While AT&T has yet to submit the deal proposal to the FCC, a recent 8-K filing with the SEC says it expects its proposed merger with DirecTV to will amount to more than $1.6 million in synergies in the first three years. Here’s what AT&T says–in a Q&A list–that will prompt the FCC and DOJ to approve the deal, based on a strong consumer bundle offering, programming costs savings between AT&T U-verse-DirecTV, the use of AT&T stores and other complementary strengths between the companies:
1. Can you provide any additional detail around your cost synergies?
AT&T expects cost synergies to exceed $1.6 billion annual run-rate by three years after closing. These savings will begin in the first year after closing, ramp up over four years and grow with the addition of video subscribers thereafter. It is anticipated that at least 40% of these total synergies will be realized by year two after closing. These synergies are conservative and derived from items such as programming cost reductions, operational efficiencies and reductions in redundant broadcast infrastructure. Programming cost reductions are the most significant part of the expected cost synergies. At this time, AT&T’s U-verse content costs represent approximately 60% of its subscriber video revenues. With the scale this transaction provides, we estimate AT&T’s U-verse content costs after the completion of the transaction will be reduced by approximately 20% or more as compared with our forecasted standalone content costs.
2. What incremental bundling opportunities exist with the combined companies?
U.S. consumers prefer to purchase pay TV service in a bundle with broadband connections and access video programming anywhere on any device, making mobile service a desirable part of the bundle. Today, DIRECTV has service available to 115 million households, but it lacks an integrated broadband service to bundle with its video product.
This transaction is a clear combination of complementary assets and capabilities that creates a strong consumer bundle which will also drive improvements in customer retention. With this deal, the combined company would be able to offer:
–A pay TV, broadband and mobile service bundle to at least 70 million customer locations.
–A pay TV and wireless service bundle to approximately another 45 million U.S. customer locations.
For AT&T, the transaction will result in a better bundling opportunity in three areas:
–DIRECTV gives AT&T the ability to bundle all its Project VIP footprint with video and broadband – 24 million more locations than originally planned.
–The economics of this transaction will allow the combined company to upgrade 2 million additional locations to high speed broadband with Gigapower FTTP (fiber to the premise) and expand our high speed broadband footprint to an additional 13 million locations where AT&T will be able to offer a pay TV and high speed broadband bundle.
–The deal provides significantly greater scale in video, affording us the ability to offer programmers better value and therefore the opportunity for us to obtain correspondingly better per subscriber content costs. We will be able to have a more competitive bundle of pay TV and high speed broadband for our customer locations where our current plans give us the double-play bundling opportunity today.
When you put it all together, we’ll be able to offer consumers greater value and convenience through: competitive bundles of pay TV, high speed broadband and wireless services to at least 70 million U.S. customer locations. Additionally, we will have competitive bundles of pay TV and wireless service for approximately another 45 million U.S. customer locations.
3. What are the details around any revenue synergies that you have evaluated?
The Company expects significant revenue-related synergies that are not currently factored in the $1.6 billion cost synergies. These revenue opportunities are in the areas of bundling, video content to multiple screens, cross selling and advertising.
Today, 97% of AT&T customers bundle their pay TV service with other AT&T services. Cable providers have 75% or more of their subscribers on a bundle of video and broadband. AT&T sees the opportunity to gain new customers through the effective bundling of video, high speed broadband and wireless services to at least 70 million locations. There’s also a revenue opportunity by being able to offer competitive bundles of pay TV and wireless service to approximately another 45 million U.S. customer locations. Bundling also allows subscribers to integrate traditional linear video with on-demand and OTT services in ways that create a richer, more flexible and increasingly ubiquitous video experience across multiple screens.
Also, AT&T will be able to use its 2,000 plus company owned stores and the approximate 10,000 retail locations of the combined companies’ authorized agents to sell these new bundled services. Currently, about 50% of AT&T retail stores do not sell a pay TV product.
The company also sees an opportunity to work with content owners to develop and market unique and exclusive multi-screen content offerings to customers covered by AT&T’s 4G LTE mobility network serving nearly 290 million people and its high-speed broadband network serving 70 million customers locations. Additionally, the company sees a measurable opportunity in advertising revenues through better customization of ads for more end users.
4. Are there additional revenue synergies that you believe you can achieve from the business marketplace?
There are numerous opportunities to achieve revenue synergies in the business marketplace. AT&T will be able to offer a compelling video service to the hospitality industry (hotels, restaurants and bars), real estate managers/developers and other commercial locations that includes DIRECTV video service bundled with a broad array of other AT&T services. This transaction dramatically expands AT&T’s ability to serve these business markets.
5. What opportunities do you see from DIRECTV’s Latin American assets?
DIRECTV’s business in Latin America offers unique opportunities for new revenues and growth. DIRECTV has spectrum covering 43 million homes in Brazil, Colombia, Peru and Argentina with which it is expanding its offering of fixed wireless local loop broadband service. When combined with AT&T’s scale and expertise in wireless data and broadband services, the Company will be able to offer video and broadband bundles to customers in these fast-growing, under-penetrated areas.
6. How competitive will the deployment of your fixed wireless broadband service be?
Today, many Americans in rural areas lack access to a high speed broadband service or have access to only one provider. With the cost synergies and increased revenue from this transaction, AT&T will expand its high speed broadband build to offer a competitive bundle of high speed fixed wireless broadband and satellite video service. We expect fixed wireless broadband to provide speeds of 10 -15 Mbps during peak periods with even higher maximum speeds during off peak times.
7. Why do you believe that this transaction will be approved by regulators?
First and foremost, the deal offers tremendous consumer benefits. DIRECTV is a premier video product that is available throughout the United States. The combined company will have the ability to offer customers the option of bundling the DIRECTV experience with integrated AT&T offers: mobile, broadband or any number of other products. The ability to bundle a high-quality video product with other services outside of our current U-verse TV footprint creates a unique new competitor giving customers what they want — an integrated bundle of video, broadband, mobility and other services. It also gives the new merged entity the economic case to significantly increase investment in broadband infrastructure. Together, these improved dynamics allow us to commit to expand or upgrade our broadband services to 15 million customer locations within four years after the deal closes. This will consist of an expansion of 13 million additional high-speed broadband locations and an upgrade of 2 million additional locations to high speed broadband with Gigapower FTTP (fiber to the premise). Additionally, many of these locations are in rural areas with few, if any, high-speed broadband choices today.
Second, the assets of DIRECTV and AT&T complement each other, with limited competitive overlap. AT&T is a leading broadband company, and in some areas, we bundle broadband with our U-verse video product. DIRECTV, on the other hand, offers a nationwide, best-in-class video experience, but it does not offer its own broadband product. By combining these assets, AT&T will be well positioned to offer customers better bundled options than either company could provide on their own. This is especially true when you add in the strength of our wireless network. Given our limited competitive overlap, and the significant consumer benefits, we are confident that the regulators will approve this combination.
RBR-TVBR observation: AT&T says the combined company will have the ability to offer customers the option of bundling the DIRECTV experience with integrated AT&T offers: mobile, broadband or any number of other products: a bundle that includes mobile cellular service. So a real impact of this merger could be on cellular competitors. Verizon FiOS offers the Quadruple Play bundle discount with Verizon Wireless–the only provider which currently offers such a deal. If AT&T can offer a low-priced bundle for, say DirecTV, U-verse in-home internet and AT&T Wireless, we may see consumers—especially DirecTV customers–flocking to such a deal. This may create a whole new wave of similar mergers to stay competitive. Verizon FiOS already offers bundle deals with DirecTV, so that will likely be off the shelf if this deal goes through.
Notes Francisco Montero, Managing Partner, Fletcher, Heald & Hildreth, P.L.C.: “In presenting this transaction to regulators, proponents of such a merger, like AT&T with DirecTV or Comcast with TW Cable want to impress two points regarding the synergies that will be created. First, that the transaction and the synergies will be of benefit to consumers and, second, that the merger will not diminish and may increase competition. And those are the major themes that AT&T is hammering home with the answers presented in this 8K filing with the SEC. In every area, AT&T states its position that the $1.6 million in synergies it claims will be created in the first three years of the merger will offer a more “competitive bundle of pay TV and high speed broadband for our customers”. And that “when you put it all together, we’ll be able to offer consumers greater value and convenience….” And in case you missed it the first few times, they close with “the deal offers tremendous consumer benefits” and “AT&T will be well positioned to offer customers better bundled options than either company could provide on their own. “ and “[g]iven our limited competitive overlap, and the significant consumer benefits, we are confident that the regulators will approve this combination.” But this is, of course, a one-sided presentation. I’m inclined to think that Verizon and other wireless competitors, to say nothing of the NAB and consumer groups might have a different opinion. As the NAB has stated, “It is hard to see how decreasing competitors in the pay TV marketplace – while increasing regulatory restraints on local TV stations – truly benefits consumers.”
