AT&T Looks to ‘Part Ways’ With DirecTV as Satellite TV Loses Relevancy

Sep 19
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AT&T (NYSE:T) is looking to "part ways" with DirectTV, only four years after it acquired the satellite TV company according to The Wall Street Journal.

It's not known what "part ways" exactly means, as the Journal's sources say a number of options are on the table including spinning off DirectTV into its own public company, or merging it with rival Dish Network (NASDAQ:DISH).

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AT&T originally purchased DirecTV in 2015 as a bid to secure dominance in the media sector. AT&T already had its own TV service, U-Verse, but looked to expand its offerings in markets where it wasn't available. At the same time, AT&T also made a push for content to deliver on these pipes with the acquisition of WarnerMedia which includes HBO, CNN and the Warner Bros. television and movie studio in Burbank.

AT&T's 2015 plays for DirecTV and WarnerMedia got it flak from activist shareholder Elliott Management Corp. The company pointed to the emergence of new technology 4G, and the future 5G, as making satellite TV less relevant.

"Unfortunately, it has become clear that AT&T acquired DirecTV at the absolute peak of the linear TV market," Elliott executives wrote in a recent report.

The company recently disclosed that it had lost 778,000 subscribers in the "Premium TV" category, which includes its U-Verse and DirecTV services during its last quarter. It says it expects to lose another 1.1 million TV customers during its next quarter as it faces intense pressure from cord-cutters.

In 2001, DirecTV and Dish Network proposed a merger that was ultimately blocked by regulators on the grounds that a merged company would kill competition in the space and provide a lack of choices for consumers. Off the record, the two companies have mused about proposing such a play again as the market environment in 2019 is much different from 2001 -- the same argument about a lack of competition and choice post-merger wouldn't likely hold up.

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DirecTV's Subscriber Problem

There was once a time where satellite TV was coveted. For those that didn't live in urban areas, it was the only way to get HDTV until the early 2010s.

But heading into the middle of the decade, the emergence of cord-cutting and the proliferation of 4G meant that for many satellite TV wasn't necessary anymore. 4G is perfectly sufficient to stream HD video, and upcoming 5G networks will only do it better.

According to Leichtman Research Group, satellite TV services lost about 855,000 subscribers during the second quarter of 2019 – compared to a net loss of about 480,000 subscribers during the second quarter of 2018. The research group says the four main Pay-TV providers within the United States lost about 1,530,000 net video subscribers during the same time. In contrast, satellite TV providers in the US only lost 40,000 subscribers in all of 2016.

Leichtman also says the top seven cable companies in the US lost about 455,000 video subscribers during the second quarter of 2019 – compared to a loss of about 275,000 subscribers in the second quarter of 2018.

5G to the Rescue

So how does the satellite TV industry revive itself? 5G.

DirecTV's closest rival, Dish Network, is already planning on building out a 5G network to rid itself of the requirements to use satellites. Dish has already spent about $20 billion on 5G spectrum during FCC spectrum auctions over the past 5 years.  The company is currently raising $10 billion to build out a 5G network city-by-city. With this entry into 5G, the company will be competing with the usual telecom incumbents. Having 5G would also mean that the company can reboot some services that it discontinued such as its DishNET internet service. After all, even in an era of cord-cutting and streaming there's still value in the pipes.

One also has to wonder why AT&T isn't doubling down on 5G as an option to revive its DirecTV service. Dish is building out 5G from the ground up at a great expense; AT&T already has a head start on a network for its core telecom business.

But ultimately linear TV is a declining business: cable TV providers have felt the same pain as their satellite counterparts. So is it worth preserving this line of business? Or just focus on building out the pipes for the future -- which is streaming.

 

 

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