While DirecTV doesn't help the telecom company compete in the online video space immediately, cost savings from the merger and the extra cash flow will improve its ability to compete with the cable giant that would be formed by Comcast Corp.'s proposed $45 billion takeover of Time Warner Cable.
With 5.7 million U-verse TV customers and 20.3 million DirecTV customers in the U.S., the combined AT&T-DirecTV would serve 26 million. That would make it the second-largest pay TV operator behind a combined Comcast-Time Warner Cable, which would serve 30 million under a $45 billion merger proposed in February.
AT&T is already the largest mobile service provider in the U.S., serving 116 million customers compared to Verizon's 103 million.
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"What it does is it gives us the pieces to fulfill a vision we've had for a couple of years - the ability to take premium content and deliver it across multiple points: your smartphone, tablet, television or laptop," AT&T's Chairman and CEO Randall Stephenson said on a conference call with journalists Sunday.
The companies are aiming to eke out $1.6 billion in annual cost savings in an increasingly expensive and maturing pay TV business. Using DirecTV cash flow, AT&T has greater ability to invest in its landline and mobile networks for broader reach and faster speeds in an Internet service market where it risks falling behind a bulked up Comcast-Time Warner Cable.
The companies also promised consumer benefits like more economical bundles that tie mobile phone, pay TV and Internet service together on a single bill.
But the deal could face unique regulatory scrutiny from the Federal Communications Commission and Department of Justice. Unlike the cable company tie-up, the AT&T-DirecTV merger would effectively cut the number of video providers from four to three for about 25 percent of U.S. households.