Could AT&T Buy DirecTV to Challenge Comcast?

AT&T has discussed acquiring the satellite television company and the move could benefit consumers.

May 2, 2014 at 1:41PM

Comcast's (NASDAQ:CMCSA) proposed $45 billion acquisition of Time Warner Cable's (NYSE:TWC) system has many fearing that the combined company will control too many customers leading to higher prices, poor service, and less choice for consumers.

To compete with that monster, one of its has reached out to another in an attempt to create a company that would be able to offer households a choice in cable and Internet service. AT&T (NYSE:T) has contacted DirecTV (NASDAQ:DTV) to see if the satellite television company has any interest in being acquired, Wall Street Journal reported, adding that the deal would be worth at least $40 billion.

The combined Comcast/Time Warner Cable will serve around 30 million subscribers (though that number could go down if the companies are forced to divest themselves of some customers in order to win regulatory approval). DirecTV currently has around 20 million subscribers while AT&T's U-verse -- which delivers a cable television package over phone lines -- has nearly 6 million customers. AT&T of course also offers broadband Internet service. Leichtman Research Group did a study of broadband subscriptions in the third quarter of 2013 and found that AT&T had over 16 million subscribers while Comcast topped 20 million, and Time Warner Cable had over 11 million.

DirecTV partners with broadband providers and used to offer a satellite-based Internet service but based on the offerings on its website appears to no longer do so. AT&T and DirecTV already have a deal through which the companies offer a co-branded version of DirecTV's television service across the 22 states where AT&T offers residential broadband and voice. DirecTV also sells AT&T's broadband services, including AT&T U-verse high-speed Internet to existing DirecTV customers.

Those deals help the companies offer an alternative to cable that's relatively simple but in that deal two companies have to make money, which impacts pricing and margin. Comcast or Time Warner Cable can offer their packages and bundles without sharing any revenue.

Why the deal makes sense

In the old days cable companies had monopolies. Towns and cities picked a cable provider and residents had a choice of using that company or not having cable. DirecTV changed that with its satellite service, which could be offered anywhere because it did not require physical lines. Later on AT&T also became an alternative through U-verse, though that service is offered only in the limited markets where AT&T has the infrastructure to support it. 

AT&T also offers high-speed Internet service in its markets around the country but for many people the only way to have one bill for cable and Internet was to go with a traditional cable company. The cable companies use that to their advantage, bundling services (including telephone delivered over cable wires) to offer a more attractive price (at least at first) to keep customers. A merger of AT&T and DirecTV would theoretically allow them to offer cable/broadband/phone packages in many markets rivaling the Comcast/Time Warner Cable packages.

This could be beneficial to consumers as DirecTV generally offers lower prices than traditional cable and it seems likely that a combined AT&T/DirecTV would at least force Comcast/Time Warner Cable to keep prices in check.

It's not really about cable, it's about access

Whoever controls the pipeline (or satellite) that brings data/entertainment/whatever else into people's homes essentially has first dibs on selling a variety of services.

"This isn't about TV anymore -- it's about controlling a fatter, more intelligent pipe for multiple services that emanate from it," including broadband Internet, phone, and home security monitoring,  Vertere Group Founder Tim Hanlon told CNN Money

Just like Comcast makes it easy for customers to add phone and Internet on top of a cable subscription either of these combined giants would have the ability to roll in the above-mentioned services to their offerings. Having more subscribers also means having more leverage over digital streaming content companies like Netflix (NASDAQ:NFLX), which recently made a deal with Comcast to ensure its customers have a good experience on the service. Deals like that will become more common (and a huge source of potential revenue) if the FCC votes May 15 to codify the idea that the so-called "last mile" Internet service providers are allowed to make agreements like the Comcast/Netflix deal.

This deal is good for consumers

If you're going to battle Godzllla it's helpful to have Mothra on your side. If the Comcast/Time Warner Cable merger goes through then it benefits consumers for that company to have another giant battling with it for customers.

AT&T buying DirecTV just makes sense. The combined companies would have a much stronger offering and be more attractive to consumers given the variety of services that could be bundled under one brand. If the Comcast/Time Warner Cable goes through and no competitor with equal heft emerges, the bigger Comcast would be in a very strong position to strong-arm customers in much of the country while also holding them hostage to make more deals like the one with Netflix. Having another option lessens that leverage and serves the marketplace well. 

Your cable company is scared, but you can get rich
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Daniel Kline has no position in any stocks mentioned. The Motley Fool recommends DirecTV and Netflix. The Motley Fool owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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