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DIRECTV Deal: Will AT&T Have Stronger Network Bargaining Power?

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DIRECTV deal to help AT&T get better content arrangements

In Part 2 of this series, we learned what a massive pay-TV subscriber base AT&T (T) has gained from its deal with DIRECTV (DTV). AT&T has now become the largest US pay-TV provider in terms of subscribers. Previously, Comcast (CMCSA) was the market leader. Now AT&T is equipped with the economies of scale to combat the cable-dominated US pay-TV industry.

A significant expense for the pay-TV industry is content costs. With a larger subscriber base, AT&T and DIRECTV now have stronger bargaining power to negotiate these costs with media networks.

According to AT&T, it pays higher content fees, as a percentage of revenue generated from the video segment, than DIRECTV does. So maybe now AT&T will get a better deal.

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Stronger bargaining power may help DIRECTV deal with rising content costs

DIRECTV’s broadcast programming and other costs include the fees paid to broadcasters for retransmission rights and programming charges paid to media networks. As we can see in the above chart, these costs continue to increase. DIRECTV’s broadcast programming and other costs, as a percentage of revenue, expanded from ~43% in 1Q14 to ~44% in 1Q15.

According to the company, these costs rose year-over-year due to an increase in both retransmission right fees and charges for sports content. The company expects these costs to rise again during 2015.

For diversified exposure to AT&T, you might consider investing in the SPDR S&P 500 ETF Trust (SPY). This ETF invested ~1% of its holdings in the integrated telecom company as of June 30, 2015. Or, you might consider investing in the Technology Select Sector SPDR Fund (XLK). XLK had invested ~4.6% of its holdings in AT&T at the end of June.

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