Kicking the tires on AT&T's (NYSE: T) claims to federal regulators last week that its proposed purchase of DirecTV (NASDAQ: DTV) will result in all kinds of consumer price benefits through bundled services, analyst Craig Moffett told investors Monday that AT&T has a "fundamental misunderstanding" of bundling economics.
Consumers, Moffett writes, only prefer bundles if they can get significant cost savings on the packaged services involved. This is particularly true, he says, of DirecTV customers, who tend to migrate to the standalone video service because of their dissonance towards bundled cable video, broadband and phone service offerings.
With AT&T's broadband and wireless services operating on an entirely different infrastructure than DirecTV, Moffett wonders how AT&T will be able to create the kind of price cut needed to entice customers.
"Are we really to believe that DirecTV's non-unionized installation, maintenance, and customer service operations were so hideously inefficient or subscale that AT&T will be able to consolidate them with its own unionized operations and run them at sharply lower costs?" Moffett asks.
Both companies contract with backend services company Amdocs, and have already offered bundled services together for several years. Moffett wonders why AT&T has to pay $48.5 billion to buy DirecTV, when this deal has already been in place.
"If the highest and best use for its time with a customer on the phone or in a store is to sell them DirecTV service, so be it," he adds. "But it wouldn't need to buy DirecTV to monetize that opportunity (and its success rate selling DirecTV service probably wouldn't have dwindled over the past few years, after much initial fanfare, if it were). A well-crafted agreement between two sufficiently motivated operators could achieve the same result."
- read this MoffettNathanson post (sub. req.)
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