Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



How Could Charlie Ergen Pose a Threat to AT&T and DirecTV?

AT&T (NYSE: T  ) likely has little to fear when it comes to the Federal Communication Commission, or FCC, and its proposed takeover of DirecTV (NASDAQ: DTV  ) . Instead, DISH Networks'  (NASDAQ: DISH  ) Charlie Ergan might pose the greatest threat, and the NFL's Roger Goodell is laughing all the way to the bank.

AT&T's $48.5 billion distraction from telecom
When AT&T announced its $48.5 billion acquisition of DirecTV, investors immediately wondered whether regulators such as the FCC would allow it. However, as investors and analysts took a closer look, realizing DirecTV creates no additional advantages in wireless or broadband, and owns no spectrum, the deal is now viewed as highly likely to be approved.

In fact, it's hard to understand why AT&T even wants DirecTV. Indeed, this would give AT&T the leading digital television company, but it hardly fits with the latter's core strategy of boosting its wireless network and building high-speed broadband service.

Specifically, broadband is its fastest-growing segment, and the company's wireless segment accounted for more than 80% of operating income during the first quarter. Yet, DirecTV does nothing to protect these two businesses.

Following the acquisition news, Jefferies uncovered significant cuts to AT&T's wireline business, thus implying a downward revised capital expenditure budget announcement in the coming days or weeks. Yet, in retrospect, fewer investments in infrastructure make sense, as it's hard to spend $21 billion on such investments when roughly $10 billion this year is being spent on dividends and $48.5 billion on DirecTV.

Therefore, AT&T's largest competitors, who are quickly expanding their networks, are likely applauding the DirecTV deal, as it makes almost no difference for the core wireless business, but is a big distraction.

DISH might not like this distraction
DirecTV may not be a threat to telecom giants, but combined with AT&T's presence, it could be a problem for DISH Networks. Broadband is AT&T's fastest-growing segment at nearly 30% annually. Combining Internet and TV, the company has 11 million subscribers, with TV accounting for 5.7 million. DISH is slightly larger with over 14 million subscribers, but by combining DirecTV's 20 million worldwide subscribers, DISH finds itself at a competitive disadvantage.

Albeit, DISH Networks' chairman, Charlie Ergen, has a rather hostile past with regard to attempted mergers. Therefore, AT&T and DirecTV investors can almost guarantee some backlash because, after all, Ergen's never seen a fight he didn't start.

So, the well-known clause disclosed in AT&T's recent 8-K stating that it can terminate the merger deal if NFL Sunday Ticket is not renewed is likely to get very interesting. Prior to the acquisition, there were wide-spread rumors that several TV and technology companies will likely bid for the service once DirecTV's deal with the NFL expires at the end of the 2014 season.

The current deal was signed in 2009 for a four-year $4 billion price. However, many have estimated a 40% price hike alone for 2015, up to $1.4 billion, making the deal relatively large for DirecTV. Currently, 10% of DirecTV subscribers, or nearly two million customers, pay for the Sunday Ticket. The list price is $300, which should create revenue of $600 million per year. But, DirecTV also offers various incentives to new subscribers and attracts consumers with lower pricing. Thus, DirecTV is likely to earn $600 million per year in revenue from the partnership.

With that said, $1.4 billion is likely a tough pill to swallow for DirecTV. But for DISH, which could be facing an enormous challenge of competing against DirecTV and AT&T as one, $1.4 billion is a small price to pay. Additionally, DISH would surely appreciate those two million NFL Sunday Ticket subscribers who are currently clients of DirecTV.

Final thoughts
Like Steve Balmer and his $2 billion purchase of the Los Angeles Clippers, Ergen stealing rights to Sunday Ticket is likely not about creating a profit, but rather gaining something new, unique, and of limited quantity.

The NFL as a brand has the highest ratings, commands the most advertising dollars, and media companies are in large demand to capitalize on its very limited supply of 16 regular season games. Therefore, AT&T might not have any trouble with the FCC, but Charlie Ergen is a completely different story.

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. 


Read/Post Comments (0) | Recommend This Article (2)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2985135, ~/Articles/ArticleHandler.aspx, 8/31/2015 7:05:15 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

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.

Today's Market

updated 2 days ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

12/31/1969 7:00 PM
DTV $0.00 Down +0.00 +0.00%
DirecTV CAPS Rating: ***
T $33.29 Down -0.15 -0.45%
AT&T CAPS Rating: ****
DISH $59.62 Up +0.51 +0.86%
DISH Network Corpo… CAPS Rating: **