DirecTV-AT&T Merger: Some Questions Still Remain

DirecTV (NASDAQ:DTV) announced in May last year that it will be acquired by AT&T (NYSE:T) in a stock and cash deal worth $48.5 billion. ^[1] The deal is currently under regulatory review and a decision is expected soon. If regulators approve the deal, it will enable the DirecTV-AT&T combo to become a leader in content distribution across various platforms including mobile, broadband and TV. However, certain unanswered questions still surround the merger. In this piece, we explore two such questions.

Our price estimate for DirecTV stands at $95, implying a slight premium to the market.

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What Conditions Will AT&T Have To Accept To Secure Approval For The Merger?

The Federal Communications Commission (FCC) is likely to approve the DirecTV-AT&T merger in the next few weeks, but the telecom provider may need to accept a number of conditions before getting the FCC’s seal of approval. The biggest concern is with respect to the FCC’s new net neutrality rules, which AT&T had earlier publicly opposed along with other service providers. In fact, AT&T was the first major Internet service provider to file a lawsuit against the FCC in relation to the issue last April. However, it was reported a few weeks back that the company was apparently willing to abide by the disputed rules as a condition to the deal being approved. ((AT&T is prepared to abide by the new net neutrality rules under the DirecTV deal, WSJ, June 2 2015)) The new net neutrality rules will require AT&T to comply with a ban against “paid prioritization”, thereby disallowing different treatment for different websites and content. It would also have to abide by the FCC’s ban on blocking websites. It is pertinent to note that AT&T has a history of blocking websites, blocking FaceTime on Apple devices and Google Hangout on Android devices in 2012 and only allowing limited access until the end of 2013.

Considering that AT&T has so far left no stone unturned in removing roadblocks to approval of the deal, it would be no surprise that it has agreed to abide by the FCC’s new net neutrality rules. However, no definite statement has come from either side stating exactly what conditions AT&T is willing to meet. We will also have to wait and watch how the carrier deals with other disputed issues such as possible curbs on “zero-rating” practices (providing free access to some websites) and its pricing of new standalone broadband products. A federal appeals court recently refused to stay the implementation of the FCC’s new net neutrality rules while they were being challenged in court by the telecommunications industry. ^[2] As a result, the rules have taken effect. This sequence of events only adds to the confusion as it has left opinion divided. While many conclude that the rules coming into effect is a setback to AT&T, some people familiar with the matter are of the opinion that this might actually help AT&T. ^[3] They argue that the FCC doesn’t need to set tough conditions on the DirecTV-AT&T merger now that its powers have increased. Instead of setting guidelines for the merged entity, the regulator can now keep checks on the DirecTV-AT&T combo by simply punishing any future violations. With no clear picture emerging as of now, we will have to wait and see what conditions AT&T will actually have to meet to secure the merger approval.

How Will The Merged Entity Perform In Current Pay-TV Landscape?

While DirecTV has managed to maintain its subscriber base, the pay-TV market in general has become saturated over the past few years. Even though total TV households in the U.S. have inched upwards, increasing from 114.2 million ^[4] in 2012-13 to 116.3 million ^[5] in 2014-15, the number of pay-TV subscribers has remained stagnant at around 100 million for the past few years. ^[6] Top pay-TV providers are currently losing a combined 100,000+ subscribers per year, having lost around 105,000 ^[7] and 125,000 ^[6] subscribers in 2013 and 2014, respectively. This rate of erosion has allowed the pay-TV providers to remain profitable as the loss of subscribers is more than offset by rising subscription fees.

The subscriber losses could worsen in the near future. TiVo released a white paper in March which estimated that approximately 1.5 million customers were planning to cut the cord of their pay-TV service. The white paper also stated that 67% of pay-TV subscribers were unhappy with the cost of their service. The rise of alternative platforms, such as online streaming services, are also bound to hasten the subscriber losses for the pay-TV industry. Streaming giant Netflix already has a thriving subscriber base and other content providers such as Dish’s Sling TV, Sony, Apple, HBO, CBS, etc., have also emerged on the scene. These services are priced considerably lower than the subscription fees charged by traditional pay-TV providers. This puts the pay-TV providers in a catch-22 situation. They have to increase the subscription fee in order to make up for the loss in revenue due to subscriber exits. However, the rising fees increases the level of dissatisfaction among the remaining subscribers, potentially leading to more subscriber losses. The white paper also claimed that 79% of pay-TV subscribers usually watch only 1 to 10 channels. This raises the question as to why the subscriber would pay $80-100 a month for effectively consuming only 10 channels. This question is partly responsible for the emergence of multiple streaming services. These services have been designed in order to cater to the specific preferences of the end user so that they do not feel like they are paying extra. All these observations state the obvious fact that large factions in the general public are unhappy with the current state of the pay-TV services. It will be interesting to see how the DirecTV-AT&T combo will go about combating the saturation in pay-TV market and the looming threat of streaming services in the coming years.

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1. Press Release, May 18 2014, DirecTV Press Release [↩]
2. UPDATE 2-Court declines to suspend U.S. net neutrality rules, June 11, 2015, Reuters [↩]
3. AT&T DirecTV Deal Upside In Lost Court Decision?, June 12, 2015, Investors.com [↩]
4. NIELSEN ESTIMATES 115.6 MILLION TV HOMES IN THE U.S., UP 1.2%, May 7, 2013, Nielsen [↩]
5. NIELSEN ESTIMATES 116.3 MILLION TV HOMES IN THE U.S., UP 0.4%, May 5, 2014, Nielsen [↩]
6. MAJOR PAY-TV PROVIDERS LOST ABOUT 125,000 SUBSCRIBERS IN 2014, March 3, 2015, Leichtman Research Group [↩] [↩]
7. Major Multi-Channel Video Providers Lost About 105,000 Subscribers in 2013, March 14, 2014, Leichtman Research Group [↩]