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AT&T's Pricey Triple-Play Deal

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With the telecommunication company's proposed takevoer of DirecTV, there will be just two cable giants left standing.

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The rumors had swirled long enough that nobody on Wall Street was surprised at the proposed AT&T (NYSE:T) takeover of DirecTV (NASDAQ:DTV) on Sunday, even at the stupefying price of $48.5 billion in stock and cash.
 
AT&T stock was down 0.98%, to $36.34, at the close on Monday. DirecTV closed down 1.77%, at $84.65. 
 
After all, the once-mighty company known in an earlier age as Ma Bell is, in its present incarnation, the nation's second-largest wireless carrier, at a time when wireless growth has pretty much leveled off. And DirecTV is a satellite television company, at a time when satellite television is seen as an option in decline.
 
However, in a competitive climate that will likely soon be lorded over by the two-headed behemoth of Comcast (NASDAQ:CMCSA) and Time Warner Cable (NYSE:TWC), being No. 2 is better than being dead -- which is what AT&T and DirecTV could be soon if they tried to go it alone.
 
In fact, AT&T gets quite a jolt from the merger, even short term. Short term in megamerger world, that is: It's expected to take a year for the company to get past DirecTV shareholder approval and governmental review.
 
Among the benefits:

  • AT&T will be the biggest comprehensive provider of all of the basic communications tools for US households: home Internet and television services, phone, and wireless mobile devices.
  • The company gains DirecTV's 20 million American subscribers, each of whom currently pays about $100 a month for satellite television. For AT&T, it's a chance to pepper a substantial new segment of the population with "triple-play" service offers.
  • DirecTV has 18 million customers in Latin America, a fast-growing market where satellite television is often the best -- if not the only -- option for consumers.
  • DirecTV has existing relationships with content companies, and the combined company will be in a stronger negotiating position to acquire additional content. Certainly, it will be stronger than it is for AT&T's U-verse, which has 5 million or so subscribers.
The notion that the deal is good for American consumers is mostly laughable, but all the same, AT&T trotted it out this week, just as Comcast did in announcing its own deal three months ago.
 
The AT&T announcement says: "US consumers will have access to a more competitive bundle; shareholders will benefit from the enhanced value of the combined company; and employees will have the advantage of being part of a stronger, more competitive company, well positioned to meet the evolving video and broadband needs of the 21st-century marketplace."
 
Presumably, this statement is meant to imply that AT&T will be able to offer a "more competitive bundle" compared to Comcast's "competitive bundle." In any case, the chances are that the companies will neatly avoid each other's territory to make sure that no unpleasant price wars ensue. That is, after all, what Comcast and Time Warner Cable did before their own merger agreement.
 
About 15 million Americans might actually see a benefit from the deal. AT&T promises to expand broadband access to that many people as part of the merger. It seems likely that they'd plan to follow satellite television's map into rural areas to establish new opportunities for "triple-play" marketing.
 
This latest megamerger is widely seen as just the latest move in an ongoing consolidation of the pay television industry, driven by that great motivator -- fear. In this case, the fear is of the vast and growing array of on-demand streaming video options on the Web.
 
That may well be true, but the consolidation is also placing Internet connectivity in the hands of fewer companies. That means little or no choice for consumers. It means pricing that makes a "triple-play" package the only reasonable choice.
 
In short, unless Google (NASDAQ:GOOG) expands its Google Fiber project at a near-impossible rate, most Americans are going to get a triple-play deal or a bad deal for the foreseeable future.
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No positions in stocks mentioned.
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