The U.S. telecom wireless industry is witnessing an eventful season with a couple of merger proposals. While on one hand, third largest U.S. telecom player Sprint (NYSE:S) seeks to acquire T-Mobile (NASDAQ:TMUS) to increase its competitive strength, AT&T (NYSE:T) has its eyes on pay-TV provider DirecTV. The second largest wireless provider AT&T is keen on making the U-Verse segment stronger through its $48.5 billion worth combination with DirecTV (DTV).
Another essential factor why the Dallas carrier wants to join forces with the TV satellite provider is to give effective competition to Comcast (NASDAQ:CMCSA), which plans to acquire Time Warner Cable (NYSE:TWC) in a $45 billion deal. To ascertain the situation better, a deeper look into the deal is required.
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Integrated bundled service is in demand, and AT&T would not be able to serve the need nationwide unless it gets assistance from DirecTV. Even the TV satellite provider would face difficulty in making such offerings as it lacks good speed broadband service. In contrast AT&T has the required nationwide broadband service but offers content only in 22 states. So if the two combine, they would complement each other and make a better offering. The combined entity with its 26 million subscribers would be able to match Comcast’s services.
AT&T argues that if the deal goes through, the company would be able to provide better pricing to its subscribers. This would, in turn, create a pricing pressure on Comcast who would be forced to sell bundles at cheaper rates. Ultimately the move will benefit the public who would get content services at reasonable rates.
However, AT&T without the merger cannot offer bundled services at lower rates as the price it needs to pay programmers is quite high given its current coverage.
The Road Bump
The biggest roadblocks on the way of the deal are the regulators. Federal Communications Commission (FCC) and the Department of Justice (DoJ) have to give their consent on the deal for it to proceed. If DirecTV is acquired by AT&T, the number of satellite providers would reduce to three. In such a case, antitrust issues will have to be dealt with to ascertain if the merger proposition is in favor of consumers, and is keeping competition alive.
Currently the FCC and the DoJ have three merger petitions in hand – Sprint and T-Mobile, Comcast and Time Warner, and AT&T and DirecTV. Of all the three, AT&T’s proposal has the highest chance of winning the regulators go-ahead signal as it gives the least threat of ruining competition.
AT&T has showcased its case to the regulators portraying that the merger transaction would create a stronger player offering bundled services and compete with satellite behemoth Comcast and Time Warner. Individually AT&T and DirecTV are too small and insignificant to pose any threat to Comcast.
Also the merger would aid AT&T and increase its coverage from 22 states to 48 states, most of which are rural areas. Its high speed nationwide broadband would get a better use as well.
The combination transaction should complete within the next 12 months, if the proposal get a favorable response. In such case, AT&T would have another line of strong business. With the mobile market saturating, a boost in the revenue of the pay-TV segment would ensure steady growth path for the national carrier. It’s time now to see how the regulators assess and act on the proposal.