AT&T Directs DirecTV to the Exit

4 months ago 248
AT&T Directs DirecTV to the Exit

AT&T’s struggles have been well-documented. And one of the things they’ve been planning on to help them is to get rid of DirecTV. And now they’ve done it!

…Sort of.

When AT&T Met DirecTV

DirecTV has the most subscribers out of any paid TV service in the US. It was purchased by AT&T in 2015 for a combined debt, cash, and stock price of $67 billion. This was part of AT&T’s aim to be in all-in-one entertainment conglomerate, as it soon made another big purchase in 2016: Time Warner, the owner of Warner Bros, HBO, and more. This deal, which the US Government unsuccessfully tried to block, was valued at $109 billion and finalized in 2018.

So that put a lot of companies under the AT&T umbrella, reminiscent of the Ma Bell days. That included, until recently, Crunchyroll. But despite its expansive portfolio, the cost to acquire all those companies was high. AT&T, though the DirecTV deal, hoped customers would want to bundle their telecommunications services.

AT&T also believed this would save them money. Meanwhile, the Time Warner deal would help them battle Netflix and Amazon.

The Relationship Starts Falling Apart

But skeptics noted that AT&T’s plans didn’t appear to be panning out. In fact, DirecTV and AT&T’s other video services like U-verse TV been hemorrhaging customers.

In 2014, AT&T had about 6 million U-verse TV subscribers and DirecTV about 20 million. Today, AT&T’s video services combined have about 16.5 million customers.

This shouldn’t be a huge surprise considering more and more streaming options have launched since then — and continue to do so. Plus, prices continue to go up.

That leads to fewer customers, but this is somewhat balanced by the increased revenue per subscriber.

In September 2019, AT&T quelled a story from The Wall Street Journal saying the media giant wanted to unload the satellite provider, but a year later, the paper reported it again.

Due to the lessening number of customers, AT&T began deprioritizing the service in its strategies, including fewer promotions, not having plans for any more satellites, and only marketing DirecTV in rural areas.

So by the time of The Wall Street Journal report, for many analysts, it was just confirming the obvious.

A Break-Up on the Horizon

So AT&T began looking for offers, but interest in DirecTV appeared to be muted. The media conglomerate considered canceling the auction because bids were so low. DirecTV was struggling to get a buyer for more than $15 billion, which didn’t put much of a dent into AT&T’s current $150 billion debt balance.

But in January, Reuters revealed AT&T was close to making an agreement, and a month later, news broke that a deal was imminent.

Finally, it was confirmed.

Not a Clean Break

But unlike, say, AT&T’s deal with Sony for Crunchyroll, this isn’t a full sale. AT&T will spin off DirecTV, AT&T TV, and AT&T U-verse video into a new company called New DirecTV with a private equity group called TPG Capital. AT&T will get $7.8 billion in cash to pay off some of its debt, and in exchange, TPG will have 30% equity in New DirecTV. New DirecTV is valued at $16.25 billion in this deal and will have about $6 billion in debt. Customer accounts and such will remain the same, and the deal will close in the second half of this year.

So, to state the obvious, this means AT&T made a horrible investment.

DirecTV is now only worth about a fourth of what AT&T paid in 2015. Even a lot of toys and electronics don’t depreciate in value so fast. One analyst predicts AT&T’s purchase of DirecTV will be infamous “as one of the worst deals ever made”.

The other thing to note is that no one wanted to take all of DirecTV. TPG is technically only putting up $1.8 billion; New DirecTV is borrowing money to pay AT&T.

DirecTV’s Future

So the next step is what’s going to happen with New DirecTV. One of the most widely speculated moves is a deal with fellow satellite TV operator Dish Network. Dish Network’s then-parent tried to purchase DirecTV’s then-parent in 2001, but it never happened due to antitrust laws.

While rumors of a merger have persisted over the years, the US Department of Justice has repeatedly blocked deals between them as recently as 2020. Dish’s CEO believes it is certain the two will combine. But even with the rise of streaming, such a deal may still face regulatory scrutiny, especially under a Biden administration.

The New York Post reports the biggest obstacle that would have to be addressed is the lack of 5G in rural areas. AT&T did just recently purchase new spectrum for their wireless network, so perhaps if their 5G network improves, it will not only gain new (or happier) wireless customers, but it will allow the US government and/or state governments to approve a DirecTV-Dish union.

Still, AT&T has a long way to go to pay off or at least get their debt to a more manageable level. About one-third of its debt is the depreciated value of DirecTV, so that’s a lot of wasted money. On the other hand, its HBO/HBO Max division is doing well, with the service reaching 40 million subscribers two years earlier than predicted.

Still, AT&T partially losing DirecTV is a big deal. I still remember the excitement when my family first got DirecTV, as I had fallen in love with Sailor Moon at a relative’s house and could now watch it at home on Cartoon Network.

Like I’m sure many of you can attest to, the bills have climbed since then, and reasons to stay are declining. The afterschool Toonami block of my youth is now a weekly late-night one. The various streaming platforms seem to almost be putting out new content faster than the networks, and even a lot of new shows airing first on TV are often put online the next day — and often for free (with ads, of course).

But I agree with the Justice Department in the importance of getting rural America better connected. In my area, for example, a lot of places are lucky to have a single broadband Internet option (and generally the speed is going 25Mbps or less, well below the US average of about 70Mbps), over-the-air TV is null or next-to-null with maybe being able to view some Canadian channels, and wireless service among the big three providers is a decision between can be kicked off if you mainly use it here since there’s no native coverage, dead zone fiesta whenever you leave a major town, and better coverage but slower speeds.

So despite the rise of cord-cutting, with limited speed divided among multiple members of a household who may want to watch their own program, that may not be a viable main option for watching anything. Since cable service is much more limited in rural areas, if DirecTV and Dish Network were to merge, that would lead many households with only one option for video watching.

With most mergers, especially ones with heavy government oversight, products and services for both must stay the same for a period of time. T-Mobile and Sprint, for instance, promised the US government rates would not increase for three years. But I wonder how many people would just decide to jump ship once news got out the two satellite providers were combining even though they could keep their service for a long while. They just might see it as the perfect excuse to finally cut the cord.

Still, that’s probably down the line a ways, probably several years. And who knows what Dish Network — and DirecTV — will look like then. Will Dish Network live up to their pledge of rising up to be the fourth national carrier, picking up where Sprint left off? Meanwhile, will the New DirecTV, now with some new partial ownership, keep up the quality of the wholly-AT&T DirecTV? Get better thanks to the new blood? Worse since it’s not a priority (and barely of any interest) for AT&T, who still owns 70% of the company?

I don’t think anybody is placing bets on the New DirecTV suddenly becoming an entertainment powerhouse that will reverse the trend in bleeding subscribers, but whether it stays as-is or finds new owners, I hope AT&T and all the other telecommunications companies in the meantime can improve their network for all citizens. This pandemic has really emphasized the digital divide, and whether a person/family has television service or goes with streaming services should be because of their choice, not because of a lack of choice.

What do you think of this news? Do you have DirecTV or another service provider, or are you a cord-cutter? How should the US and/or utility companies address the digital divide and monopoly concerns?
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