The simple, brilliant logic behind AT&T’s purchase of DirecTV

Names you might soon see on all your screens.
Names you might soon see on all your screens.
Image: AP Photo/ Seth Perlman, Reed Saxon
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AT&T’s purchase of DirecTV hasn’t won much praise from investors. Many people have dismissed it as just another case of financial engineering: the telecom giant is buying an asset cheaply that will bolster its cashflows and help it cover its dividend.  The Wall Street Journal (paywall) came right out and said the deal “leads AT&T in the wrong direction.”

But there is a strategically wise—perhaps even visionary—element to the transaction. This morning, at a conference hosted by JPMorgan, AT&T’s chief financial officer, John Stephens, offered the best explanation of it yet. He made it clear that AT&T is setting out to explode the boundaries that separate different modes of watching television.

Stephens explained that the proposed joint company plans to leverage its huge customer base across several platforms to negotiate better deals with TV’s content providers. It will then deliver that content on every screen imaginable—over its wireless and fixed-line networks, “over-the-top” on the internet, and via satellite:

So we’re going to go to them [content providers] with an opportunity for 70 million new customers….That’s something unique that nobody else can do. Nobody else has that, with the broadband capabilities, with the wireless capabilities, and then with this satellite video platform. We will be the only one. We’ll be unique, and that will be a national force.

The race is on to launch America’s first full-fledged internet TV service (as distinct from subscription-based video-on-demand services such as Netflix and Hulu). Internet TV could, in theory, be more affordable than cable and have more functionality, especially for sports fans. Dish Network is currently in the lead, and Verizon bought Intel’s fledgling platform earlier this year. If AT&T is heading toward a world where it sells DirecTV over the internet, either to its own mobile customers or to everyone, then it would be a game changer for the industry.

Satellite, with its clunky equipment, is an outdated broadcast technology on borrowed time, but DirecTV is still the second biggest pay TV provider in the US, and its scale will help AT&T strike the deals it needs with content owners to proceed with the kind of service it is hinting at. DirecTV has its own content arrangements, including lucrative packages with the National Football League that need to be renegotiated for the deal to go ahead. Stephens had some comments on that as well:

Quite frankly, a combined company, once combined, has a unique opportunity to offer the NFL something that no other company can provide: mainly those hundreds of millions of opportunities, whether they be satellite, whether they be broadband, whether they be wireless, whether they be tablets, in any variety. 

It is worth noting that AT&T also recently struck a deal with the Chernin Group to create its own online video businesses. A full-fledged over-the-top video product seems like the tantalizing conclusion.

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