Why AT&T Buying DirectTV Is Good for Consumers

The combination of the two companies will allow AT&T to offer packages for phone, cable, and broadband internet that rival those offered by cable companies.

May 19, 2014 at 2:23PM

If you've seen the latest Godzilla movie you know that sometimes it takes a giant monster to keep a giant monster in check.

When Comcast (NASDAQ:CMCSA) announced it would be buying Time Warner Cable (NYSE:TWC) for $45 billion it effectively created a monster. The combined cable giant would serve approximately one in three American homes. The new company would be a veritable Godzilla that could offer cable, phone, and Internet service to a large swatch of the country. For many of those customers there would be no alternative offering a similar package of services all on one bill.

In purchasing DirecTV (NASDAQ:DTV) for $45.8 billion in a deal announced Sunday, AT&T (NYSE:T) creates its own monster (Mothra perhaps) that can battle the giant that a merged Cox/Time Warner Cable will be. And unlike the movie battles between the giant lizard creature and the equally large flying moth, wide-scale destruction is not likely. Instead consumers should benefit as the two monsters battle for customers, market share, and dollars. One giant left unchecked would likely lead to higher prices but two fighting will be good even for people not living in places where both are practical options.

Why is AT&T making this deal?

Cable companies have an inherent advantage over satellite and phone companies looking to provide Internet and offer cable. The cable industry infrastructure has largely been built or upgraded to accommodate delivery of not only cable television, but also phone, and Internet services. Phone companies can offer broadband Internet service in many markets but lack the ability to in many cases to offer cable. 

AT&T, for example, sells its U-Verse cable television service in a number of markets but the service is offered on a very limited basis due to the infrastructure it requires. Currently U-Verse has about 5.7 million customers in 22 states -- a fraction of the roughly 41 million cable homes serviced by Comcast and Time Warner Cable jointly. Owning DirecTV will allow AT&T to offer packages that include cable television to its customer base while also gaining a chance to make it very easy to market to DirecTV's 20 million U.S. customers and another 18 million in Latin America.

While some percentage of AT&T's users are already DirecTV customers, The New York Times in an article about the deal said that "AT&T and DirecTV share little overlap" so the potential exists for the new AT&T to offer bundled phone services to a large percentage of DirecTV's 38 million paying homes. 

"Customers will be able to get wireless, voice, data, TV, and home security from the same company nationwide," Roger Entner, an analyst at Recon Analytics, told USA Today. "It allows [AT&T] to grow the share of consumers' spending on telecom."

AT&T will also -- and this might be the biggest benefit for consumers -- be able to offer satellite television service to every single one of its customers, making it a true single-bill alternative to Comcast/Time Warner Cable as well as other cable companies that offer phone, broadband, and cable packages, including Cox. 

"This is a unique opportunity that will redefine the video entertainment industry and create a company able to offer new bundles and deliver content to consumers across multiple screens – mobile devices, TVs, laptops, cars, and even airplanes." said Randall Stephenson, AT&T chairman and CEO, in a press release.

Basically the deal allows AT&T to compete on even footing with the cable companies.

Will regulators agree?

While as a consumer who currently only has the option of one company (Cox) to receive phone, broadband, and cable on one bill, I see the joining of AT&T and DirecTV as a positive. Federal regulators may not agree. Because the deal is likely to face regulatory scrutiny, AT&T announced a number of self-sanctions/promises when it announced the deal. Some of those include:

  • AT&T will offer broadband services in 15 million locations where it does not provide it today. 
  • The company also promises to offer stand-alone broadband at speeds of at least 6 Mbps (where feasible) in areas where AT&T offers wireline IP broadband service today at guaranteed prices for three years after closing. 
  • AT&T will continue to offer DirecTV on a stand-alone basis at nationwide package prices that are the same for all customers.

Stephenson said he is confident that the deal will be approved.

"We became very comfortable that this is a deal that should pass regulatory muster," he told The New York Times. 

AT&T has been down this road before -- its failed attempt to buy T-Mobile was nixed by regulators, costing the company around $6 billion in breakup fees. For this deal it's hard to imagine regulators signing off on Comcast buying Time Warner Cable and not allowing AT&T to buy DirecTV.

More competition is good

AT&T buying DirecTV takes a player off the board, but it makes the remaining company actual competition. In the current marketplace I could buy cable from a satellite provider, phone from Vonage or a similar company, and broadband from either my area's cable provider or phone company. In that scenario I have three bills and pay full price for each service.

If this merger goes through AT&T will be able to offer me everything I currently get from Cox, which should result in lower prices for me. Having two large companies fighting over customers is generally good for the public. Given how aggressively AT&T has priced bundled services in its U-Verse markets (generally $99 guaranteed for two years for cable, phone, and Internet though offers vary), there is no reason to believe it won't be equally aggressive in marketing its new offerings after it buys DirecTV. 

If AT&T markets a lower-priced bundle to steal customers then Comcast and the other cable companies will likely have to do the same. This should lead the cable/phone/broadband industry down the path that mobile phone service has been following -- a path where real competition drives prices lower.

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. 


Daniel Kline 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