AT&T-DirecTV deal could spur more consolidation

Analysts have said the AT&T deal for DirecTV will help the merged entity mitigate the rising cost of content and could also spur further industry consolidation.

US telco AT&T announced Sunday that it has agreed to buy satellite pay TV operator DirecTV for US$48.5 billion and the news followed the announcement, in February, that Comcast is buying Time Warner Cable for about US$45 billion. Both deals need regulatory approval, but industry-watchers were quick to note yesterday, that if approved, the mega groups would likely make significant savings on content.

“The best defense against rising content prices is to get bigger: The largest operators benefit from lower content costs on a per-subscriber basis, alongside greater potential to sweat the subscriber base for complementary services,” noted DTVE publisher Informa Telecoms & Media.

The two combined businesses would jointly control over half of the US pay TV market meaning huge negotiating power with channel operators that would lose a massive number of subscribers if they were not carried on either system – the FCC has already noted that DirecTV’s national footprint allows it to negotiate lower carriage fees than smaller rivals. The knock-on effect could be channels and networks attempt to pass on the costs to the other, smaller operators.

“If the Comcast/Time Warner Cable and DirecTV/AT&T mergers become reality, a radical shift in the pay TV landscape would be well underway,” noted another analyst house, IHS. “The combined companies would be the largest operators in the business, and would be able to leverage their size, enjoying the opportunity for significant program cost savings. That may leave the rest of the pay TV operators to bear the brunt of network retransmission fees as owners look to secure carriage fee increases elsewhere.”

Should regulators approve a deal, it is likely to open the door for more consolidation. In its analysis, Informa noted: “If one deal is approved, it is hard to see how [communications regulator] the FCC could reasonably block further consolidation in the market, making this an ideal time for large-scale pay TV operator M&A.”

It added that other operators will be increasingly focused on M&A options and could be more open to approaches from international suitors: “All other operators in the US are probably assessing their options with unprecedented levels of intensity.”

The new mega operators will also be able to creatively bundle channels and content in a way that makes churn less likely and insulates them from the effects of cord cutting. The FCC is already reviewing the mooted Comcast-TWC deal and will also scrutinise AT&T-DirecTV.