AT&T and DirecTV executives told tales of changing times, fast-advancing technologies and underserved Americans in rural areas, as they presented their case for a proposed merger before the U.S. House of Representatives Subcommittee on Regulatory Reform, Commercial and Antitrust Law June 24.
After the morning’s hearing with the House (which all testimony that follows is from), the merger candidates moved on to an afternoon date with the Senate.
Joining AT&T Chairman and CEO Randall Stephenson and DirecTV Chairman and CEO Michael White on the House’s witness list were Ross Lieberman, senior vice president of Government Affairs at the American Cable Association, and John Bergmayer, senior staff attorney with consumer advocacy group Public Knowledge.
Both White and Stephenson argued that together their companies will do “what neither company can do on its own.” They’ll offer competitive bundles of services that enable consumers to “watch more of what they want, when they want and where they want”; provide new or faster broadband to at least 15 million consumers, most of them in rural areas; and compete more effectively with cable bundles by creating a “new and unique alternative,” said White, who also highlighted a faltering DirecTV.
Because the pay-TV provider currently isn’t great at bundling, White explained—even showing screengrabs of competitors’ ads highlighting DirecTV’s inability to offer a “really good Internet package”—subscriber growth has slowed in recent years. While it has tried to address its shortcomings via partnerships, including a partnership with AT&T, such arrangements ultimately make for a bad customer experience, said White, since they’re more expensive, installation is difficult and customer support is two-pronged, instead of unified.
Stephenson testified that AT&T and DirecTV have few overlapping pay-TV markets and so very little competition would be lost. Consumers would gain, instead, a “new competitor with unprecedented capabilities.” Plus, he continued, “the substantial cost savings and other synergies associated with the transaction will allow us to price all of our services more competitively, which will drive cable and other competitors to lower their prices and improve their own offerings.”
The transaction would allow AT&T to lower content costs to video subscribers by at least 20 percent and create cost synergies in excess of $1.6 billion annually within three years. “These transformative effects,” continued Stephenson, “will dramatically improve the economic case to invest in new broadband infrastructure to millions of customer locations.”
Customers in rural locations will particularly benefit from the merger, said Stephenson, promising to build and enhance high-speed broadband service “to at least 15 million customer locations, most of them rural, within four years of the transaction closing.”
Further, AT&T will bring broadband Internet access to 13 million customers in rural areas in 48 states.
“Rural customers will be able to purchase this new broadband service, DirecTV and IP telephone service with advanced features and larger calling areas as an integrated package or, if they prefer, on a stand-alone basis,” said Stephenson. “We estimate that nearly 20 percent of these rural consumers today have no access to a high-speed wireline broadband service, and that another 27 percent are hostage to only one provider.”
Stephenson added, “This is big news for rural America.”
Public Knowledge’s Bergmayer worried that with so many pending mergers making headlines (Comcast/Time Warner Cable, a rumored Sprint/T-Mobile deal), “merger fatigue may be settling in.” As such, he welcomed scrutiny of whether each merger could significantly reduce competition and harm the public interest.
In the case at hand, AT&T has failed to prove that competition wouldn’t be harmed, or that the deal is in the public interest, Bergmayer argued. Further, he said, AT&T’s “record of following through on past public interest commitments gives good reason to be skeptical even of the limited claims it makes.”
AT&T, DirecTV Merger Hearings Underway at the House, Senate
Bergmayer pointed out that when AT&T introduced Project VIP in 2012, it promised to provide broadband service to 57 million customer locations and wireless broadband to 19 million additional customer locations.
“That’s a plan to serve 76 million customer locations with a broadband product—6 million more than it is promising to serve after [the DirecTV] deal,” said Bergmayer. “A commitment to serve 70 million customers with broadband cannot count as a merger-specific public interest benefit when AT&T already plans to serve 76 million.”
He also pointed out that AT&T plans to offer fixed wireless service—what it’s calling wireless local loop, or WLL—and that 85 percent of WLL locations are said to be outside of AT&T’s wireline footprint.
“Policymakers should ask whatever became of AT&T’s 2006 commitment to serve 100 percent of the population in its footprint with broadband (wired and wireless),” Bergmayer said in his testimony. “Why have these customers gone without AT&T broadband for so long, and why should we think that promises in this merger will turn out any different than past unmet merger promises?”
A Need for Review
The ACA’s Lieberman described his industry as being in the midst of “considerable consolidation” that will have “major ramifications for consumers and competition.”
Lieberman said that regulators and authorities at all levels need to analyze pending deals and address “harms they create, either through divestitures and behavioral remedies or outright denial.”
Moreover, he continued, “Congress should review existing rules and regulations to ensure that industrywide problems are addressed so the new market order does not harm consumers by hindering the ability of firms other than the merging parties to compete effectively.”
An AT&T/DirecTV merger will also increase the incentive of DirecTV-affiliated programmers to charge higher prices to their rivals, which include hundreds of small and medium-sized multichannel video programming distributors (MVPDs), said Lieberman.
These smaller MVPDs—which provide “triple play” bundles of video, broadband Internet and voice services, and compete against big companies like Comcast, DirecTV, Dish, TWC, AT&T, Verizon and Charter—are the ACA’s members.
AT&T has nearly 6 million TV subscribers, TWC has 11 million, Dish has 14 million and Comcast has 22 million. DirecTV, with its 20 million subscribers, might pay 20 percent less for content than AT&T does currently, said Lieberman. A merger, he explained, would solve AT&T’s programming costs issue, but leave smaller MVPDs in the pinch. Between 2008 and 2013, 1,078 small and rural cable systems were closed.
“Given the rise in programming costs, we are likely to see even more system closing in the coming years. Moreover, we’re also likely to see more small cable systems controlling costs by dropping programming, particularly independent programming,” said Lieberman.
Sports programming has become particularly out of the reach of smaller MVPDs; notably, the details of the merger allow AT&T to walk away from the deal if DirecTV fails to secure the rights to the NFL’s “Sunday Ticket” programming.
Likely to Happen
While AT&T may be playing up a new commitment to rural consumers that can start some eyes rolling, it’s also committing to spending serious money.
“That’s real money they’re going to be putting behind that effort, and that means jobs and economic activity that wouldn’t otherwise have happened, or happened in the same time frame … so there’s strong incentive for the government to say yes to the promises that AT&T is making,” Technology Business Research Senior Analyst Chris Antlitz told eWEEK.
“When AT&T says they’ll get synergies and cost savings, they’re right. The question is, will the cost savings get passed on to consumers or go into AT&T’s coffers? Probably both,” Antlitz continued. “They need to provide a good offering to the consumer, or [regulators] aren’t going to buy it.”
That said, Antlitz estimates that there’s a “more than 50 percent chance” that the deal will be approved.
“The key thing to understand here is they’re going to be able to offer a very different thing across the country,” said Antlitz. “This is going to help AT&T transform itself into a leading, end-to-end provider of video services, rather than a dumb Internet pipe.”
What that means, too, is that other carriers will want to do the same thing by teaming up with a DirecTV equivalent: Dish Network.
“Something’s going to happen to Dish. The question is who, and when and how much,” said Antlitz. Given how stretched budgets are (Verizon’s Vodafone deal, for example, exhausted a good chunk of resources), such a deal may not come about through a merger.
With “not a lot of money floating around,” said Antlitz, “I think there’s a good possibility for a unique partnership.”