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Does AT&T Still Need DirecTV?

By Adam Levy – Jul 28, 2020 at 12:30PM

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If software-based video delivery is the future, where do satellite dishes fit in?

AT&T (T 0.27%) just reported another quarter of staggering pay-TV subscriber losses. Almost 900,000 fewer people subscribed to one of AT&T's premium TV services at the end of June compared to a quarter earlier. The bulk of those subscriber losses can be attributed to DirecTV, from which AT&T has been under pressure to divest since activist investor Elliott Management bought a sizable stake in the company.

Meanwhile, AT&T is shifting its focus to software-based entertainment. Its new AT&T TV and HBO Max services will take center stage, as the company looks to deliver more programming over the internet. With those products launched, it begs the question of whether AT&T still needs DirecTV. In fact, one analyst asked AT&T CEO John Stankey exactly that during the company's second-quarter earnings call. Here's what he had to say.

A satellite TV dish.

Image source: Getty Images

"We like the customer base."

"You can go back and look at comments I made, I think, very early on and post-transaction of DirecTV that we didn't necessarily make that move because we love satellite as a technology," Stankey told analysts. "We like the customer base. It was an opportunity to move that customer base into the right technology platforms moving forward."

The satellite service gives AT&T significant scale. After the acquisition, AT&T became the largest pay-TV distributor in the country. That scale was useful for negotiating carriage rates for the launch of its over-the-top service DirecTV Now (now called AT&T TV Now).

AT&T's other connectivity services, like home broadband or wireless, can also be sold to that customer base. Indeed, a big piece of AT&T's strategy is bundling its services together.

But Stankey says satellite technology probably isn't the best solution for where AT&T is headed. AT&T wants to provide a single platform for live linear television and on-demand programming. Furthermore, software-based delivery requires less overhead for installation than DirecTV since customers self-install and there's no expensive equipment (like a satellite dish).

Is the divestment coming?

Now that it appears AT&T is all-in on the software-based approach, with services launched and contracts in place, DirecTV's customer base isn't as valuable as it once was -- and not just because it lost millions of subscribers over the five years since its acquisition.

Moving DirecTV's customer base to new technology doesn't require AT&T to own that customer relationship. AT&T saw this firsthand as virtual multichannel video programming distributors (vMVPDs) won customers away from its legacy TV services.

AT&T could use cash raised from selling DirecTV's assets to pay down its debt faster. The company refinanced $17 billion worth of debt in the second quarter, issuing new lower-interest long-term bonds and retiring near-term debt. AT&T ended the quarter with over $152 billion in net debt -- an improvement from $162 billion at midyear 2019, but still a massive overhang on the business.

It's unlikely AT&T would be able to recoup the $49 billion it paid for DirecTV in 2015. A spinoff of DirecTV in conjunction with Dish Network proposed last year would net AT&T about half of its original purchase price. Still, that would put quite a dent in AT&T's debt balance and streamline its operations to focus on AT&T TV and HBO Max.

AT&T no longer needs DirecTV to deliver the product it wants for consumers. But it'll have to accept a big loss if it's going to divest the company.

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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