumer advocates and legislators raise all the usual concerns over AT&T’s merger with DirecTV, a deal similar in scope and size to Comcast’s proposed merger with Time Warner, AT&T will surely use some of the same arguments used by Comcast’s representatives: in order to survive in the increasingly complex jungle of content, data and entertainment, AT&T needs access to all forms of media and technology.

Indeed, companies like Google, Apple, Amazon and Microsoft have been hungering for ways to break into those 4.5 hours of TV viewing for some time. Using ever-more technologically smart and small devices, such as Amazon’s Fire TV and Apple TV, the delivery of television content continues to fragment into numerous non-traditional mechanisms. And there are plenty of competitors even in that segment: Chromecast, Aereo, Roku, Google TV, to name but a few. Further shattering the traditional cable TV wire and satellite dish arrangement are the direct-from-manufacturer applications available in newer TVs and Blu-ray players from Samsung, Sony and Vizio—robust technical innovations which can deliver content right out of the box. Aereo’s tiny device is so small—and its business model so simple—that broadcasters have challenged Aereo in the U.S. Supreme Court.

This is why Comcast told regulators and Congress that concerns over competition based on the cable-versus-cable business model is outdated, to say the least. Diversity and innovation are essential. There are new, more rapidly evolving beasts in the jungle, and Comcast needs its partnership with Time Warner to stay relevant. Thus, AT&T needs its proposed marriage with DirecTV to work, and quickly.

AT&T made the big announcement on Sunday afternoon, and, if approved, the deal would be one of the biggest mergers in U.S. history. AT&T offered $95 per share for DirecTV stock. Part of the buyout would be in cash, and part in AT&T stock.

This would not be AT&T’s first foray into television content and distribution. Back in 1999 AT&T briefly outflanked Comcast for control of the old Media One cable empire. Comcast made the opening bid, offering to buy Media One outright. It was a headline-grabbing offer at the time. But weeks later AT&T made an even higher bid, an offer that Media One stockholders found too good to resist. AT&T snaked the deal right off of Comcast’s desk. But AT&T’s brief foray into cable TV did not go as planned. Customer service problems systemic under the Media One brand just got worse in most markets, and among the most common problems were customer complaints of 45 minutes waits on hold and one hour waits in lines at local offices. Installation work became routinely late and service calls could take up to three days. Eventually AT&T’s stockholders grew weary of cable TV, and the entire division was sold in 2001—to Comcast.

But this time around you can bet AT&T intends to stay the course, incorporating DirecTV’s technical operations and business model into its own massive footprint. The merger makes perfect sense when viewed from the perspective of shifting technologies and the existential threats posed by the internet and handheld devices.

But the obvious question will be the most important one for most North Americans: will this deal improve customer experiences with either DirecTV or AT&T? Will such a mega merger improve service or lower the cost of phone, internet or television?

Figures are not yet fully available for 2013, but in 2012 cable television prices increased on average by a rate of 5.1%, somewhat faster than inflation. Some of this increase was the result of fees (regulatory costs, retransmission consent, public service fees) being passed along directly to consumers. But much of this, in the eyes of consumer advocates, is just a sample of what to expect in a world with only a few cable companies.

But in theory, AT&T can make the argument to regulators and Congress that its acquisition of DirecTV makes it more immediately competitive with Comcast. In other words, you’ll need our T-Rex to compete with their T-Rex, otherwise no one will be safe.

AT&T is also attempting to soften the impact of the colossal merger by committing to net neutrality for a period of no less than three years. Being “net neutral” means that a principal internet carrier, in this case AT&T, will make no attempt to slow or micromanage speeds for certain services or products, nor will it block or limits access to specific sites. Think of net neutrality as being a multilane superhighway with no speed limits. Comcast made a similar agreement in 2011 when it first proposed purchasing NBC Universal.

AT&T can also make the case that it needs DirecTV’s vast trove on continuous content to provide entertainment and streaming to its millions of wireless customers. AT&T will also be in a position to use its substantial clout to bargain with programmers and distributors to reduce prices, since it will have negotiating leverage in both wireless and wired content. AT&T already has TV content through its U-Verse product, though U-Verse is cable without being identical to cable. DirecTV carries many of the same channels as Comcast and the other cable providers. U-Verse has approximately 5.7 million subscribers in the U.S.

Then there is the issue of sports—especially NFL. DirecTV has its own venue for football, special NFL programming like its NFL Sunday Ticket, which gives its subscribers exclusive access to certain games not available in many TV markets. The only hitch will be getting the NFL’s approval for DirecTV sharing that football access with AT&T customers.

Consumer advocates have already begun arguing that the Comcast-Time-Warner deal has paved the way for even more massive mergers like the one now proposed by AT&T and DirecTV, and the argument can be made that in the end customers suffer the most when competition is eliminated. But some business analysts and media watchers say that the AT&T merger is less likely to meet resistance in Washington since AT&T’s product line does not fully overlap with DirecTV, with the possible exception of its U-Verse programming.

In the meantime, the talk of a mega merger between Sprint and T-Mobile is back in the news as well, as the major communications and telephony companies also seek ways to consolidate their technologies and resources. A merger between Sprint and T-Mobile would create a wireless company on the same playing field as cellular giants Verizon and the aforementioned AT&T.

Related Thursday Review articles:

Kings of Content: Why Comcast is Inevitable; R. Alan Clanton; Thursday Review; February 28, 2014.

Comcast: Don't Worry, Be Happy; R. Alan Clanton; Thursday Review; April 9, 2014.