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AT&T Needs to Make a Deal With Dish

By Adam Levy – Nov 6, 2018 at 5:00PM

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Dish blacked out HBO and Cinemax after failing to sign a distribution agreement.

Dish Network (DISH -2.34%) subscribers are going to have to go without HBO and Cinemax for a while. The premium cable networks owned by AT&T (T -0.99%) subsidiary WarnerMedia failed to come to a distribution agreement for Dish's satellite business and its Sling TV streaming service.

Both sides are pointing fingers. Dish says HBO's demands for guaranteed subscribers are untenable. Meanwhile, AT&T is accusing Dish of actively working to make the company look like a monopoly following its Time Warner acquisition.

While Dish has a history of hard-nosed negotiations where it's allowed channel blackouts, the pressure is on AT&T to ensure it doesn't overstep its bounds, especially considering the DOJ's upcoming appeal of its merger.

A still from the series Westworld. A woman and a man sitting on horseback.

Image source: HBO.

If it looks like a monopoly, and it smells like a monopoly...

Regardless of what's really going on behind the scenes at the negotiation table, it doesn't look good for AT&T.

One of the biggest complaints from the Department of Justice (and Dish Network, by the way) to the court about AT&T's merger with Time Warner was that it could use its content ownership to drive customers to its television service. AT&T's response was that cutting off licensing HBO and other WarnerMedia content to other distributors would destroy the economics of Time Warner's business.

But if HBO's brand and product are strong enough, AT&T could drive customers to access HBO in other ways for a comparable price to consumers. And it just so happens AT&T offers HBO nationwide through several channels -- DIRECTV, DIRECTV Now, and HBO Now. There are few other pay-TV companies that offer nationwide coverage and include HBO and Cinemax.

The company has the potential to make much more from subscribers that pay them directly instead of selling HBO and Cinemax through a distributor like Dish. Bringing in pay-TV customers for DirecTV and DirecTV Now also opens the door for AT&T to bundle its wireless and home internet services, generating even more revenue for the company.

Allowing its current contract with Dish to lapse gives AT&T a sense of how customers would respond if their preferred service provider didn't offer HBO. Considering Dish's Sling TV is AT&T's biggest competitor in the streaming linear TV space and has low switching costs for customers, it might not take very long for AT&T to see a measurable impact.

Why AT&T needs to play for the long term

AT&T should be doing everything it can to ensure it doesn't look like it's doing anything monopolistic at this point in time. While it overcame the DOJ's lawsuit against the merger, the government is still appealing the ruling.

AT&T could be better served by more lenient negotiations, which may result in less short-term gain, but keep the AT&T-WarnerMedia company intact. AT&T spent a lot on the acquisition, and it spent a lot on making sure it went through. It's also made various efforts to incorporate WarnerMedia assets into its wireless and entertainment businesses, and it has plans to offer a streaming service heavily reliant on WarnerMedia's assets next year. At this point, it would be more costly to see a reversal of its merger than to sacrifice some money in negotiations with a distributor.

Perhaps AT&T is confident the Court's decision will be upheld despite trouble negotiating a deal with Dish. After all, Dish has a history of allowing distribution deals to expire and blacking out channels. Meanwhile, HBO hasn't had a blackout in 40 years of operation. That was before AT&T bought its parent company, though.

If AT&T is truly making a good faith effort to negotiate a fair deal with Dish and Dish still won't agree to terms, that'll be revealed in court. But investors ought to prefer that it never gets to the point where things are left to a judge's determination.

Adam Levy has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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