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.

Your cable company is scared, but you can get rich
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple. 


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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers