AT&T/DirecTV Concessions Seen Standard for Such Deals; FCC Approval Viewed as Likely

AT&T and DirecTV executives examined areas that are cautionary to regulators and identified the conditions from there, said Stephenson. The deal is going to create “a very different competitor,” said Stephenson. He expects the deal to help AT&T to accelerate growth and redefine the entertainment business in the mobile and high-speed broadband world, he said. It gives AT&T the opportunity to develop new over-the-top (OTT) services, he said. The synergies of the transaction “will allow us to deploy IP broadband to 15 million additional households, mostly in rural areas,” he said. DirecTV will continue to be available on a stand-alone basis nationwide at prices that are the same for all customers for at least the next three years, he said. AT&T plans to have a bundled offering “right out of the gate” if the transaction is approved, he said.

AT&T’s plans to participate in the broadcast incentive and the AWS-3 auctions haven’t changed, Stephenson said. AT&T’s previous spectrum acquisitions will be critical to delivering video service over the next six years, he said. The AWS-3 (see separate report below in this issue) and broadcast auctions are going to be very important for the industry, “and we have structured this transaction in a way that ensures we will have plenty of capacity to be very active in both of those auctions,” he added. What DirecTV’s premium business is missing is “owning our own two-way broadband pipe into the home and being able to offer a bundled offering to customers with a single bill,” said DirecTV CEO Mike White. This deal “gives us exactly that opportunity,” which would lead to more competitive pricing, he said.

The DirecTV acquisition would give AT&T “the premier video provider in the industry, by far,” Stephenson said. DirecTV touts “the highest-quality subscriber base in the industry,” and a “best-in-class, capital-efficient distribution platform,” he said. DirecTV has “more HD channels than anybody, and a really clear and elegant path to Ultra HD,” he said.

The opening conditions are a good place to start, and the FCC most likely will be tempted to approve the transaction, said MoffettNathanson analyst Craig Moffett. “You can’t simply reject everything they want to do,” he said, referring to the FCC concern on AT&T’s failed 2011 effort to buy T-Mobile.

What AT&T/DirecTV offered is the standard approach when parties propose a big acquisition, said a media attorney not involved in the deal. The parties try to think in advance what the commission would want or require to get the deal approved, he said. The national unchanged DirecTV pricing proposal “wasn’t enough back in 2002 to satisfy” the Department of Justice when it was reviewing DirecTV combining with the company then called EchoStar, said Moffett. “It’s not entirely clear that it'll be enough this time either.” The offer to bring more broadband to underserved homes is a “check-the-box kind of offer,” he said. “It’s hard to feel like there’s any real meat on the bones when you parse the language carefully.”

Free Press Research Director Derek Turner is skeptical of the commitments and criticized AT&T for shying away from investing to expand its business. To reach the additional 15 million homes, AT&T will be “utilizing a combination of technologies including fiber to the premises and fixed wireless local loop capabilities,” he said in an email. “AT&T is going to be offering the same expensive and heavily capped fixed 4G wireless services that it’s currently offering in areas where it refuses to upgrade its wired networks.” The three-year stand-alone wireline broadband service isn’t a benefit, but “a sign of market failure,” he said. “Forcing consumers to buy one product (pay-TV) in order to get another product that’s offered in an uncompetitive market (broadband), sounds pretty close to what’s known as ‘product tying,’ something that’s supposed to be illegal.”

The net neutrality commitment doesn’t seem to have teeth, some observers said. It “doesn’t have all that much real-world import,” Moffett said. “It gives the FCC something of a win on what is a very controversial topic right now.” The commitment is a “joke,” Turner said. “With its major entry into the old pay-TV business, AT&T’s long-term incentives to bring an end to Net Neutrality in order to kill over-the-top video are larger than ever. … A short-term commitment to loophole-ridden rules that Comcast has already figure out how to evade is totally meaningless."

The concessions in AT&T/DirecTV will probably lead DOJ and the FCC to approve, said Guggenheim Partners analyst Paul Gallant.

DirecTV has made no secret in recent months of its ambition to beam 4K content with the launch of its DirecTV-15 satellite this fall, though it will initially limit Ultra HD to event programming rather than broad content (CD Feb 21 p9). DirecTV has trademarked the brands “4KN,” “4KNET” and “4K Network,” but hasn’t discussed specific plans for using them.

A possible candidate for 4K delivery may be DirecTV’s NFL Sunday Ticket programming package, the agreement for which expires this year. Under the merger agreement, AT&T can walk away from the deal if DirecTV’s NFL Sunday Ticket deal is not renewed “substantially on the terms discussed between the parties,” AT&T said in an 8-K SEC filing Monday. But AT&T won’t lay claim to damages from such a failure as long as DirecTV “used its reasonable best efforts to obtain such renewal,” the 8-K said.

In Q&A on the conference call, White said he and Stephenson have briefed NFL Commissioner Roger Goodell and New England Patriots owner Robert Kraft, who chairs the NFL’s broadcast committee, about the proposed deal. Those briefings were “to convey our enthusiasm for why this transaction is great for the NFL and the future as well as great for us,” White said. “I'm still highly confident that we're going to get our deal done,” he said. “We've been in active discussions with the NFL. I absolutely expect those discussions to be consummated before the end of the year,” well before the anticipated May 2015 close of the merger, he said. “So nothing changes from my perspective. Our discussions have been very positive and constructive with the NFL. If anything, I think this unlocks further opportunities for the NFL and for us, and we're very excited about the future together.”

DirecTV has about 2 million subscribers to NFL Sunday Ticket, which last year cost subscribers $224 for the season for the basic service and $295 for the addition of streaming. DirecTV last paid $1 billion for the rights in 2009 for NFL Sunday Ticket, which generates slightly under $600 million in annual revenue for DirecTV, Goldman Sachs has said.

NetCompetition and WealthTV supported the conditions of the proposed deal. The acquisition is an example of how competition and technology advances “are forcing competitors to creatively transform their businesses to innovatively meet consumer demand in new and productive ways,” NetCompetition said in a news release. The deal presents an opportunity for independent programmers, said Robert Herring, CEO of Herring Broadcasting. Herring owns AWE Network, which is included on the AT&T U-verse line-up. AT&T doesn’t own programming, so it opens up the market for makers of independent programs to come in and diversify programming, he said. ,