Last week AT&T announced that it has signed a multi-year reseller agreement with DirecTV to bundle its DTH video services with AT&T broadband and voice, to create triple and quad plays. It is widely understood that although this deal will be positive for some years to come, AT&T would really like all the customers it sells to, to later become U-Verse customers, as its IPTV system rolls out all over the US. But for now, it is important that it has a triple play to counter the growing threat from cable, which daily increases the rate at which it steals phone line customers from AT&T.
At present the Dish network service has been integrated into a broadband DTH hybrid entertainment service called AT&T Homezone, by use of a common set top, and AT&T is currently selling Dish in a purely financial bundle. Its Bellsouth acquisition was reselling DirecTV, as does rival Verizon. So in order for AT&T to harmonize its relationship with a DTH TV supplier, one part of AT&T had to extricate itself from its existing agreement. Last week, confusingly AT&T said that it had extended the Dish agreement for one month to the end of January 2009, which could have meant that it was simply making time for further negotiations. Now it is clear that all AT&T was doing was fitting in the ending of the Dish contract with when the new DirecTV offering will be ready to start.
The effect on share prices was immediate, with Dish going down almost 20% to a value of $9.2 billion. DirecTV had gone down when AT&T announced the extension on the Dish deal, and has now recovered that drop and is valued at almost $29 billion, more than 3 times Dish.
Of all the people that are kicking themselves over the DirecTV Dish saga, and their courting of AT&T as a reseller, the one kicking himself the hardest must be Rupert Murdoch, Chairman and CEO of News Corp. He has gone on record saying that triple play services from cable and telcos had failed to make the kind of impression he had expected and as a result he wishes he had not sold control of the company to Liberty Media. But Liberty CEO John Malone, who has made a career out of building things and then selling them to AT&T, was probably the only man that could have turned the tide against Dish. It was in the driving seat, very tightly integrated, right down to the billing level with AT&T, and it has separated the two sides of its business in order for Dish to be acquired by AT&T. Either Dish CEO Charlie Ergen overplayed his hand in negotiating such a deal, or the suddenly improvements at DirecTV in terms of subscriber additions, due to a strong HD lineup, have turned AT&T’s head.
Without AT&T selling subscribers for it, Dish is almost certain to continue leaking customers, and the stock may have some more falling to do. Ergen has aggressively addressed the HD deficiencies of Dish and perhaps customers will begin signing once again, and churn will fall, but that still won’t make up for the loss of the additions usually brought by AT&T. The second quarter next year will be when all of this becomes clear, the first full quarter without AT&T retail support.
But it doesn’t end there. The next rumor to begin circulating Wall Street is that Liberty will sell DirecTV to AT&T, which given the disparity in price, we would have expected Dish to be the tastier morsel. If that idea continues to take hold on Wall Street, DirecTV stock will continue until it is out of sight of an acquisition. We think that if it was an acquisition that AT&T wanted, it would have gone for Dish and the deal would be done by now.
However Malone may in the future convince AT&T to buy some of the DirecTV shares, since his Liberty Media only holds 50% and the rest of the shares are public.