AT&T-DirecTV combo promises new challenges for Comcast-TWC merger

AT&T's (NYSE: T) bid to acquire DirecTV (NASDAQ: DTV) for $48.5 billion poses multiple challenges for the cable industry and, specifically, for Comcast's (NASDAQ: CMCSA) ongoing effort to acquire Time Warner Cable (NYSE: TWC) for $45.2 billion.

Just from a regulatory perspective, folding the nation's leading satellite provider into a top tier telco with an expanded wired and wireless network gives cable operators reason for worry. Proposing to do it at the same time Comcast is striving to merge with Time Warner Cable adds a level of intrigue for regulators who will now have two mega-mergers to dissect and determine--which may be why after all these years of talking, AT&T and DirecTV decided now was the time to pull the trigger.

"I think the timing of this merger makes sense with the Comcast and Time Warner Cable merger on the table," industry analyst Jeff Kagan said in a press release. "I think either they will both be approved or denies, which is the question and we'll just have to wait and see."

It also will undoubtedly add more money into the pockets of Washington, D.C.'s army of lobbyists. OpenSecrets.org recently noted that "AT&T is responsible for more campaign cash than any organization in the entire communications/electronics cycle" adding that "Comcast is not far behind."

From a technology and service perspective, the merged company would give DirecTV what it lacks--a wireless/broadband component--and would, to an extent, expand AT&T's video networks. At the very least it would also give AT&T a huge customer base to leverage when negotiating for content rights.

"There is not another company that will have a nationwide mobile footprint, a nationwide video footprint, a broadband footprint as extensive as this one," AT&T Chairman-CEO Randall Stephenson said during a webcast detailing the proposed transaction.

To an extent, AT&T already has many of those elements thanks to a multibillion-dollar broadband initiative called Project Velocity IP (Project VIP) that is nearly completed across the carrier's footprint.

"We're getting very close to closing out our VIP commitment," Stephenson said, noting that the results have over-achieved what AT&T predicted. "The broadband performance, the broadband growth has been in excess of what we had modeled."

Stephenson said having DirecTV in the fold would allow AT&T to push its broadband to another 15 million subscribers.

"So far it sounds like a great deal for AT&T," Kagan said. "It will let them continue to grow in new ways and that will keep investors, customers and partners happy."

In some ways, however, the deal seems to bring more to DirecTV which has, while remaining competitive in the video space, been losing ground steadily to cable's broadband strengths.

"The one missing element to DirecTV's premium business over the last four-and-a-half years is owning our own two-way broadband pipe into the home and being able to offer a bundle to customers with a single bill," DirecTV Chairman-CEO Michael White said on the call. "This merger gives us exactly that opportunity … but a whole lot more. Not only will we be able to market DirecTV service into AT&T's 70 million customer locations but also across their nationwide 4G LTE wireless network and their nearly 100 million subscribers. It allows us to more effectively bundle our premier service with a more robust and wide-ranging broadband offering to combat the current dominance of cable in the bundled space."

White said he believes the deal brings something to both partners.

"AT&T brings so much to the party and I think we bring some things to the party as well," he said. "In many ways, people have talked about us together for four years but I have to tell you I think it's more the change in the trends in the industry, broadband being more important, technology change that enables higher speeds in broadband, competitive content costs being important if you want to have a great video business and video on mobile."

The pair will combine their strengths in another area that would challenge cable operators: OTT.

"Mobile video and over-the-top … could potentially be big win-wins not only for us and our customers but also for our programming partners," White predicted.

Perhaps AT&T's biggest gains will come outside the U.S. where the carrier plans to dissolve a 22-year relationship with Carlos Slim's America Movil as it targets Latin American markets.

DirecTV has long considered Latin America its video playground and has, of late, even started moving into the mobile wireless space there. AT&T is jumping at the opportunity to get into what many analysts consider to be the world's fastest growing market with cost advantages of its own.

"Programming costs are lower; prepaid (wireless) is a developing market and Brazil, in particular, represents a very large opportunity," Stephenson said.

Overall, both domestically in Latin America, AT&T expects to get its money's worth and in the process redefine the video delivery space.

"It gives us the opportunity to lead the way and redefine the video entertainment business for mobile and high-speed," Stephenson said. "That includes delivering content to subscribers across multiple screens, multiple devices, TVs, laptops, the backset displays of connected cars and even airplanes … and the ability to develop new video options including over-the-top services."

For more:
- AT&T has this press release
- Jeff Kagan has this press release
- OpenSecrets.org has this item

Related articles:
AT&T to purchase DirecTV in $49B deal
AT&T dealmakers apply their magic to M&A
Report: Regulators may be easing opposition to Sprint, T-Mobile merger
Media deals drive lift in M&A prices

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