That’s one of the most important questions people in Hollywood should consider now that the FCC and Justice Department are poised to give a green light to AT&T’s $48.5 billion deal to buy DirecTV.
There’s a free-for-all as companies strive to connect with the fast-growing ranks of consumers who watch TV shows, movies and other content on their smartphones and tablets — especially as Nielsen measures those views. Verizon plans to launch a streaming service by the end of this summer. Dish Network recently introduced Sling TV and is amassing wireless licenses to build — well, it’s not clear yet what CEO Charlie Ergen has in mind. And the cable guys are trying to figure out what they can do with their patchwork of public Wi-Fi hot spots.
AT&T can muscle its way to the head of that chaotic pack. It had a wireless subscriber base of 121.7 million and a broadband base of 16 million at the end of March and 6 million homes receiving video from U-verse’s wired service. With DirecTV, it picks up 20.4 million homes that depend on the No. 1 satellite service for video.
FCC Chairman Circulates Proposal To Approve AT&T-DirecTV Deal
AT&T has offered few specifics about its plans. (We might learn more tomorrow when it talks with analysts about its Q2 earnings.) But CEO Randall Stephenson says he’s thinking big.
“The traditional linear [TV] model is about to change in a significant way,” he told an investor conference recently. Once AT&T has a nationwide TV, wireless and retail infrastructure “we’re going to be in a unique position” to offer DirecTV’s TV Everywhere streaming and other online services including Hulu. If all goes as planned, “we go from our video business being a money loser to being a money maker.”
Peter Chernin is central to that effort. Just before AT&T made its deal with DirecTV, it teamed with the Chernin Group to create a joint venture called Otter Media that’s supporting streaming services. Stephenson calls Chernin “one of the best creative minds in Hollywood. … To have an equity position with somebody like that who can go out and create unique things and create unique access to content is really, really critical.”
With $500 million in funding, the Otter partnership has bought a majority stake in anime service Crunchyroll and picked up Fullscreen — a YouTube multichannel network that provides creators with the technology and infrastructure they need to find advertisers and an audience.
With so much riding on Chernin, it’s worth noting that his five-year TV deal with 20th Century Fox Television just ended. He was seriously considering taking the TV company independent, my colleague Nellie Andreeva reported in May.
So will AT&T lead the charge of the media disruptors? Don’t count on it, MoffettNathanson Research’s Craig Moffett says. By spending so much for the No. 1 satellite company, AT&T’s also betting on “the preservation of the video status quo.” The company “can’t afford to do anything that might hasten DirecTV’s decline; they are consigned to fighting yesterday’s war.”
AT&T can’t blithely throw cash into video initiatives. It promised investors that the deal with DirecTV will result in $2.5 billion a year in cost savings. That includes an expected reduction in programming outlays for U-verse as it benefits from the lower rates that DirecTV pays.
Investors are accustomed to seeing growing dividends from AT&T. There’s a school of thought that AT&T is eager to control DirecTV’s cash flow so it can continue to make those payments as its wireline phone business declines, U-verse struggles to compete with cable, and wireless engages in a price war with T-Mobile.
And AT&T will have to earmark dollars to fulfill promises it made to federal regulators. FCC Chairman Tom Wheeler says that as a condition for approving the DirecTV deal, AT&T will build “a competitive high-speed fiber connection” to 12.5 million homes — 10 times its current deployment. Consistent with the new net neutrality rules, AT&T can’t discriminate against rival streaming providers that want to use its platforms, or favor its own services. An “independent officer” will keep an eye on the company’s practices.
Cowen and Co’s Colby Synesael says he “would not be surprised” to see AT&T pitch a streaming service to Millennials. That will give the company a sexy story. But for now, don’t be surprised if it doesn’t commit a lot of cash. AT&T can look for opportunities to cross-market phone service with satellite TV — and wait to see whether DirecTV was the right bet.
Subscribe to Deadline Breaking News Alerts and keep your inbox happy.