Deeper Dive—The inevitability of a Dish Network-DirecTV merger

DirecTV clouds
Satellite TV has been falling at a fast and steady pace for years now. (Acabashi/Wikimedia Commons)

The U.S. satellite TV industry is crashing back down to earth, making it increasingly likely that Dish Network and DirecTV will need to join forces to avoid burning up on reentry.

It’s an idea that’s been floated before but not without scrutiny. MoffettNathanson analyst Craig Moffett said the alarming rate of satellite subscriber losses could be enough to sway regulators but that a merger would be difficult to finance. However, AT&T’s John Stankey has said that DirecTV is a crucial piece of his company’s video strategy, and that it’s not for sale.

This week, though, Dish Network Chairman Charlie Ergen left little doubt that a merger of some sort between Dish and DirecTV would have to happen.

“It’s inevitable that those two should go together because the growth in TV is not coming from linear satellite TV providers,” said Ergen during Dish’s earnings call Wednesday. He said the regulatory environment is usually behind the marketplace and that there still could be some regulatory issues there but warned that the two satellite providers can’t keep competing alone.

“You can’t swim upstream against a real tide of over-the-top players,” Ergen said.

Satellite TV has been falling at a fast and steady pace for years now. MoffettNathanson has been tracking the declines, which hit a rate of 13.1% during the fourth quarter of 2019. Dish contributed 100,000 net subscriber losses and DirecTV took a huge hit, dropping 945,000 premium video subscribers (between DirecTV and U-verse) in the fourth quarter.

The losses on both sides are eye popping, MoffettNathanson presented the theory that satellite TV is “at least partially an entity of its own,” where subscribers are more likely to float back and forth between Dish and DirecTV than they are to move to cable or cord cutting. That would suggest that DirecTV’s loss is Dish Network’s gain.

“With that in mind, we continue to suspect that, over a longer time horizon, AT&T and Dish Network’s results will converge somewhere in the middle. AT&T’s will get less bad. Dish’s will get worse again,” wrote Moffett in a research note.

If Dish and DirecTV are indeed locked in a vicious subscriber-swapping cycle, then regulators might be content to let them just keeping competing for the available market.

However, even if Dish is currently benefitting from DirecTV’s suffering, the provider is still losing in the long run. Dish ended 2015 with approximately 13.27 million satellite subscribers. At the end of 2019, it’s down to about 9.39 million. AT&T now has 19.473 million traditional video subscribers, down 15% annually.

With both Dish and DirecTV evaporating at this rate, it could be time to revisit the rumored offer from private equity firm Apollo. In October,  Fox Business’ Charlie Gasparino reported that Apollo proposed creating a new company and having AT&T offload DirecTV to the new company. Then, Dish Network would sell itself to the new company. The entire deal would be financed by Apollo, and AT&T would maintain control of this new company as a majority owner.

Now that T-Mobile’s merger with Sprint is done and Dish is on its way to becoming the fourth national wireless carrier, Dish is likely more amenable to a deal like that.

Or, it could just be that a merger is inevitable.