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.
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.