The FCC (News - Alert) is about to approve a $49 billion merger between AT&T and DirecTV, the No. 1 US satellite TV provider, and if the conditions that the commission wants to put on the union are adopted, consumers may just win, big time.
FCC chairman Tom Wheeler issued a confirming statement earlier in the week: "An order recommending that the AT&T/DirecTV (News - Alert) transaction be approved with conditions has circulated to the commissioners. The proposed order outlines a number of conditions that will directly benefit consumers by bringing more competition to the broadband marketplace."
The biggest part of this? The FCC would require AT&T to commit to building out 12.5 million additional customer locations with fiber.
And make no mistake—this would be a massive investment for the telco. It would represent a tenfold increase over AT&T's existing fiber-to-the-premise/U-verse deployment, for one thing, and more than triple the number of metropolitan areas AT&T has announced plans to serve. But critically, it would also boost the nation's residential fiber build by more than 40%--a move that would haul the U.S. into the most-wired-country arena to keep company with the likes of South Korea—with all of the attendant economic benefits.
And indeed once the residential drops are in place, it would be a logical step to start boosting metro fiber availability for businesses as well.
As far as Net neutrality, AT&T signaled that it’s ready to commit to open Internet principles. Along with offering standalone IPTV broadband plans that might encourage cord-cutting, AT&T said that it would honor a ban on blocking and throttling websites, and would agree to refrain from paid prioritization of traffic for websites willing to pay for that.
The FCC will require an independent officer to help ensure compliance with these and other proposed conditions, Wheeler added.
Naysayers would like AT&T to agree to abide by the Net neutrality commitments for several years, and are asking for low-cost broadband-only plans to be part of the mix, ideally at 25Mbps for $30 per month. AT&T has countered with a pledge for 6Mbps for $35 per month—and it remains to be seen what the details shake out to be.
The Value of the Bundle
DirecTV is the second biggest pay-TV operator after Comcast (News - Alert), serving about 20 million customers domestically. AT&T is much smaller in size, serving just 5.7 million, but together their 25+ million subscribers would be on par with the merged Comcast-TWC, which would serve 30 million. That could be seen as a positive for the public interest, giving the industry a counterweight to the cable giant’s sheer bulk and ability to set terms for the market.
But more importantly, the AT&T-DirecTV deal is nuanced. It’s not so much about scale as it is about filling in missing pieces for each other’s subscribers. The two have overlapping service territories for 25% of the country but offer different things; DirecTV has no broadband play, so AT&T can help it there; conversely, AT&T has only a limited TV presence, so DirecTV offers an expansion path on that front.
It should be noted that the AT&T-DirecTV merger is a natural follow-on from the existing relationship between satellite and telcos. AT&T, Verizon, CenturyLink (News - Alert) and others have historically lacked video infrastructure, while satellite’s inability to provide decent broadband cost-effectively has been an issue for it in competing with triple-play providers. All of this has led to a series joint marketing deals over the years; in fact AT&T already has a partnership with DirecTV to sell a package of AT&T broadband in areas where it doesn't offer the U-verse TV service.
That said, while the merger wouldn’t have the same effect of consolidating power over the last mile as the failed Comcast-Time Warner Cable merger would have, there’s still a whole lot of consolidation going on. And, in areas where AT&T offers U-verse TV, the deal would definitely reduce choices for video service.
Cox Communications, in an April filing with the FCC, said the merger would bring about “a troubling and unprecedented combination of wireline, wireless and satellite assets.”
AT&T argues that the synergies are actually positive for the consumer: It said that by combining the largest US telephone company and largest US satellite-TV provider, it would create a business that could offer bundles of broadband and video, translating into lower prices.
"This merger occurs against the backdrop of fundamental shifts in the ways consumers obtain broadband and video services…Through this combination, the companies will marry complementary assets to achieve what they could not achieve separately or through a contractual arrangement: a compelling bundle of video and broadband services," AT&T's original FCC filing reads.
AT&T also told investors that the merger would reduce content acquisition costs by 20% — a point it talked up to the FCC in the context of streamlining and resultant price cuts.
"Because the products and assets of the merging companies are primarily complementary, economic theory predicts that this transaction will put strong downward pressure on the prices for the combined company's bundled products. That, in turn, will trigger competitive responses from competing cable providers, to the further benefit of consumers," it said.
Online Video Concerns
The tie-up will marry the No 2 wireless carrier and the largest satellite company in the US. Together they would have more pay-TV subs than the current market leader, Comcast—and have a notable incentive to make competing online video services unattractive to consumers.
So, the conditions will also address online video. DISH Network and Cogent Communications, along with other advocacy groups, have filed comments with the FCC outlining deal conditions that they would like to see, including that AT&T include all video in any data caps.
It’s the expansion of broadband access offerings to all of DirecTV's subscribers that critics say worries them the most. The fact that AT&T will expand its addressable market so precipitously raises questions about potential threats to video streamed over the Web, DISH et al have argued. The FCC is certainly open to the arguments: it was concern over competitive threats to online video that derailed the Comcast-Time Warner Cable deal earlier this year.
And indeed, Wheeler specifically said that “the conditions will build on the Open Internet Order already in effect. In order to prevent discrimination against online video competition, AT&T will not be permitted to exclude affiliated video services and content from data caps on its fixed broadband connections.”
Also at issue are interconnection fees and concerns over who's paying for heavy traffic from online video: The FCC should ensure that peering arrangements with the likes of Netflix and DISH's new Sling TV streaming service remain reasonable.
“In order to bring greater transparency to interconnection practices, the company will be required to submit all completed interconnection agreements to the commission, along with regular reports on network performance,” Wheeler said.
But aside from living-room, STTB-delivered video—and the aforementioned required broadband buildout—there’s a significant mobile and multiscreen angle to consider.
AT&T's proposed $49 billion acquisition of DirecTV will help smooth the digital rights licensing process for content, according to top exec Ralph de la Vega, because of its sheer scale.
De La Vega, who started out as the telco's connected device evangelist and who is now CEO of its mobile & business solutions group, said that seamless multiscreen delivery will be one of the side-effects of the deal, which is still pending review by US regulators.
"What customers want is video on their terms on their device, on their schedule," he said in a recent interview. "And I think that's a huge challenge for industry to address because of the licensing."
Digital rights are notoriously thorny, often negotiated outside standard contact carriage agreements. Some of that is starting to change, most notably with Disney's recent contract re-ups with various ABC/Disney/ESPN pay-TV distributors, which often have included the mobile and streaming rights as part of the package. But in many cases, what can be watched where and via which app is still largely a patchwork process, especially on the mobile front, with many sports, premium network shows and current-season broadcast hits subject to strict controls or available only via certain laid services.
De La Vega said that AT&T and DirecTV combined would have the kind of negotiating leverage to crack that system open. AT&T is one of the largest national ISPs and wireless companies in the United States — thus supporting vast amounts of streaming video — while DirecTV is the No 1 satellite payer, which already carries considerable clout with content providers.
"Over time we have to get the content providers comfortable that they will be able to protect their properties, get the expected revenue streams," he said, adding: "With the DirecTV deal behind us, I don't know anybody that will be in a better place to make that happen."
DirectTV has already dipped a toe in the mobile TV waters: It recently launched the Kids App, a TV Everywhere play that showcases age-appropriate content at no extra charge via mobile devices. The app is designed for children aged 5-10, and offers hundreds of popular children’s shows and kid-friendly movies, available to watch instantly from Nickelodeon, Cartoon Network, HBO, STARZ, Sprout and others, based on the customer’s DirecTV programming package.
There are big synergies here too for AT&T. According to earnings data, mobile data is a $23 billion+ revenue stream for AT&T and is growing at 17% annually. In comparison, U-verse (and that’s broadband and video combined) is worth more than $13 billion of annualized revenues (but is growing at 28%). AT&T has invested heavily in its LTE (News - Alert) deployments, and covers 300 million+ people across the country.