ViaSat's (NASDAQ:VSAT) surprisingly fast Internet speeds, combined with recent actions on behalf of Google (NASDAQ:GOOG) (NASDAQ:GOOGL), might imply significant upside potential in the future of satellite Internet providers. Moreover, this might hold important clues as to what AT&T (NYSE:T) sees in DirecTV (NASDAQ:DTV).
Measuring broadband America
In a surprising report from the Federal Communications Commission, or FCC, the top Internet/broadband provider by speeds was a small company called ViaSat, with just 640,000 subscribers. ViaSat produces, on average, about 18 megabits per second, or Mbps.
While ViaSat does not have billions to spend on infrastructure, it has managed to earn the No. 1 ranking by using an unconventional business model that many other broadband providers have abandoned. The company actually uses satellites, which were previously considered a last resort for customers in rural areas who could not get services via fiber or 4G buildouts.
Over a 14-year period, the company has been very acquisitive in creating new technologies like satellite terminals and better antenna systems to increase broadband speeds.
How is DirecTV relevant?
In retrospect, a $2.6 billion company with $1.35 billion in annual revenue has outperformed the juggernauts of broadband with a seemingly dead technology. Albeit, DirecTV is a satellite company, and while its technology doesn't exactly mirror that of ViaSat, the infrastructure is already present for AT&T to create a broadband satellite service, something it lacked prior to the acquisition.
To many, this might sound foolish, but the acquisition of DirecTV was initially puzzling to many AT&T investors, as the synergies weren't evident, nor did AT&T acquire any spectrum in the deal. Since broadband, or U-Verse, is AT&T's fastest growing business, and now accounts for 10% of total revenue, it is possible that AT&T is hoping to utilize DirecTV's technology to create satellite broadband like ViaSat's in rural and underdeveloped areas.
Google serves as proof of AT&T's interest
Before dismissing the notion of AT&T using DirecTV's satellite network for broadband, consider the company's intense competition with Google to build the fastest Internet service the world has ever seen. Google Fiber is a multi-billion initiative that is already in three cities, with plans to launch in 34 additional cities. The service has speeds of one gigabit per second, or 100 times faster than average broadband.
AT&T U-Verse GigaPower is an initiative to increase the company's top broadband speeds from 300 Mbps to equal that of Google Fiber. The company will build this network in 100 cities in 21 metropolitan areas. So, why would AT&T backpedal to equal the speeds of ViaSat at barely 18 Mbps?
According to the Wall Street Journal, AT&T's biggest competitor, Google, will soon spend more than $3 billion on satellites to provide Internet access. Google already purchased the drone maker Titan Aerospace earlier this year, which streams Internet service from the sky. Therefore, Google's satellite initiatives might have something to do with Titan, and the Wall Street Journal adds that Google will roll out this service with 180 small satellites.
With all things considered, satellites might boost AT&T and Google's broadband market share while their fast broadband services are being built. Currently, much of the country's rural areas lack Internet access, but by building low-cost/high-speed satellite and drone services, Google and AT&T could capture consumers who might one day upgrade to faster speeds.
Acquiring DirecTV makes a lot of sense for AT&T, given the competitive nature of this space and DirecTV's enormous satellite presence; the acquisition could make AT&T a clear leader -- if it can utilize the technology to create a ViaSat-like service.
Due to AT&T and Google's recent initiatives, there is reason to believe that ViaSat's heyday could be short-lived. Furthermore, it appears that both Google and AT&T will launch a competing service in the near future, with DirecTV being crucial to the latter's plan. Albeit, a satellite service alone doesn't justify a near-$50 billion acquisition, but it does help to explain why AT&T was willing to buy the company, and shows that its plan for DirecTV might be broader than we realized.
Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Google (A shares) and Google (C shares). The Motley Fool owns shares of Google (A shares) and Google (C shares). 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.