AT&T Direct TV Deal Challenges the Mode

Reviewed: June 10, 2015
By FinanceWeb

The $49 billion purchase of Direct TV by AT&T does more than consolidate a large content provider into a very large Internet and cell phone provider. The deal raises questions about net neutrality and the traditional business model called bundling. It will test the judgment of federal regulators who have moved strongly since 2008 to ensure neutrality and to grow the Internet by promoting open access for users, and content providers. It will test the commitment to increased customer access to high-speed service.

Impact of the Deal

By acquiring Direct TV, AT&T will be the leader in content distribution across the major platforms, including mobile, broadband, and television. It will also be a leading source, and in some areas the only source, of high-speed Internet connection. The deal gives AT&T a boost in moving into Latin America and particularly for expanding subscriber growth in Brazil for television content. It adds 20 million Direct TV subscribers plus six million U-verse subscribers. Consumers may have additional choices but also some confusing options. They will see a four-part bundle- a quadruple play- of mobile, broadband, television, and direct wired services. The cross marketing goals include bringing Direct TV customers into AT&T phone services with attractive introductory pricing.

Net Neutrality

The FCC recent decision to enforce net neutrality has closed this issue. AT&T must accept this policy as part of its operations, and it has not objected. It will handle all traffic across its system without preference or fees. Some observers noted that getting the issue out of the way paved the way for eventual federal approval of the deal.

Content Providers

The issue of interconnection is a point of contention. Interconnection is the term applied to use of AT&T systems to deliver content from sources like movie channels services. AT&T prefers to negotiate fee arrangements with content providers like Level 3 to cover the costs of adding space to handle their products. Public comments will continue to press for a one-size fits all approach and force AT&T to handle all traffic without adding fees. Analysts expect this issue to be tough, and that AT&T will fight for its system of negotiated fees with content providers.

Stand Alone Internet Service

Regulators will likely insist that AT&T offer stand-alone Internet service. Competitors will likely urge that the conditions include speeds at or above average speed transmission rates. Some comments suggest 25 Mbps standalone speeds for seven years at about $30 per month while AT&T is likely to offer 6 Mbps for three years at about $35. This issue will test federal policy promoting high-speed access. Bundling has been a crucial part of the business model for AT&T and Direct TV. It forces consumers to take less popular items to get popular services. Bundling was a major reason for the acquisition- to add a four-part bundle when its competitors can only offer three-part bundles. Bundling violates the spirit of the federal policy that favors access over cost factors that limit access. The speed is important because federal policy recognizes that slow and crowded Internet connections make the user experience unequal, and deny slow service users the essential benefits of the Internet for learning, business, and communications.

Federal Approval Expected

The overwhelming consensus among comments and analysts is that the Federal Government will approve the deal both on market impact and communications policies. The early years will bring fewer changes than the later years as the struggle will focus on AT&T bundling in a global marketplace that increasingly offers customers more precise options. AT&T will likely resist top speeds for standalone Internet and continue to promote four-way bundling of fixed line, broadband, mobile, and Internet services. Mergers and consolidation reflect the maturity of the TV and broadband businesses. The competitive edge lies in ever increasing speeds and ease of operation. Customers will focus more on the experience of smooth and constant access at blazing speeds, particularly on mobile devices.