2 Great Reasons to Get Behind DirecTV and AT&T, and 1 Huge Issue

From a shareholder point of view, the proposed merger looks like a win all around. Whether it's the right move for competition is a different story.

May 15, 2014 at 7:30PM

The market is abuzz again this week with further details on the proposed buyout of DirecTV (NASDAQ:DTV) by telecom giant AT&T (NYSE:T). Predictably, the media and telecom worlds are converging at a lightning-fast pace after the opening salvo that was Comcast's offer for number two cable player Time Warner Cable.

The advantages to consolidation are crystal clear: greater cash flow, reinforced business moat, and increased pricing power, among others. Some analysts are focusing on the offer price, arguing that the incremental gains may or may not justify a reported $100 per share offer. But really, this is a great move for both companies. The biggest downside (and it's big), lies far from the financial statements.

Two great reasons
AT&T still has room to grow in its broadband segment, though other areas of its business are largely mature. While the company continues to tack on subscribers, the focus is now more on unit-level profitability as measured by ARPU -- average revenue per user. This is one area (of many) in which DirecTV excels, and something it would bring to the merger table. DirecTV's North American market is a mature one, where the pay-TV penetration rate is very high and competition is fierce. The company consistently generates higher ARPU's in this market with its premium offerings.

DirecTV's 20 million-plus subscribers generate an ARPU of more than $100. AT&T's ARPU has been growing steadily quarter after quarter for more than five years, driven by precipitous jumps in data usage and the continued adoption of U-Verse -- the company's wireline broadband product.

As the resulting company would be the second largest pay-TV provider in the United States, one of the big advantages to the proposed merger is pricing power. Content owners and broadcasters are constantly bargaining for more money from the cable and satellite industries. Sometimes, as many have experienced, deadlocks ensue, and consumers lose out on prime sporting events, hot shows, and lousy cable news. When a provider represents more than 25 million viewers (DirecTV and AT&T would have nearly 27 million), the power shifts in favor of them over the content owners.

So the merger makes plenty of sense, business-wise, and sets up the proposed company and its investors for long-term, stable growth. There is a glaring issue with it all, though, and that's the implications for the consumer.

The big picture
Similar to the concerns of those against the Comcast/Time Warner Cable merger, a marriage of AT&T and DirecTV forces the consideration of certain consumer rights questions. Do we want the majority of U.S. pay-TV homes to have to go through one of just a couple of services? Is there a threat that companies like AT&T and Comcast would wield too much control over what reaches our homes and devices? Regulators in Washington have large questions looming ahead of them with both deals on the table simultaneously.

One thing is for sure: the end user will realize few benefits from the proposed merger. The companies will likely state that customers will have faster access and convenience benefits, but these serve more as PR filler than anything. At the end of the day, less competition is less competition -- consumers lose ground.

The outcome remains to be seen, as federal regulators must first decide whether to rule in favor of the organizations or get behind the principles of competition and consumer advocacy. If the deal does go through, though, investors should cheer a decision that will almost certainly add long-term value.

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Michael Lewis has no position in any stocks mentioned. The Motley Fool recommends DirecTV. 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.

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