Why AT&T Inc. Desperately Needs DirecTV

Among several other telecom deals on the table, AT&T's (NYSE: T  ) nearly $50 billion proposed acquisition of DirecTV  (NASDAQ: DTV  ) will similarly face regulatory scrutiny. The pair have laid out the reasons a merger is warranted. AT&T doesn't believe it can compete with one of the other proposed mergers: Comcast (NASDAQ: CMCSA  ) and Time Warner Cable  (NYSE: TWC  ) . If Comcast and Time Warner are allowed to merge, the resulting behemoth would have immense scale. That would put a standalone AT&T at a disadvantage with negotiating content costs.

AT&T's pay TV business lags far behind its broadband and voice services in terms of subscribers. Broadband and voice each have around 16 million to 17 million subscribers, but U-verse TV has just under 6 million subscribers. Meanwhile, DirecTV only offers satellite TV service, and lacks the infrastructure for broadband. Combined, the two companies would boast approximately 26 million TV subscribers, which would be able to challenge Comcast and Time Warner's combined 30 million. However, by predicating its merger rationale on Comcast and Time Warner, AT&T's argument becomes weaker if regulators block the first deal.

Regulators have their work cut out for them in evaluating these deals, as the industry is undergoing a massive wave of consolidation. AT&T has committed to keeping prices low if the DirecTV deal is allowed to go through. In contrast, Comcast makes no assurances as to pricing. 

In this segment of Tech Teardown, Erin Kennedy discusses AT&T's strategic reasoning with Evan Niu, CFA.

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