If you've seen the latest Godzilla movie you know that sometimes it takes a giant monster to keep a giant monster in check.
When Comcast (NASDAQ:CMCSA) announced it would be buying Time Warner Cable (UNKNOWN:TWC.DL) for $45 billion it effectively created a monster. The combined cable giant would serve approximately one in three American homes. The new company would be a veritable Godzilla that could offer cable, phone, and Internet service to a large swatch of the country. For many of those customers there would be no alternative offering a similar package of services all on one bill.
In purchasing DirecTV (NYSE:DTV.DL) for $45.8 billion in a deal announced Sunday, AT&T (NYSE:T) creates its own monster (Mothra perhaps) that can battle the giant that a merged Cox/Time Warner Cable will be. And unlike the movie battles between the giant lizard creature and the equally large flying moth, wide-scale destruction is not likely. Instead consumers should benefit as the two monsters battle for customers, market share, and dollars. One giant left unchecked would likely lead to higher prices but two fighting will be good even for people not living in places where both are practical options.
Why is AT&T making this deal?
Cable companies have an inherent advantage over satellite and phone companies looking to provide Internet and offer cable. The cable industry infrastructure has largely been built or upgraded to accommodate delivery of not only cable television, but also phone, and Internet services. Phone companies can offer broadband Internet service in many markets but lack the ability to in many cases to offer cable.
AT&T, for example, sells its U-Verse cable television service in a number of markets but the service is offered on a very limited basis due to the infrastructure it requires. Currently U-Verse has about 5.7 million customers in 22 states -- a fraction of the roughly 41 million cable homes serviced by Comcast and Time Warner Cable jointly. Owning DirecTV will allow AT&T to offer packages that include cable television to its customer base while also gaining a chance to make it very easy to market to DirecTV's 20 million U.S. customers and another 18 million in Latin America.
While some percentage of AT&T's users are already DirecTV customers, The New York Times in an article about the deal said that "AT&T and DirecTV share little overlap" so the potential exists for the new AT&T to offer bundled phone services to a large percentage of DirecTV's 38 million paying homes.
"Customers will be able to get wireless, voice, data, TV, and home security from the same company nationwide," Roger Entner, an analyst at Recon Analytics, told USA Today. "It allows [AT&T] to grow the share of consumers' spending on telecom."
AT&T will also -- and this might be the biggest benefit for consumers -- be able to offer satellite television service to every single one of its customers, making it a true single-bill alternative to Comcast/Time Warner Cable as well as other cable companies that offer phone, broadband, and cable packages, including Cox.
"This is a unique opportunity that will redefine the video entertainment industry and create a company able to offer new bundles and deliver content to consumers across multiple screens – mobile devices, TVs, laptops, cars, and even airplanes." said Randall Stephenson, AT&T chairman and CEO, in a press release.
Basically the deal allows AT&T to compete on even footing with the cable companies.
Will regulators agree?
While as a consumer who currently only has the option of one company (Cox) to receive phone, broadband, and cable on one bill, I see the joining of AT&T and DirecTV as a positive. Federal regulators may not agree. Because the deal is likely to face regulatory scrutiny, AT&T announced a number of self-sanctions/promises when it announced the deal. Some of those include:
- AT&T will offer broadband services in 15 million locations where it does not provide it today.
- The company also promises to offer stand-alone broadband at speeds of at least 6 Mbps (where feasible) in areas where AT&T offers wireline IP broadband service today at guaranteed prices for three years after closing.
- AT&T will continue to offer DirecTV on a stand-alone basis at nationwide package prices that are the same for all customers.
Stephenson said he is confident that the deal will be approved.
"We became very comfortable that this is a deal that should pass regulatory muster," he told The New York Times.
AT&T has been down this road before -- its failed attempt to buy T-Mobile was nixed by regulators, costing the company around $6 billion in breakup fees. For this deal it's hard to imagine regulators signing off on Comcast buying Time Warner Cable and not allowing AT&T to buy DirecTV.
More competition is good
AT&T buying DirecTV takes a player off the board, but it makes the remaining company actual competition. In the current marketplace I could buy cable from a satellite provider, phone from Vonage or a similar company, and broadband from either my area's cable provider or phone company. In that scenario I have three bills and pay full price for each service.
If this merger goes through AT&T will be able to offer me everything I currently get from Cox, which should result in lower prices for me. Having two large companies fighting over customers is generally good for the public. Given how aggressively AT&T has priced bundled services in its U-Verse markets (generally $99 guaranteed for two years for cable, phone, and Internet though offers vary), there is no reason to believe it won't be equally aggressive in marketing its new offerings after it buys DirecTV.
If AT&T markets a lower-priced bundle to steal customers then Comcast and the other cable companies will likely have to do the same. This should lead the cable/phone/broadband industry down the path that mobile phone service has been following -- a path where real competition drives prices lower.
Daniel Kline has no position in any stocks mentioned. The Motley Fool recommends DirecTV. 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.