Why AT&T-DirecTV Deal Will Attract Less Regulatory Scrutiny Than The Comcast-TWC deal

The Federal Communications Commission (FCC) has paused its review of the proposed merger of DirecTV (NASDAQ:DTV) with AT&T (NYSE:T) along with its review of the Comcast (NASDAQ:CMCSA)-Time Warner Cable (NYSE:TWC) deal. ^[1] The FCC has further stated that it can restart the reviews as it sees fit. The commission stopped both reviews citing a pending court ruling on the issue of sharing sensitive information about pay-TV carriage contracts with third parties. We believe that both mergers will get the required approvals in the due course of time. However, we also note that FCC’s recent actions add a bit of uncertainty to the Comcast-TWC deal. (Read More – FCC’s Recent Rulings Add Uncertainty To Time Warner Cable’s Deal With Comcast) In this article, we examine the AT&T-DirecTV deal in the same context and conclude that the level of uncertainty regarding its approval is considerably less than that surrounding the Comcast-TWC merger.

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Level Of Uncertainty Is Less For AT&T-DirecTV Deal

The Comcast-TWC deal has been vehemently opposed by different parties involved, including consumers, public interest groups and industry players. The primary gripe for most critics is that Comcast and TWC have traditionally been rivals and their merger will reduce choice for the customers. Even though both these companies do not directly compete with each other and there is no physical overlap in their respective service areas, their business models are eerily similar and one of the main motivations behind the merger is consolidation of market share. In contrast, DirecTV is primarily a satellite-TV provider and AT&T is telecommunications giant and their core competencies are not that similar to begin with. They do compete in the pay-TV market but DirecTV is a much bigger player and AT&T’s market share is only 6% of that market. ^[2] Their merger does not reduce choice for the customers and as a result, the FCC might look at this merger more favorably.

The other issue with the Comcast-TWC deal is the market share of the post-merger entity. Critics have said that the merged entity will yield too much power in the pay-TV industry, as the combined market share for the two companies is approximately 33%. Comcast has spun off some of its subscribers to alleviate this concern and the reduced market share will be around 30%. (Read More – Comcast-TWC Merger Makes Sense Despite Ever Growing Opposition) The FCC had previously used 30% as a strict limit on the maximum allowable market share for one company. However, the AT&T-DirecTV Deal raises no such issues as the pay-TV market share of the merged entity will be just over 26%. ^[3] Similarly, the combined entity formed by the Comcast-TWC deal would account for just under 37% of the high speed internet market while the AT&T-DirecTV combine will represent only 17% as DirecTV does not have any high speed internet subscribers. ^[3] Hence, the market shares for the AT&T-DirecTV combine in both pay-TV and internet markets will remain below the 30% unofficial limit, which could result in less scrutiny by the FCC.

Why The Deal Is Important For DirecTV

DirecTV has posted solid results over the past few years in terms of subscriber growth and average revenue per user (ARPU), consistently outperforming most competitors. However, the growing availability of online content as an alternative video platform, along with an expanding market for connected devices, has negatively impacted DirecTV as well as the entire pay-TV industry in the country. This has led to a stagnation in subscriber growth, forcing pay-TV companies to look at other avenues to register revenue gains. Cable companies have been effectively offsetting their video subscriber declines by selling high-speed broadband services, but satellite-TV providers such as DirecTV have not been able to follow suit because of speed constraints in satellite-based broadband. Its deal with AT&T could provide DirecTV the broadband channel it has been looking for. AT&T’s acquisition of DirecTV is likely to enable the merged entity to become a leader in content distribution across various platforms including mobile, broadband and TV. (Related – Why Would DirecTV Merge With AT&T?)

The merged entity will likely offer a “quadruple-play” bundle of mobile, fixed-line, broadband and TV to bring growth back to DirecTV’s business and will try to convince DirecTV customers to switch to AT&T for mobile, as the bundled packages would likely offer competitive pricing. The fact that the merged company will be able to offer four bundled services, compared to the three (fixed-line, broadband and TV) offered by the Comcast-TWC behemoth, could also provide it a significant competitive advantage. ^{[4] [5]} The deal would also result in substantial savings, as the companies expect cost synergies of over $1.6 billion annually within three years of the deal closing, primarily on account of the increased scale of their video subscriber base. ^[4]

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1. FCC Stops the Clock Again on Comcast-TW Cable, AT&T-DirecTV Merger Reviews, March 13, 2015, Variety [↩]
2. MAJOR PAY-TV PROVIDERS LOST ABOUT 125,000 SUBSCRIBERS IN 2014, March 3, 2015, Leichtman Research Group [↩]
3. MAJOR PAY-TV PROVIDERS LOST ABOUT 125,000 SUBSCRIBERS IN 2014, March 3, 2015, Leichtman Research Group, Inc. [↩] [↩]
4. Press Release, DirecTV, May 18 2014 [↩] [↩]
5. AT&T to Buy DirecTV for $48.5 Billion in Move to Expand Clout, NYTimes, May 18, 2014 [↩]