AT&T Inc. CEO Randall Stephenson seems to be coming around to the right idea that the wireless carrier would be better off without its shrinking DirecTV business. Oddly enough, his decision could hinge on a legal trial in December that has little to do with his company but everything to do with how far antitrust regulators can be pushed in the Trump administration.
It was the $67 billion takeover of DirecTV four years ago that first turned AT&T into a diversified communications conglomerate. Stephenson overpaid and underestimated how quickly the satellite-TV service would lose subscribers to cheaper online alternatives. With AT&T now squarely focused on expanding its 5G wireless network and integrating HBO and the other WarnerMedia assets it acquired last year, the company is finally considering parting ways with DirecTV, the Wall Street Journal reported Wednesday, citing unidentified sources. The pivot comes as activist investor Elliott Management Corp. puts pressure on Stephenson and AT&T’s board to streamline its operations.
I explained in January how a sale of DirecTV might help AT&T pay down its mountain of debt more quickly and remove a cloud over its stock price. AT&T also has far too many pay-TV products, and it’s already started to play down the DirecTV brand by changing the name of DirecTV Now, a skinny live-TV streaming platform, to AT&T TV Now:
One option is spinning off the unit into a separate publicly traded entity, though it’s hard to see the appeal for investors of a stand-alone DirecTV. It wouldn’t have the same advantages AT&T gets through its scale and simultaneous control of popular programming. For example, HBO went dark on Dish Network Corp.’s satellite-TV services last year because of a carriage dispute between the companies, leaving many HBO fans the choice to either switch to DirecTV or subscribe to the HBO Now app for $15 a month — both properties of AT&T. DirecTV has also lost customers rapidly while turning to desperate price increases to shore up profit margins.
AT&T’s other option for unloading DirecTV is to combine the business with Dish, which is beset by the same industry challenges. Charlie Ergen, the billionaire who controls Dish, said in an interview in July that he sees “industrial logic” for putting the two together. They could substantially cut costs, and the added cash flow would aid Ergen in his efforts to build a nationwide wireless network.
Regulatory friction is seen as the biggest obstacle to a DirecTV-Dish merger, with Reuters reporting Wednesday that the companies aren’t discussing a deal for that reason. But the way I see it, Stephenson and Ergen may just be awaiting the outcome of T-Mobile US Inc.’s attempt to buy Sprint Corp., as I wrote in June. Should that deal proceed, it would set a precedent for allowing the merger of two direct competitors in a highly concentrated market. So far, T-Mobile and Sprint — the No. 3 and No. 4 U.S. wireless carriers, respectively, behind AT&T and Verizon Communications — have received clearance from both the U.S. Department of Justice’s antitrust division and the Federal Communications Commission. However, 18 state attorneys general — and counting — have joined a lawsuit to block the transaction on the grounds that it will lead to higher prices for consumers, discourage industry innovation and hurt workers. The trial is set to begin Dec. 9.(1)
A triumph by the companies may embolden Stephenson and Ergen. They could even argue that the pay-TV market isn’t as concentrated, with numerous new streaming-TV apps posing competition to the traditional distributors. Walt Disney Co. has constructed a $13-a-month bundle for Disney+, Hulu and ESPN+ that almost rivals denser cable-TV packages in content, and certainly does in price.
The wild card, of course, is President Donald Trump. It’s been reported that he tried meddling in AT&T’s takeover of Time Warner, a unit now called WarnerMedia, because of personal grievances with the news network CNN, one of the assets AT&T inherited in the deal. As for DirecTV and Dish, “the biggest ‘regulatory’ obstacle may be the president and his undying desire to punish CNN,” analysts for New Street Research wrote in a report Thursday.
Stephenson said in December 2016, when AT&T was integrating the DirecTV purchase, “We did DirecTV not because we love satellite technology, but because it gave us access to some premium content.” It’s a refrain both he and his deputy and heir apparent, John Stankey, have repeatedly recited. But the subsequent $102 billion acquisition of WarnerMedia gave AT&T all the premium content it needs. DirecTV is just a distraction now.
(1) Ergen also plays a key role in the T-Mobile-Sprint merger trial. The carriers were required by the Justice Department to divest certain assets to Dish so that it can enter the wireless market and foster competition.
Tara Lachapelle is a Bloomberg Opinion columnist covering the business of entertainment and telecommunications, as well as broader deals. She previously wrote an M&A column for Bloomberg News.
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