May 20, 2014

Back to the Future: AT&T, DirecTV, and the Future of TV

Huge news out this week with AT&T (finally) announcing its $48 billion acquisition of satellite pay-TV provider DirecTV. Wait a minute. Wasn’t broadband supposed to be the future of TV? Wasn’t AT&T supposed to launch an OTT service over its broadband network and make old school pay-TV services like DirecTV irrelevant?

Obviously, the brave new world of TV is not going exactly according to plan. So what can we learn from this latest TV industry megamerger?

Two lessons come to mind…

1. TVE beats OTT

TV Everywhere (TVE) was and is the US pay-TV industry’s last and best attempt to extend their current business model (i.e., large per household monthly subscriptions) to the online world. Newsflash – it’s working.

By placing much of the best TV content behind an authenticated pay wall, TVE has transformed the Internet from an existential threat into an extension of the legacy TV ecosystem. Surprising, but true. In other words, without a valid pay-TV subscription, much of the most compelling TV-on-the-web content simply disappears.

So how does this explain AT&T’s acquisition of DirecTV? It is actually surprisingly simple.

AT&T wants to leverage its broadband and wireless networks to deliver content to every screen. As just established, however, in order for users to consume something other than OTT services like Netflix on any of these screens they must first have a home pay-TV subscription to authenticate their TVE apps, whether those of the operator or a content network. So where are AT&T customers going to get that pay-TV subscription? uVerse? Nope. There are only five million uVerse customers and AT&T has no realistic path (or the patience) to fund a nationwide fiber footprint. Comcast? God forbid. There is no way AT&T is going to promote Comcast content to its own customers.

Once it became obvious that IP-based multi-screen delivery was the future and that broadband without pay-TV means no access to the latest and greatest content, and with little hope for sizable organic growth in a short period of time, AT&T had little choice but to try and gobble up as many pay-TV subscribers as it could. DirecTV’s 20 million households, along with a nationwide satellite footprint that can be marketed to the tens of millions of AT&T customers who are not DirecTV (or uVerse) customers today is a pretty good start. If this merger passes muster, together with uVerse, AT&T can claim 25 million pay-TV households who are ready, willing, and able to consume TVE content on its network. Once the merger is approved, expect aggressive AT&T marketing and promotion of TVE services, in particular to its wireless subscribers.

2. The Broadband Bundle Beats Pay TV
So this deal clearly makes sense for AT&T, but what’s in it for DirecTV? Three things: broadband, broadband, and broadband.

Satellite pay-TV providers have been at a serious strategic disadvantage from the day the cable companies shipped their first cable modem. Trying to appeal to the modern American consumer without an Internet play? As a company, I can’t bundle services to compete head to head with cable incumbents. As a subscriber, I can’t watch TV on my iPad. What’s going on here?

It’s a credit to the satellite guys (and a sad commentary on the customer service reputation of the cable industry) that they have done as well as they have with such a lousy set of cards.

All good things come to an end, however, and DirecTV obviously concluded that the jig was up and it was time to find a broadband partner while the value of their pay-TV franchise is still high. Going forward, the bundling of broadband and pay-TV services (the ordering is intentional) will become a fact of life, meaning the vast majority of American households will receive both their broadband and pay-TV services from the same provider. Let’s at least hope auto log-in and other TVE improvements come along for the ride.

To some, AT&T’s acquisition of DirecTV may seem a bit backwards. Don’t be fooled. TVE is the future of the US TV industry and both AT&T and DirecTV know it. The $48 billion price tag just goes to show how much is truly at stake.

Sign Up for Weekly Analyst Insights

Recent Insights