Was AT&T’s DirectTV acquisition too expensive?
In the previous part of this series, we discussed how viewers’ “cord-cutting” process is causing the decline in the pay-TV market. This process is causing huge subscriber losses to cable providers such as Comcast (CMCSA) and Time Warner Cable (TWC), while satellite TV players such as DirecTV (DTV) and Dish (DISH) have somehow managed to maintain their subscriber base. AT&T’s (T) acquisition of DirecTV has raised the questions as to why AT&T acquired a player in the declining pay-TV market. In this article, we’ll discuss whether acquiring DirecTV would indeed benefit AT&T’s business enough to justify a valuation of $67 billion. If the deal turns out to be too expensive for AT&T, it would impact the Vanguard Telecommunication Services ETF (VOX), Fidelity MSCI Telecommunication Services Index ETF (FCOM), and iShares Global Telecom ETF (IXP), which have high exposure to AT&T.
AT&T should have put resources into its own pay-TV service, U-Verse
An argument against AT&T decision to acquire DirecTV is that AT&T already has a high-quality TV and Internet service in U-Verse. As the above chart shows, AT&T’s U-Verse TV service has been growing at a decent pace compared to the overall pay-TV market. As we discussed in the last part of this series, the overall pay-TV market lost 251,000 subscribers in 2013. This means AT&T would have been better served by investing its resources to develop its own service rather than acquiring DirecTV. Another point to note here is that there’s considerable overlap between AT&T and DirecTV in the pay-TV market. AT&T could be forced not to offer its U-Verse service in those markets, which would be another waste of AT&T’s investment in U-Verse.
DirecTV lacks any wireless spectrum
AT&T will be paying DirecTV $67 billion, which becomes an expensive acquisition when we consider that DirecTV lacks any wireless spectrum. The spectrum is a valuable asset in the telecom industry, and additional spectrum would have given AT&T an opportunity to improve its network quality. After all, AT&T is primarily a wireless company, and acquiring DirecTV doesn’t help AT&T grow in the wireless area. Instead of DirecTV, AT&T could have acquired Dish Network, which has a good spectrum and which would have come in handy for AT&T. All in all, this casts doubt on AT&T’s decision to acquire DirecTV.