Why Does AT&T Want to Buy Satellite-TV Technology?

NEW YORK (TheStreet) -- When AT&T announced plans to buy satellite-TV operator DIRECTV (DTV), industry watchers were left perplexed that a broadband and wireless company would want to execute a $48.5 billion deal to acquire an operator of satellite-TV when that technology is being fast outmaneuvered by new high-speed fiber-optic networks owned and operated by cable-TV providers.

Investors continued to question AT&T's move for DIRECTV, selling shares in the stock which fell for a second day on Tuesday, falling 1.2% to $35.95. DIRECTV also slipped, losing 0.8% to $83.99.

While DirecTV has more than 20 million subscribers in the US alone, domestic growth has slowed and even fallen in some regions. Streaming outfits like Netflix (NFLX) and Hulu, a venture of Comcast's (CMCSA) NBCUniversal, 21st Century Fox (FOXA) and Walt Disney's (DIS) ABC Television Group  are disrupting the business models of not just satellite but cable-TV companies as well. Comcast has had to seek growth through the acquisition route as it attempts to win government approval to buy Time Warner Cable (TWC).

For AT&T, whose convergence brand U-Verse--a mix of telephony, internet, and pay TV-- has around 5 million subscribers, it became necessary to match Comcast's moves, even though the industry outlook overall remains bleak.

The challenge for the new entity will be how to manage the expectations of the new age customer, who has an Internet-centric view of the world, and wants higher bandwidth every year to consume rich media content, where TV is just one part of the big picture.

While DIRECTV will bring some premium programming as part of the deal--like the exclusive NFL Sunday Ticket--more skeptical observers are asking how buying a satellite-TV company improves AT&T's ability to battle fiber optic-centric rivals like Comcast, which are desperately trying to make "cord-cutting" a losing proposition.

Does AT&T hope that DIRECTV customers will switch to the U-Verse brand? If that happens, the company would be cannibalizing growth rather than adding new customers. Compared to Comcast, AT&T has an edge in mobile telephony, but thanks to VoIP, it may not be significant.

DIRECTV strength is in markets such as Latin America--where it has 18 million subscribers. Revenue from the region should help the balance sheet of the new entity but then again AT&T would have to take a conscious decision to focus on international markets for future growth. 

One argument in support of AT&T's move is that a much larger subscriber base would allow the merged company to negotiate better re-transmission deals for programming from media content companies such as CBS (CBS) and its biggest rival, Comcast, owner of NBC. Unfortunately, with like Netflix moving to producing their content--like House of Cards--the industry landscape may be moving faster than anticipated.

If anything, it would not be impossible to imagine AT&T and Comcast allying against the one company whose ambitions could make a major dent in their respective bottom line: Google (GOOG). Google Fiber's ambitious plans on creating a broadband superstructure across the US has even got federal regulators like the FCC excited.

It's very hard as a consumer to say no to a promotional punchline that says 'The goodness of Internet and TV. TIme 100." With plans to cover 34 cities rolled-out, Google might make AT&T's investment a very costly gamble in the weeks to come.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff

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