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Will DirecTV Suffer if Its Merger With AT&T Is Denied?

To both AT&T (NYSE: T  ) and DirecTV  (NASDAQ: DTV  ) investors, the benefits of a merger between the two companies are clear: the joint company would have a nationwide video reach, nationwide wireless, broadband expansion to 70 million customer locations, and a more diverse revenue base. But what isn't as clear is how the companies would do on their own if their merger isn't approved. How would DirecTV fare on its own if Comcast and Time Warner Cable are allowed to merge? 

The main differences between AT&T and DirecTV
AT&T and DirecTV are very different companies. AT&T is mostly a voice and Internet provider while DirecTV is mostly a satellite TV provider.

If Comcast and Time Warner Cable merge, the new joint company will have nearly 34 million pay-TV subscribers. As of December 31, 2013, AT&T had just shy of 6 million pay-TV subscribers while DirecTV had over 20 million. Clearly, on a customer base standpoint, DirecTV is better-equipped to compete in the pay-TV market if the Comcast-Time Warner Cable merger is approved. 

In the same light, you could say that AT&T is better-equipped to compete with Comcast in the ISP (Internet service provider) market than DirecTV. But DirecTV isn't trying to compete in the ISP market in the U.S. In the words of Mike White, CEO of DirecTV, "we look for opportunities rather than threats."

But, isn't AT&T better positioned to deal with cord cutting than DirecTV?
You could argue that an advantage AT&T has over DirecTV is its Internet service providing business that will protect it from the cord cutting revolution. Data shows that people are setting up Internet connections faster than they are cutting cable connections. So in the future AT&T should be less affected by the cord cutting revolution than DirecTV, right?

Not necessarily. DirecTV is not your typical pay-TV company. It's a satellite company that has operations in the U.S. as well as Latin America.

DirecTV Latin America and its growth potential
DirecTV Latin America (L.A.) has helped DirecTV grow its top-line over the past four years by a constant annual growth rate of 10%. In contrast, AT&T's revenue grew by a CAGR of just over 1% over the same four years.

DirecTV L.A., which is composed of fully and jointly owned subsidiaries, offers both satellite cable and Internet services to consumers in various countries across the Latin American region. DirecTV L.A. generated over 21% of DirecTV's total revenue in the first quarter of this year. 

Unlike in the U.S., where the pay-TV industry is shrinking, the pay-TV industry is growing in Latin America. Much of the growth has been attributable to the region's healthy level of housing creation: a huge driver of cable subscriber growth. Also, the expansion of the middle class in Latin America--which, according to the World Bank, has grown by 50% over the past decade--has grown the market for cable since more consumers can afford subscriptions.

As houses continue being built and the middle class continues expanding in Latin America, DirecTV's subsidiaries such as Sky Brasil should continue gaining subscribers and generating more revenue for DirecTV.

There is no reason DirecTV can't grow its top and bottom line over the long haul without a merger.  

Conclusion: DirecTV will be fine either way
Clearly, it seems like AT&T needs DirecTV more than DirecTV needs AT&T. If you're invested in either company, keep an eye out for news about the pending mergers in the telecom industry. If Comcast and Time Warner are allowed to merge and AT&T and DirecTV are not, DirecTV will be fine. 

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. 


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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 July 18, 2014, at 12:47 PM, NigeCo wrote:

    Reply on behalf of Smalls.

    If T doesn't build 1 gbps internet service going forward then someone else will. DTV is a move in the wrong direction. Instead of embracing what the customer wants you are buying a satellite asset to avoid bandwidth consumption...which is what Stephenson eluded to in an interview. If GOOG can install full fiber and TV bundle economically for $120/mo then who isn't going to change to that service when their TV bundle is that much? Check out "" technology. Tried posting about it on that Fool article but posting link won't work for me. Google may not get much full fiber competition because full fiber networks are going to be cost disadvantaged with the launch of dropping install costs of a 1 gbps customer by 80%. Yes, 80% with a couple articles commented 90%. Cost advantage goes to last leg copper line incumbents. There is a reason FiOS build was halted by Verizon back in 2010. Check when Huawei began work on for a quick hint. ;-) NOW we have standardization which was completed in April 2014. OEMs developing models with commercial launch expected for Europe in 2015 instead of 2016 on the back of standardization being completed earlier than projected. Essentially AT&T is wasting $68B on satellite assets which are fading assets.

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Michael Nielsen

Michael is a full-time MBA student and certified stock market junkie. For the Fool, he writes articles about the telecom industry. To see some of his market-beating investment ideas, follow him on twitter

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