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AT&T, DirecTV Merger Could Hamper Cord-Cutting

By Kris Holt
Jun 13, 2014 2:10 PM PT

AT&T's planned merger with DirecTV is far from a done deal. Among the objections that have been raised is one stemming from a filing this week with the Federal Communications Commission. There is now concern that the merger would make it more difficult for consumers to cut their cable-TV cords.

AT&T, DirecTV Merger Could Hamper Cord-Cutting

The companies told the FCC in a public interest statement that the merger is the only way they would be able to compete with the likes of Comcast and Time Warner Cable -- two companies that also have a pending merger.

This is largely because DirecTV cannot offer broadband, and thus is unable to provide consumers with a bundle including high-speed Internet service. Such bundles, the companies claim, are consumers' preferred choice for purchasing Internet, TV and phone services, and the merger would allow DirecTV to offer them to its customers, many of whom live in rural areas.

Smaller Territory

The second key point laid out in the filing is that AT&T currently is able to provide bundles only in 22 states. Since that is a smaller territory than its competitors have, AT&T says it need to pay higher prices for video content.

The merger would allow it to offer TV services throughout the whole country, which would enable it to negotiate cheaper prices for content because of its larger scale, AT&T argues. It could then pass those savings to customers and pressure competitors into lowering their prices as well.

The merger would allow the companies to "marry complementary assets," they said, allowing them to provide bundles in a way they would not be able to by themselves or through a contract with each other.

"The FCC wants to promote competition," Rob Enderle, principal at the Enderle Group, told the E-Commerce Times. "They want to make sure nobody owns the airwaves. They don't want to re-create the RCA of the past, where there's one big company that controls most of the content.

Control Concerns

"Their goal is to ensure the airwaves remain to a large extent free to have competitors," Enderle added.

"They don't want any one company to have too much control, because that control would lead to issues with regard to the content we receive, the prices we pay, and everything else. They also have to make sure nobody does anything that damages the capabilities of others to broadcast information," he explained.

"I think there's probably less they're going to be concerned about with an AT&T-DirecTV merger than with a Comcast-Time Warner merger, for example," telecom analyst Jeff Kagan told the E-Commerce Times.

"AT&T is a telephone, wireless and Internet company, and DirecTV is a satellite television company. They already resell DirecTV. It's not like you're removing a competitor or changing the marketplace. They're going to make DirecTV stronger," he pointed out.

"The problem with DirecTV is that the industry is moving ahead and DirecTV can't," Kagan continued. "DirecTV on its own cannot. If they don't merge with AT&T, what's going to happen? I think that's the bigger story. If they don't merge with AT&T, DirecTV may be toast."

Competition Issues

Nevertheless, the proposed US$48.5 billion merger between AT&T and DirecTV is facing broad criticism. One objection is that having another large communications merger will reduce competition, with fewer choices potentially resulting in higher prices.

AT&T has argued against the pending Time Warner Cable-Comcast merger, stating that the combined conglomerate would put it at a disadvantage. For their part, Comcast and Time Warner Cable have argued their merger would level the playing field.

This week's filing by AT&T and DirecTV, which was required as part of the FCC's regulatory review process to determine if the merger is in the public interest. It informally starts the countdown for the agency's 180-day consideration period. The merger also needs approval from the Department of Justice, which will examine antitrust issues.

Cutting The Cord

Although AT&T and DirecTV hope to offer consumers bundled services, a growing number of customers are trying to free themselves of satellite- and cable-TV service altogether. Many consumers are turning to streaming services such as Netflix, which allows them to choose what they wish to watch, rather than having the burden of paying for fixed bundles that include TV channels they will never watch.

Half the participants in a recent survey said they would leave their cable companies, if possible, but the choices were simply too limited. Many would cut the cord if more content were available online, including live sports.

AT&T has a clause in its agreement with DirecTV that allows it to back out of the deal if the latter fails to renew its contract with the National Football League for the Sunday Ticket. That exclusive deal might make it more difficult for sports fans to ease away from their satellite-TV service.

Broadband Smokescreen

Meanwhile, although AT&T claimed the merger would allow it to offer broadband Internet service to 15 million rural customers, that could be a smokescreen. The company already had announced plans to expand its broadband service a few weeks before announcing the proposed merger.

Meanwhile, AT&T reportedly failed to follow through on similar promises after it merged with BellSouth.

"There are multiple mergers on the table right now," Kagan pointed out.

"There's AT&T-DirecTV, Time Warner Cable-Comcast, and Sprint-T-Mobile. If any one of those mergers were the only merger on the table, I think it would be a lot more difficult to win approval. But since there's three mergers on the table, and one last year (Sprint-SoftBank), we're obviously moving into a phase of consolidation, building and growth in the industry, similar to what happened 10 years ago," he observed.

"If that's the case, the FCC and SEC will be looking at these mergers differently, and they'll either say yes or no to them all," suggested Kagan.

"It's not a single merger redefining a company, but it's a number of mergers redefining the industry: what it means to be a competitor, the services that you offer, and the customers you can offer them to," Kagan said. The FCC wants competitors "to be able to grow, do well and compete. They want them to serve the consumers."

Kris Holt is a writer and editor based in Montreal. He has written for the Daily Dot, The Daily Beast, and PolicyMic, among others. He's Scottish, so would prefer if no one used the word "soccer" in his company. You can connect with Kris on Google+.

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