DirecTV, AT&T and a changing world

The possibility that AT&T might sell the DirecTV satellite-TV service evokes questions not just about the identity of a buyer, but a deeper curiosity about what a new owner might expect to gain by operating a degrading, and arguably obsolete, video distribution platform.

A New York Post report earlier this month said AT&T has invited a second round of bids for the satellite TV business, with offers reportedly coming in at less than the $20 billion floated during a preliminary round. The Post calculated the value based on learning that bids came in at roughly 3.5x DirecTV’s annualized earnings before taxes, depreciation and amortization.

The appeal of owning DirecTV could fall along two lines: purely financial or presumably strategic. If nothing else, DirecTV produces cash. With 14 million subscribers paying slightly more than $120 per month, DirecTV promises its owner a built-in, if declining, stream of revenue, along with the potential for margin improvements. Even in an environment of obvious erosion — we estimate DirecTV has lost nearly 3.9 million net subscribers in the past 12 months — the legacy pay television business still boasts enormous scale coupled with lofty ARPU levels. For all of its success in the video streaming category, it’s worth noting that Netflix collects $13.25/mo in payments from its nearly 73 million North American subscribers. DirecTV wrests away nearly 10x that amount, albeit with a much higher cost of delivery. It’s conceivable that by tweaking the programming lineup, identifying operational savings, and/or leveraging technology efficiencies, a financially oriented buyer might find ways to harvest the remaining value for a period of many years. DirecTV itself has adopted similar thinking by eliminating as of Sept. 1 the low-cost “Select” tier (promo rate of $60/mo and rack rate of $85/mo), leaving the “Entertainment” package ($65/$97) as the new low-cost entry point.

A second motivator might run along strategic lines, possibly involving more familiar media industry names. Although AT&T may have soured on the idea of positioning DirecTV as part of a wider complement of video services, other companies might still see promise here. DirecTV offers a buyer a prize no cable company or regional telco can match, which is a national footprint. A chance to leapfrog the patchwork quilt that is the U.S. cable industry might appeal to an operator eager for prominence on a national scale.

Next? Selling what once was a jewel of the U.S. pay TV system would represent a stupendous retreat on the part of AT&T, which paid $49 million for the satellite TV provider in 2015. Almost every important aspect of AT&T’s video vision was hitched to DirecTV: attractive rates for TV network programming, an immediate national presence, bundling synergy with AT&T’s wireless business, and the chance to lord over the pay TV industry as the nation’s largest provider. What’s striking here isn’t just that AT&T would accept a tremendous devaluation. A bigger question is whether AT&T, shorn of DirecTV, would continue to press on in the business of linear pay television whatsoever. There has been no indication so far that the Internet-delivered AT&T TV service, seen as a successor to DirecTV, is a runaway hit. Rather, AT&T appears to be favoring the HBO Max direct-to-consumer service as the mainstay vehicle in a changing pay TV market. It’s possible that taking bids for DirecTV is only one part of a changed strategy for the large media/telecom company. Should DirecTV go away, other pieces could follow. 

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