Will AT&T Suffer if its Merger with DirecTV is Denied?

Recently, The CEO's of AT&T and DirecTV claimed that the only way they can remain competitive in the telecom industry is if their merger plans are approved. Is there truth to their claims, or are the execs just doing whatever they can to get their merger approved by the FCC?

Jul 1, 2014 at 9:00AM
Try Again

Image of Michael White (on left) and Randal Stephenson before congressional panel (Bloomberg)

On Tuesday, June 24, 2014, Michael White, CEO of DirecTV (NASDAQ:DTV), and Randall Stephenson, CEO of AT&T (NYSE:T), went before congress to discuss the benefits of their merger plans.

The CEO's claimed that merging their companies is the only way to preserve competition if Time Warner Cable (NYSE:TWC) and Comcast (NASDAQ:CMCSA) are allowed to join forces.  

Were the executives just blowing smoke, or is the AT&T-DirecTV merger truly essential for competition in the telecom market if Time Warner Cable and Comcast's merger is approved?

What the pay-TV industry will look like if Comcast & Time Warner Cable merge
First let's imagine Comcast and Time Warner Cable are the only two companies in the telecom industry that are approved to merge. Now let's look at pre-merger and post-merger pie graphs of the market share of the largest pay-TV companies:

 Cable Real
Pie graph created by Michael Nielsen using customer data from annual reports, quarterly reports, Leichtman Research, Google Finance and toptenreviews.com

 Cable
Pie graph created by Michael Nielsen using customer data from annual reports, quarterly reports, Leichtman Research, Google Finance and toptenreviews.com

According to DirecTV's annual report from 2013, there were 100 million pay-TV households in the U.S. If Comcast mergers with Time Warner Cable, the resulting company would have nearly 34 million cable customers. That would mean over one third of the Pay-TV households in the United States would use Comcast as their service provider.  

Now let's take a look at a before-merger and after-merger snapshot of the Internet service providing market:

Internet Before
Pie graph created by Michael Nielsen using customer data from annual reports, quarterly reports, Leichtman Research, Google Finance and toptenreviews.com

Internet After
Pie graph created by Michael Nielsen using customer data from annual reports, quarterly reports, Leichtman Research, Google Finance and toptenreviews.com

After the merger, Comcast would have over 32 million Internet subscribers. The new Comcast would serve about 32 million of the 98 million Internet-using households in America. 

The market power of the new Comcast could help the company gain even more subscribers. There is no telling powerful the new Comcast could become. 

So exactly how would this Affect AT&T's competitiveness?
Comcast and Time Warner Cable have created an advertisement campaign to get the general public to support their proposed merger:

Comcast Campaign
The image above is from Comcast's corporate website

As you can see from the advertisement above, the companies are touting that the merger will result in faster Internet, a more reliable network, lower Internet costs for the consumer, and more TV channels for its customers. 

If the merger does everything the two companies claim it will, consumer preferences could shift dramatically. Currently Comcast and Time Warner Cable are two of the lowest-rated Internet service providers in the United States. If the merger is approved, the company could improve its service quality and win back a significant number of subscribers previously lost to AT&T. This would result in lowered revenue and subsequently lower profits for AT&T. 

If AT&T can merge with DirecTV, then it would have a fighting chance against post-merger Comcast. If Comcast's merger is allowed and AT&T's is not, AT&T's competitiveness and ability to generate value for its shareholders may suffer substantially. 

What's the bottom line in all of this
If the FCC allows Comcast to merge with Time Warner Cable, then it should allow other companies to merge as well. The competitive advantage of a combination of Comcast and Time Warner Cable result in a monopoly comparable to the pre-1984 Bell System.

It seems like the CEO's weren't blowing smoke after all. If AT&T's merger isn't approved and Comcast's is, AT&T will definitely lose its ability to compete with Comcast. 

Warren Buffett: This new technology is a "real threat"
At the recent Berkshire Hathaway annual meeting, Warren Buffett admitted this emerging technology is threatening his biggest cash-cow. While Buffett shakes in his billionaire-boots, only a few investors are embracing this new market which experts say will be worth over $2 trillion. Find out how you can cash in on this technology before the crowd catches on, by jumping onto one company that could get you the biggest piece of the action. Click here to access a FREE investor alert on the company we're calling the "brains behind" the technology.

Michael Nielsen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

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.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

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. The show is also heard weekly on dozens of 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. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers