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Is AT&T-DirecTV Really About Broadband?

Carol Wilson
5/5/2014
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From the initial reports of AT&T's potential interest in buying DirecTV, I've been a bit puzzled. While a possible deal gives AT&T a broader reach for video offerings and more scale and market power in an industry segment where both are important, pay TV doesn't seem to be the business in which AT&T most wants to play going forward. (See AT&T Eyeing a Bid for DirecTV?.)

It is certainly not AT&T Inc. (NYSE: T)'s primary business, from what I can see, nor is it even all that profitable a part of the service bundle, according to most experts. The cost of content continues to rise, while the ability to pass those increasing costs on to consumers is reduced by growing availability of cheaper online content.

So what's the appeal of buying DirecTV Group Inc. (NYSE: DTV) that would prompt AT&T to pay an expected 20% premium for its stock, according to Amy Yong, a New York-based analyst for Macquarie Group Ltd., quoted in this Dallas News article?

My favorite explanation is this one: Using DirecTV's satellite service for TV frees up more bandwidth for broadband distribution. A separate nationwide video distribution network would let AT&T free up bandwidth and compete more effectively on broadband. Better broadband is ultimately the greatest competitive tool and the single most important service. This is especially true as AT&T moves to use broadband as the support for wireless voice inside the home, delivered via femtocells or other small cell technology, replacing wireline voice or supporting its wireless subscribers in places where cellular coverage is weak.

AT&T's determination to avoid the cost of fiber-to-the-home has left its U-verse service vulnerable to higher bandwidth options from cable. And while AT&T and its vendors have pushed DSL and compression technologies much farther than most of their critics initially thought possible, there are still limits to what copper can deliver versus a more fiber-rich solution. And there are places where U-verse won't be available, in areas covered by other competitors, that DirecTV can reach.

Of course, there are limits to the satellite distribution of TV signals, as anyone who has ever subscribed to Dish Network LLC (Nasdaq: DISH) or DirecTV knows all too well: Weather-related outages plague both services and aren't likely to go away any time soon, and interactivity is limited. Coupling a DirecTV option more tightly with broadband would make such outages less relevant in a video world in which time-shifting dominates the viewing environment and time-sensitive programming, such as live sports, can be made available via online options.

That's what makes the most sense to me; let me know what you think.

— Carol Wilson, Editor-at-Large, Light Reading

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VernonDozier
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VernonDozier,
User Rank: Moderator
5/13/2014 | 7:32:00 PM
Re: Good theory
Yes,

 

Especially in Los Angeles.  Some of the copper is insulated with paper or cloth; and zoning prevents the ability to get in to replace it.  So, they actually maintain the city block's wiring with a 150-lb tank of nitrogen gas that blows water away.  The gas tank the same size as a Helium Tank and has to be refilled twice a week. 

In the event of an emergency, like an earthquake, my guess is that maintaining the gas tanks will be at the bottom of a list of priorities.

One thing I haven't seen in discussions is that most satellites are designed with a typical life of 20-15 years anyway.  My guess is that DirecTV's satellites need to be updated/replaced.  If they replace them all with LTE techonology (similar to ViaSat), DirecTV might be onto something great.
sam masud
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sam masud,
User Rank: Light Sabre
5/7/2014 | 4:18:14 PM
Re: Good theory
Just wondering is some of the copper is so old/bad that it cannot be upgrade to support video--in which case having a satellite TV option would make sense as opposed to upgrading the old copper.
Mitch Wagner
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Mitch Wagner,
User Rank: Lightning
5/6/2014 | 6:13:40 PM
Re: Good theory
seven - "I think this notion of replacing U-Verse video with Direct-TV is not viable.  Can you imagine trying to convince these video customers to change all their setup because the service they had marketed to them is now defunct?" 

I can imagine it but it would be dangerous for AT&T. As long as people are switching services, they might switch to another provider. 
brookseven
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brookseven,
User Rank: Light Sabre
5/6/2014 | 10:43:10 AM
Re: Good theory
So Carol,

I think this notion of replacing U-Verse video with Direct-TV is not viable.  Can you imagine trying to convince these video customers to change all their setup because the service they had marketed to them is now defunct?

I think more likely that AT&T is doing their normal consolidation.  In this case, they get to expand their video footprint outside of U-Verse.  In particular, they can now offer video + DSL + phone triple play to rural properties.  This should increase their ability to hold onto lines in these areas with no network infrastructure buildout.

seven
loli.cyp
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loli.cyp,
User Rank: Light Beer
5/5/2014 | 10:37:03 PM
Re: Good theory
Wouldn't they simply go for bundling the broadcast with their broadband services and offer HbbTV interactive content on top of the stream?
Carol Wilson
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Carol Wilson,
User Rank: Blogger
5/5/2014 | 3:23:43 PM
Re: Good theory
Video services have not been a vein of gold at all - a company as large as AT&T can probably eke out profits on their video services but I don't think that's where their future lies unless consolidation puts more market power into the hands of distributors.

Just the cost of distributing sports programming alone is eating into video profits - the huge MLB contract which doubled to $1.5 billion this year from Fox, ESPN and TBS - guarantees prices will continue to rise. 
mendyk
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mendyk,
User Rank: Light Sabre
5/5/2014 | 3:05:57 PM
Re: Good theory
From a corporate standpoint, decoupling video service from broadband data might make sense, although this seems to be a pretty expensive way to do it. Looks like video services haven't panned out to be the vein of gold initially expected.
Mitch Wagner
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Mitch Wagner,
User Rank: Lightning
5/5/2014 | 1:42:41 PM
Re: Good theory
I meant to say "why would AT&T want to expand its investment in that business," rather than "get into that business." Of course, AT&T already distributes video.

It's still Monday morning here. Too early in the week to expect intelligence out of me. 
Carol Wilson
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Carol Wilson,
User Rank: Blogger
5/5/2014 | 1:39:03 PM
Re: Good theory
This deal hasn't made much sense to me at all, to be honest. This is my conjecture, and I've seen pieces of it elsewhere, but not quite this perspective. I could be way off. 
Mitch Wagner
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Mitch Wagner,
User Rank: Lightning
5/5/2014 | 1:37:27 PM
Good theory
It's a good theory. I like it. 

You've put your finger on something that I hadn't seen reported elsewhere. With cable TV subscriptions declining, why would AT&T want to get into that business? And you've advanced a credible explanation. 
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