Monday, July 28, 2014

AT&T wants to buy DirecTV. Here's what you need to know.

AT&T is already one of the largest telecommunications companies in the United States. A proposed acquisition of DirecTV, the nation's largest satellite TV company, would make it even bigger. AT&T has offered to pay $48.5 billion in cash and stock for DirecTV, an offer DirecTV's board of directors has unanimously accepted. What's behind the merger, and what would it mean for you? Read on to learn more.

Why does AT&T want to buy DirecTV?

AT&T's press release announcing the deal is full of corporate buzzwords — supposedly, the deal will produce "cost synergies" that will "exceed $1.6 billion annual run rate by year three after closing." But it looks like the deal is mostly about two things: economies of scale and bundling.

AT&T currently offers a video service called U-Verse that delivers content over fiber optic cables the company has installed over the last decade. But the service hasn't been that popular — only 5.7 million households have signed up in the first quarter of 2014. That's much less than Comcast's 22 million television subscribers and the 20 million US households subscribed to DirecTV.

The merged company would vault ahead of Comcast to be the nation's largest paid video provider (if you don't count Netflix, which delivers content over the internet to around 30 million US subscribers). One big advantage to being the largest video distributor is greater leverage in negotiations with content companies. Content companies like Disney and Fox have been able to steadily raise the rates they charge video distributors like AT&T and DirecTV TV channels like ESPN and Fox News. Joining forces will put the AT&T and DirecTV in a better position to resist these rate hikes.

A second reason is bundling. Telecom companies like to offer consumers bundles of different telecommunications services. AT&T can already offer "triple play" packages of voice, video, and data in areas where it offers U-Verse service. But the company also has customers — both wired and wireless — in areas where U-Verse isn't available. Owning DirecTV would allow AT&T to offer video services to customers already subscribed to voice and data packages. AT&T says it will pitch DirecTV service to customers who visit the 2300 AT&T wireless stores across the country.

Why does AT&T say the deal will be good for consumers?

AT&T says that the combined firm will benefit consumers by offering a "stronger competitive alternative to cable." The new, larger company could negotiate better rates from content companies and pass those savings along to their customers. More bundling could also be good for consumers who like one-stop shopping for their telecom services.

In addition, the company says cost savings from the merger will enable it to make several consumer-friendly commitments:

  • AT&T will "build and enhance high-speed broadband service to 15 million customer locations, mostly in rural areas where AT&T does not provide high-speed broadband service today."
  • Customers who want to subscribe to Netflix will be guaranteed access to stand-alone internet service for 3 years after the deal closes.
  • AT&T will promise to respect net neutrality for three years.

What's the case against the deal?

Right now, if you live in an area served by U-Verse, you have four options for paid video: U-Verse, your local cable company, and two satellite television options. The merger would reduce the number of options for these consumers from four to three, which in the long run could lead to less vigorous competition and higher prices.

The deal could also create headaches for regulators in the future. For example, a big reason people were concerned about Netflix's  high-profile dispute with Comcast — which focused on whether Netflix would have to pay a "toll" to deliver content to Comcast subscribers — was that Netflix was a direct competitor to Comcast's paid television service. Some Comcast critics worry the cable giant could use its power as an internet service provider to hobble one of the biggest competitors to its video business.

Right now, AT&T has much less incentive to engage in that kind of anticompetitive conduct because AT&T's video service is a relatively small part of AT&T's business. But if DirecTV became part of AT&T, that could change. So regulators might need to scrutinize AT&T's business practices even more closely.

AT&T's commitment to offer stand-alone internet access and respect net neutrality help to address those concerns in the short run. But those commitments only last for three years. The big question is what will happen after that.

What happens next?

The deal must be approved by DirecTV shareholders and by state and federal regulators. AT&T offered a healthy premium for DirecTV shares, so shareholders are likely to approve the deal. We don't yet know how regulators will react to the proposal.

One positive sign for AT&T is that the deal hasn't faced immediate condemnation from groups that usually oppose big telecom mergers. For example, John Bergmayer, an attorney at the liberal group Public Knowledge, said in an emailed statement that "policymakers will have to ask a lot of tough questions when looking at this deal." But he stopped short of calling on regulators to stop it. The deal is only a few hours old, so that could change. But so far reaction to the announcement has been muted.

Correction: This article originally stated that AT&T was offering $48.50, not $48.5 billion, for DirecTV.

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