Did AT&T Just Hand Google a Gift in the Form of DirecTV?

AT&T's (NYSE: T  ) acquisition of DirecTV (NASDAQ: DTV  ) was a curve ball, as it seemingly sways from AT&T's goal of bolstering its broadband Internet to better compete against the rise of Google (NASDAQ: GOOG  )   (NASDAQ: GOOGL  ) . Nonetheless, looking beyond the acquisition's lack of broadband appeal, do the benefits of DirecTV outweigh the concerns? Or, did AT&T just hand Google a massive gift?

AT&T and DirecTV: What's the point?
AT&T has confirmed that it's paying more than twice its 2014 capital expenditure budget to purchase digital television leader DirecTV for $49 billion. As a result, AT&T will gain DirecTV's 20 million U.S. subscribers and 18 million Latin American subs.

To many investors, this acquisition seems strange and far left-field from AT&T's ongoing strategy. DirecTV lacks substantial spectrum assets and has limited, if any, broadband Internet patents or services to benefit AT&T.

However, what DirecTV gives AT&T is strength in video, and completes a vision where subscribers can view TV anywhere using DirecTV's services on AT&T's massive network, which could be valuable in attracting subscribers following increased pricing pressure.

Is DirecTV's lack of spectrum and broadband a substantial concern?
The fact that DirecTV lacks spectrum may not be a big deal, as AT&T can still acquire low-frequency spectrum at next year's auction. But, what's substantial is that its $49 billion cost does not give AT&T an advantage in broadband Internet. This is a highly competitive space, one where AT&T's U-Verse GigaPower has become the company's most significant growth driver.

U-Verse finished 2013 with 10.7 million customers, growing at 25% and accounting for nearly 10% of the company's $128.7 billion in revenue. AT&T's GigaPower was recently upgraded to reach speeds up to 300 megabits per second, or 30 times faster than typical broadband.

However, this upgrade was in response to the success of Google's new initiative, called Fiber, which allows for Internet speeds of up to 1 gigabit per second, or 100 times faster than normal broadband. This is a project that analysts originally estimated could cost Google $20 billion-$28 billion over five to 10 years, but would make it head-and-shoulders above all others within the space, including AT&T's fast-growing segment.

Since the original analysis, Google has been able to cut costs by requiring customers to sign up for service prior to Fiber being built. This was successful in Kansas City and Austin, and now the company has plans to penetrate 34 new cities with the same approach.

Moreover, the company has been able to save on even more costs by using the existing infrastructure of companies like AT&T, mainly telephone poles. Due to this success, rumors have circulated that Google has plans to become a wireless provider of not only Internet, but also TV and mobile as a virtual network operator, meaning Google would essentially borrow another network. Overall, this is horrible news for competitors like AT&T, as could grow Google into the next telecom giant.

Final thoughts
In response to the news from Google, AT&T has been investing heavily into boosting its speeds to 1 Gbps, which costs large amounts of money, but is important for AT&T to maintain its position in this space. Since AT&T needs to build this network rapidly, but just spent $49 billion on DirecTV, while also paying out more than 50% of earnings in dividends and buybacks, it's easy to see that AT&T's money is running low.

With that said, cost synergies of AT&T and DirecTV are expected to total $1.6 billion, and the combined companies will seek to increase their presence in Latin America. Hence, there are benefits, but with broadband being so important, and the rise of Google Fiber being so evident, it appears that AT&T just handed Google a huge gift in the form of an acquisition, limiting AT&T's ability to focus on GigaPower. Therefore, as it appears today, it's hard to view this acquisition as beneficial when it results in neglect of what may be the most important segment of AT&T's business.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 20, 2014, at 5:40 PM, BobinTexas wrote:

    There is also another thought that wasn't mentioned. At this moment, DirectTV's major competitor is Dish network who is the only major supplier of satellite internet service. While this may not be important to urban people, there are a lot of folks out in the hinterland who do not have access to cable, DSL and will be left out by Google. With DirectTV's satellite technology, this could be an entry into the "ignored" customers who are pretty well locked into one and only one supplier of internet services.

  • Report this Comment On May 20, 2014, at 6:57 PM, RalphS wrote:

    This isn't the first, seemingly, stupid move AT&T has made. I guess time will tell. We all know how the attempted T-Mobile acquisition turned out. Of course, Direct TV and AT&T already had a cross branding and billing agreement in place. If fiber to the curb was not available, AT&T U-Verse, then you could purchase Direct TV through AT&T and get one bill. I live in South GA and have Direct TV. I would not even attempt to use it for internet. My reception goes out with heavy cloud cover and light rains, which lately has been quite often.

  • Report this Comment On May 21, 2014, at 9:16 AM, torridtelco wrote:

    Outside of Austin (in response to Google Fiber), where has ATT been investing and rolling out 1gbps service? There's been a lot of "fiber to the press release" by ATT, and some talk of cities that MAY get 1gps, but very little of that has translated to reality. Talk is cheap, but crazy purchases of companies to temporarily prop up a slow growth business is not. How many cities could that $49B help to get 1gbps? To invest in a video-centric provider now seems asinine to me. The next generation of consumers have repeatedly shown they aren't willing to pay $80/mo + for "old school" entertainment. Paid TV has plateaued and will soon begin to decline. The only growth now is to build a monopoly/duopoly in order to drive prices up. Unfortunately these large companies don't understand what it is to innovate. They're rightfully worried and this is the result (along with their battle against network neutrality) because they don't have a clue how to bring new ideas and new ways of doing business to market. Its just surprising the investors would allow such an expenditure on something that doesn't appear to have much long term value.

  • Report this Comment On May 21, 2014, at 10:20 AM, byrontx wrote:

    Competition in the broadband market, where? In most of the U. S. the choices are between two mediocre offerings at most, coupled with poor customer support and rarely achieving the speeds quoted in the contracts. Rather than invest in bringing more products and services to consumers the trend by ATT (and wireless phone providers) is to to limit choices while overcharging the consumer for the services provided. More likely, ATT fears a wireless broadband effort by Google and this is a preventive measure to make such a move by Google less likely.

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Brian Nichols

Brian Nichols is the author of "5 Simple Steps to Find the Next Top-Performing Stock: How to Identify Investments that Can Double Quickly for Personal Success (2014)" and "Taking Charge With Value Investing (McGraw-Hill, 2013)". Brian is a value investor, but emphasizes psychology in his analysis. Brian studied psychology in undergrad, and uses his experience to find illogical value in the market. Brian covers technology and consumer goods for Motley Fool. Brian also updates all of his new and current positions in his Motley Fool CAPs page. Follow Brian on Twitter and like his page on Facebook for investment conversations and recent stories.

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