AT&T Completes Takeover of DirecTV

Merger Creates Largest Pay-TV Provider

AT&T Completes Takeover of DirecTV
August 5, 2015

Merger mania continues in the communications industry. The Federal Communications Commission (FCC) recently gave final approval to the $48.5 billion takeover of DirecTV by AT&T (NYSE:T). The merger, completed almost immediately after the FCC approval, makes AT&T the largest provider of pay-TV services. DirecTV brings 20 million new U.S. customers to join the 6 million domestic customers of AT&T's U-Verse service, and also adds approximately 18 million customers in the growth market of Latin America.

DirecTV shareholders received $28.50 cash and 1.892 shares of AT&T common stock per share of DirecTV stock.

Theoretically, this merger gives AT&T a huge upper hand in bundling services. They now offer powerhouse bundling capability in four areas — TV, high-speed Internet, and both mobile and fixed phone services. Comcast (NASDAQ:CMCSA) lacks the mobile phone component and Verizon (NYSE:VZ) lacks the TV component.

To discourage anti-competitive behavior and meet some agency goals, the FCC extracted some concessions from AT&T as part of the deal.

  • Expansion of Fiber Service – Within four years, AT&T must offer all-fiber high-speed Internet services to 12.5 million new locations. AT&T claims on their website that at the end of the four years, approximately 25.7 million customers will have broadband speeds of 45Mbps or higher (including existing high-speed connections). Qualifying schools and libraries within the fiber network will be offered 1Gbps service.

  • Discounted Services – The FCC targeted affordable broadband connections for underserved or underprivileged customers. As a result, within the previously wired network, AT&T will offer discounted broadband to those qualifying for the Supplemental Nutrition Assistance Program (SNAP). Rates and speeds will range from 10Mbps for $10 a month to 3Mbps service for $5 per month.

  • No Preferential Treatment – While AT&T can still offer discounted integrated bundles for video and high-speed Internet, they cannot favor their own video services. This prevents AT&T from squeezing out potential streaming service rivals, such as Netflix, that are dependent on quality high-speed broadband.

    The FCC considered this of high importance, since AT&T is the only major provider of Internet service that places "data caps" on broadband service through usage-based pricing.

  • FCC Access/Oversight – AT&T agreed to submit interconnection agreements for FCC review, develop a method for measuring Internet traffic performance and report those metrics to the FCC — in essence, setting up the process to monitor possible preferential treatment of broadband access. A Company Compliance Officer will be named to ensure compliance to merger terms and an independent third party will be retained to evaluate the plan and implementation progress, reporting to the FCC.

    AT&T had been one of the fiercest opponents of net neutrality, so this can be considered a sizable win for the FCC.

Precedents Have Been Set with This Takeover

Executives at Charter Communications (NASDAQ: CHTR) should be taking note of the FCC restrictions as they navigate their proposed $67 billion takeover of Time Warner Cable (NYSE: TWC) and Bright House Networks, which would vault them into third place in the pay-TV realm behind AT&T and Comcast.

What Made This Deal Work Where Others Have Failed?

The AT&T-DirecTV takeover succeeded where the $45 billion Comcast-Time Warner Cable bid did not, because the former is a more complementary mixture. DirecTV fills in what was arguable the weakest spot in the AT&T portfolio of services, and does not fortify an already strong holding.

By contrast, Comcast-Time Warner would have created an Internet behemoth with over half of the U.S. high-speed Internet market, causing concerns about access. It is more about the underlying broadband access than it is the TV services.

Similarly large and complementary deals would be hard to find given what is left to work with for merger partners. Possibilities include Verizon going after Dish Network, the country's second largest satellite-TV provider, to bring in a strong TV component, but that is not the most synergistic fit. Similarly, Comcast could target a T-Mobile or Sprint relationship to fill in their wireless gap. Most other large mergers would require some sort of divestiture.

What Does This Merger Mean for Current AT&T and DirecTV Subscribers?

In the short term, both providers' services will not change. Then gradually over the upcoming months, AT&T will roll out a new line of services and bundling packages integrating the DirecTV capabilities. It will be interesting to see how they use their new leverage in negotiations with content providers.

Consumer advocates are not convinced the merger will benefit consumers in the long term, since the same concentration that allows deals through service bundling also squeezes out smaller players and can eventually lead to higher rates through lack of competition. This may very well turn out to be true, but it is impossible to say what will happen in the long term with absolute certainty, as the FCC conditions are effective for four years.

Regardless of outside opinion, the FCC and the Department of Justice, who also completed an investigation as to whether or not this deal hurts competition, believe that it strikes a competitive balance. Only time will tell if they were right.

Photo © Jo Heilman

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