AT&T may be looking to buy DirecTV for $40B

As pay TV dies a slow death, the titans are combining forces

It looks like the pending Comcast/Time Warner merger may have ushered in a new epoch of TV/ISP titans. Now, word on the street is that AT&T has approached DirecTV about a possible merger. And lo! the peasants were caught unawares as the mighty TV/ISP giants rose up and crushed them with anti-competitive deals and artificially inflated price hikes…

DirecTV is the second largest pay TV provider behind Comcast, and if AT&T does indeed acquire the satellite TV company, the deal would be worth at least $40 billion—DirecTV’s current market cap.

The news comes from the Wall Street Journal, who cited sources familiar with the talks. And at present, it sounds like it’s just that—talks. No deal has yet been made, evidently.

DirecTV’s satellite TV business currently serves 20 million subscribers, but its customer base has been gradually dropping off every year since 2010. While AT&T’s market cap is nearly five times the size of DirecTV’s, at $187 billion, its land-line based TV service is much smaller, with just 5.7 million subscribers. Between the two of them, however, the 26 million subscribers they would serve would rival the size of the combined Comcast/Time Warner company, which will have 30 million customers.

All of this comes at a time of struggle for the pay TV industry, which saw its worst 12-month stretch ever in 2013. The pay TV industry has reached a saturation point, with 90% of U.S. households now subscribing to some form of TV service, whether it’s cable, satellite, or phone company-provided. That translated to zero growth in 2012 from 1.9 million net additions in 2009, according to analyst Craig Moffett. In Q3 2013, all of the major pay TV companies combined lost a total of 113,000 subscribers.

That might not seem like a lot, but for investors, it would be like hearing that absolutely no one on the planet will ever buy another iPhone from Apple—they’ll only lose customers from here on out.

From 2010 to 2013, some five million people cut the cord.

But an AT&T/DirecTV merger would face tough regulatory scrutiny. The two companies would have to prove to the FCC that a merger would actually offer something to customers that the two separate companies couldn’t offer individually. This will likely bring added scrutiny to the Comcast/TWC merger. One major combined TV/ISP giant is one thing, but two could potentially reduce the pay TV/ISP industry to a duopoly. Basically, instead of having four shitty companies trying to strangle your Netflix service to bleed more money out of them and others, there would be two shitty companies.

But the WSJ cites a source that says that the FCC is likely to approve such a deal because it views pay TV as a dying industry anyway.

Netflix recently teamed up with Senator Al Franken to oppose the Comcast/TWC merger on the grounds that it would give the combined company too much leverage to artificially inflate prices and cheat companies and customers in an effort to wrangle more money out of them. As it stands, Netflix has accused Comcast of nothing short of extortion, claiming that the company allowed its connections to Internet transit providers to become clogged up to force Netflix to pay for a “fast lane.” Now, rumor has it that Apple may be paying for a similar fast lane.

AT&T has been no better. Netflix actually pointed out in a recent blog post that its service has been so degraded under AT&T’s U-Verse that users would actually be better off using DSL.

Image source: topnews.net.nz