By Thomas Gryta
AT&T Inc. knew it was buying a melting ice cube when it
agreed to acquire satellite-TV company DirecTV last year for $49
billion. But recent moves by HBO, Apple Inc. and the National
Football League have turned the temperature up a few degrees.
A wave of new TV services delivered over the Internet allow
Americans to get prime programming like the hit HBO series "Game of
Thrones" and ESPN sports without paying a big cable or satellite
bill. That, in theory, means fewer customers for bundles of TV
channels like those sold by DirecTV. And unlike cable companies,
DirecTV doesn't have a significant broadband business to fall back
on.
AT&T is aware of the risks. Chief Strategy Officer John
Stankey says the telecom giant figured when it did the deal that
demand for traditional bundles of TV channels probably had peaked.
But AT&T is betting the decline will be slower than many people
think--a gradual 34-degree melt, as opposed to a 75-degree one--
and that it will be able to milk the cash produced by the declining
satellite business in the meantime to fund upgrades in its
networks.
"The world is going to be broadband--wireless and fixed--and
that is where we want to be," Mr. Stankey said.
AT&T announced the DirecTV deal last May. Since then, the
agreement's value has fallen by about 4% to about $46.5 billion,
due to a decline in AT&T's stock, which DirecTV shareholders
will get in addition to some cash. AT&T expects the deal to
close by the end of June.
Randall Stephenson, the company's chief executive, said at the
time of the deal that AT&T would benefit from the satellite
broadcaster's scale in TV. That would bring down the cost of
programming for AT&T's own U-verse service and give the company
more clout to negotiate content deals for over-the-top services of
its own.
AT&T also committed to extending broadband service to
another 15 million households. The carrier had 16 million broadband
connections at the end of 2014.
DirecTV rival Dish Network Corp. has since launched its Sling TV
service, which offers a slim package of channels, including Walt
Disney Co.'s ESPN and Time Warner Inc.'s CNN, over the Internet for
$20 a month. HBO, also owned by Time Warner, is launching an
Internet version of its channel that will cost $15 a month on Apple
TV.
Apple itself is talking with content companies about a service
of its own, people familiar with the matter have said. And, the NFL
said Monday that it will broadcast one game this coming season only
over the Internet.
Telecom and cable analyst Craig Moffett of MoffettNathanson says
the new services pose very little threat to traditional pay TV,
which will keep losing customers at a very slow rate. But he also
says the new offerings from companies that control content have
made the industry's trajectory harder to forecast.
The conventional wisdom is that such services aren't
comprehensive enough for most households and will take a long time
to catch on. Still, developments signal that the companies that
make the TV shows and control big-league sports are ready to start
experimenting with services they had to this point largely held at
bay.
The NFL's experiment bumps up against DirecTV's main asset--its
Sunday Ticket package, which promises complete coverage of
out-of-market professional football games for about $250 a season.
The service is so critical to the satellite broadcaster that
AT&T negotiated the right to walk away from its deal if
DirecTV's agreement with the NFL wasn't renewed.
Last year, the NFL renewed its deal with DirecTV for eight
years, with the broadcaster reportedly paying about $1.5 billion a
year. That gives the league an incentive to move slowly with any
Internet offerings to avoid upsetting a rich vein of revenue.
In regulatory filings, DirecTV identifies over-the-top products
as a risk to its business. It also says its inability to offer
broadband or telephone service helped drive it to seek a merger
with a partner that could diversify its business.
Charlie Ergen, co-founder and incoming CEO of Dish, said there
is no question that his company's new online-video service will
cannibalize its traditional satellite service. In a March 25
interview on CNBC, Mr. Ergen said the vast majority of those who
signed up for Sling TV in its first six weeks came from outside the
traditional pay-TV market. But he said the new service will
inevitably lure some current Dish subscribers.
AT&T rival Verizon Communications Inc. has said buying a
satellite-television business wouldn't make sense for it because it
is more interested in over-the-top video than in the traditional TV
model.
In essence, AT&T is betting on inertia. Old technologies can
be slow to fade. even when newer alternatives catch on. Most
Americans now carry smartphones. But about 53% of U.S. households
still pay for a landline phone, according to data released in
December by the Centers for Disease Control and Prevention.
"This is a slow moving thing," said Moody's senior telecom
analyst Mark Stodden.
Shalini Ramachandran contributed to this article.
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