Ask yourself, AT&T: Do you really want a Latin American adventure?
If this was a defensive move, why didn't you speak to Dish instead?
Opinion The recent $48.5bn merger agreement between US telecoms giant AT&T and leading US satellite TV provider DirecTV is being seen as a trigger for yet more consolidation in the US, with everyone looking for natural fits between each of the lonely remaining players.
As usual, everyone seems to be looking in the wrong places for significance. We have heard that DirecTV will bring AT&T a combo satellite broadband wireless system, that DirecTV’s experience in Latin America with TD-LTE will open AT&T’s eyes to the technology in the US, and that Verizon must immediately turn its gaze to spectrum-rich Dish Network. We buy none of that.
Faultline has written about the reasons for the merger before, and among them is the ability to castrate spectrum-hogger Dish and its ambitions to create a serious contender in the wireless broadband space in the United States. France is a great example of what happens to cellular environments if they have too much competition – the profit (lifeblood) is choked out of cellular, and AT&T must never let that happen.
Dish has a ton of satellite S-Band and L-Band spectrum that could eventually give it terrestrial coverage of the US with an LTE Advanced network – that is, if it has the odd $10bn or more that it needs to build it out. A partnership through a merger with DirecTV would have given it the financial clout to take that risk (and it may end up doing it on its own) but Clearwire is an example of what can happen when a company goes it alone – it takes too long, and it makes shareholders uncomfortable – something that Dish chairman Charlie Ergen must be keen to avoid, and it smashes your share price.
The Dish partnership options were 1) With AT&T, 2) with Sprint or even just the Clearwire part of Sprint 3) with T-Mobile and 4) along with DirecTV, going it alone. Few of these deals are still on the table and if Sprint ever gets it together to merge with T-Mobile, that would take out the last of the opportunities for Dish to ever control or own a US-wide return path.
While Ergen’s options shorten, meaning that he will bring the spectrum to market (AT&T might buy it, just to get it off his hands). The other upside speculations about AT&T and DirecTV include satellite broadband combinations and TD-LTE build-out, but AT&T is already actively pursuing TD-LTE fixed wireless cautiously, and also has its own carrier aggregation system ready and waiting courtesy of a Qualcomm chip deal. That will bring into play the spectrum that Qualcomm sold to AT&T in 700 MHz, and can also take in its 2.3 GHz spectrum that would make a perfect host for a mostly data download TD-LTE play. So anything that is on the table after the merger is still on the table.
Why a run for the border would be GOOD for AT&T
But it is outside of the US where we see the most interesting aspects of this merger and where the options are not so obvious.
Yes, DirecTV has experimented in TD-LTE and owns spectrum in Brazil and Colombia. Does that mean that AT&T can turn the DirecTV operations into a fully-fledged mobile service south of the border?
In Faultline's estimation, this is not the way that AT&T operates. It is cosy in the US, where it has significant and protected market power. It also has a strong lobby base and can pretty much get away with fairly anti-competitive practices by getting the courts to side with it against the FCC. The US is not a market well known for pushing incumbents too hard and the mergers that created AT&T would not have been allowed in most countries which have a competition regulator with teeth.
But comfortable as it is, AT&T needs to work outside the US, and learn that it is tough when you do not have the government on your side, and when you have to win over consumers on an even playing field. AT&T SHOULD want to push DirecTV into a triple play outside of the US, but we don’t think it will.
Instead, forever financially prudent, we would not be at all surprised to see DirecTV outside of the US, offloaded so that AT&T does not have to “fail” at trying something new. Despite massive growth in that market over the past four years, DirecTV Latin America could bring back many of the billions that AT&T has laid out to purchase the US direct-to-home satellite player by simply selling it off.
Who would buy it? Take your pick - the old owner of DirecTV, what was once News Corp, now 21st Century Fox, would surely do a deal, but then there remains Dish, already competing head-on with DirecTV in Mexico, but with no larger Latin America footprint.
Could AT&T ask for the spectrum that Dish holds in part payment for the DirecTV Latin America assets? It would get Dish out of a hole at the same time, everyone becomes a winner, and Dish’s attention is moved to outside the US, something sure AT&T might like.
People at DirecTV might hate that, but extending a quad play reach to the entire US footprint, not just where its fixed line sits, would certainly prepare AT&T well for the coming fight ahead in mobile video, and that’s with Verizon.
We know that Verizon wants to use its LTE network to power an out-of-home and in-home video experience on portable devices, and use its recent purchases, including Intel’s OnCue content rights and technology.
Verizon used these deals to take a lead in video delivery and is planning extensive live channels and live sports rights on mobile using LTE Broadcast. AT&T could match that LTE Broadcast play, but doesn’t want to go out and buy sports rights purely for mobile, perhaps with DirecTV that now makes far more sense.
All Faultline can say is that if this is the outcome, then AT&T bought the wrong company, and should have bought Dish instead – just as in 2006 it made the wrong choice of a partnership with DirecTV (it had swallowed Bellsouth and had to choose between Dish and Direct TV as its DTH TV partner).
It should have chosen Dish back then, and then Dish would not have been so keen to acquire spectrum, and it should be buying it now, to take its spectrum out of the game. To cut a long story short, we would be really impressed with AT&T management if it a) kept DirecTV Latin America and b) made a success out of it by taking it fully mobile. Selling off its assets in Mexican telco América Móvil would certainly pay for much of that.
Copyright © 2014, Faultline
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