DirecTV Linkup Promises Little for SBC Camp - TheStreet

You can see how the phone industry's dark days might lend themselves to stargazing. But talk of a big satellite deal at SBC (SBC) still looks pretty far out.

Reports that SBC is sniffing around

DirecTV

come as little surprise to observers who have charted the decline of the big phone companies. After all, DirecTV, the digital satellite broadcasting operation of

GM Hughes Electronics

(GMH)

, is one of the few dependable tech-industry growth plays nowadays, a fact that takes on additional importance as telcos like SBC confront a steepening decline in their core local phone business.

Still, investors say a DirecTV-SBC linkup makes far more sense for DirecTV, which has been on the blocks for what seems like ages, than for SBC. Observers doubt cost-conscious SBC is prepared to make a costly bid for a money-losing operation whose business intersects little with SBC's own. Indeed, some analysts say the deal talk points more to the desperation of telecom giants to find new opportunities than to the prospect of a linkup.

"This is clearly a signal that they are questioning the growth opportunities available to them in their core business," says Stratecast Partners analyst Mike Smith, whose firm consults for all the major phone and cable companies. In midday trading, Hughes rose 6% to $10.30 and SBC dropped 4% to $24.10.

Plan B

For years, the regional Bells have tried to convince investors that while local phone revenues were declining, there was offsetting growth available in new markets like long distance, digital-subscriber-line-based fast Net access and wireless. Now, though, given its poor performance in those markets, SBC seems willing to explore plan B -- for broadcasting.

"SBC is now admitting what the entire industry has already seen: The number of growth opportunities available is very limited," says Smith. "DSL remains weak, in mobile wireless, they demonstrated that

Cingular

was an underperformer and now they are realizing that long distance is not the market they originally thought it was."

"Let's face it, long distance was never attractive, but now SBC has the empirical data to show it," says Smith.

With

Cox

(COX)

and

Comcast

(CMCSK)

pushing in varying degrees into phone service, SBC's consideration of DirecTV can be seen as a strategic counterstrike. But not all the elements of this potential deal add up.

On one level, with its 19% year-over-year revenue growth in the fourth quarter, DirecTV offers SBC a compelling new product to add to its well-established sales, billing and service operation. By some analysts' calculations, SBC could add monthly revenues of between $40 and $50 per customer with digital satellite service.

Let It Bleed

But there is also some subtraction in the equation, say observers.

First is cost. Not only would SBC have to cough up something around $15 billion or more for the deal, it would gain a business that bleeds about $250 million annually in red ink, according to CIBC World Markets' analyst Tim Horan.

Then there's technology. With no overlapping or shared systems, there's nothing to help SBC drive network efficiencies. For the most part, digital satellite broadcasting is entirely separate from telephone networks, and while satellite is everywhere, SBC's network coverage is limited to its 12-state region.

Few, if any, analysts and industry observers expect SBC

will go through with the deal. By some accounts, the report of preliminary discussions could simply represent a brilliant bit of positioning for both companies.

SBC has increasingly found itself mentioned as an eventual

bidder for long-distance giant

AT&T

(T) - Get Report

. Though DirecTV doesn't answer the question of how SBC expects to win new big business customers, it does give the company some other options.

And for Hughes, which in all likelihood will have to sell DirecTV to

News Corp.

(NWS) - Get Report

, the sudden flurry of talk gives the impression that there may be at least one other interested party. Hughes' previous trip to the altar, with

EchoStar Communications

(DISH) - Get Report

, fell apart after strenuous antitrust objections from regulators.

"For the past five months, there has been only one buyer for DirecTV," says Yankee Group analyst Adi Kishore. "This is one great development for GM."