For DirecTV (DTV.DL) investors, the company's first-quarter results were mostly immaterial to the investment thesis but still pointed to a strong operational result. Overall, the company added 279,000 net subscribers -- including 60,000 in the mature U.S. market -- as the company grew its top line 3.7% on a year-over-year basis. On the basis of reported diluted earnings per share, the company grew its year-over-year result 32.1%, from $1.09 in the first quarter of 2014 to this quarter's result of $1.44.
That said, the elephant in the room remained unaddressed: DirecTV said very little in regard to the progression of the proposed AT&T (T) merger. Both groups of shareholders have approved it, but the Department of Justice and the Federal Communications Commission are reviewing it - extremely closely. The latter has had a decidedly pro-consumer slant, recently denying a similar -- although not exact -- merger of Comcast and Time Warner Cable.
The differences between the two proposed mergers are apparently important. The Wall Street Journal reports that neither regulatory body appears to have serious issues with the AT&T/DirecTV merger and AT&T that has even tapped the bond markets in anticipation of eventual approval. But apparently, Netflix (NFLX) wants its voice heard on the matter: The company is now urging regulators to deny the merger unless there are changes.
Does Netflix have serious concerns?
According to Netflix, the combination of AT&T and DirecTV creates a powerful force in pay TV. The company states: "The merger with DirecTV would make AT&T the largest provider of cable and satellite service, and could well make it the largest Internet service provider as well. Such market power creates new incentives and abilities to harm entities that AT&T perceives as competitive threats, and will exacerbate the anticompetitive behavior in which AT&T has already engaged."
However, I think Netflix's concerns are overblown here. First, the federal government's net-neutrality rules prevent ISPs from treating legal data differently and even provides an outlet for Netflix to complain about interconnection disputes -- and although the final rules haven't been hashed out and are subject to court challenges, Netflix is now afforded stronger protections than it had at the beginning of this year.
Second, although the company is correct that the combined entity will become the largest cable/satellite TV provider, Netflix's concerns about ISP dominance appear to be overblown. As of the last quarterly report, AT&T reported 12.6 million Uverse Internet subscribers in its recently reported quarter, while DirecTV doesn't have a significant ISP business. It appears Netflix is assuming that AT&T will win a significant amount of DirecTV's 20 million-plus pay-TV subs post-merger to compete with Comcast's 22.4 million Internet subs -- but the vast majority of those subscribers already have existing Internet relationships.
Is Netflix at risk of becoming a "sore winner"?
Considering Netflix won big during the net-neutrality decision, gaining both equal treatment and an outlet to argue interconnection fees, you would think the company would be satisfied. Now the company wants to speak up to prevent possible mergers because they may pose a threat to its business model, although the FCC's rules essentially disallow it. In the end, the company appears to be is at risk of becoming a sore winner.
Considering Netflix commands nearly 35% of North American downstream traffic during peak Internet hours, the government is essentially forcing non-Netflix watchers to subsidize heavy watchers by serving them with slower speeds or indiscriminate price increases to pay for increased capital expenditures.
I think Netflix's concerns regarding this merger are overblown, and Netflix should be content with its huge win during the net-neutrality ruling.