The AT&T CFO this week dropped heavy hints on a subject that pretty much everyone in direct to home satellite pay TV services has known for some time, that by next year either EchoStar or DirecTV will have to live without AT&T continuing to sell their subscriptions.
AT&T has been responsible for a considerable number of EchoStar’s new Dish customers each quarter, while its new subsidiary Bellsouth is still selling DirecTV subscriptions. Both were trying to get close to a DTH supplier in their pre-IPTV state, in order to offer discounted triple play bundles so they might hold back the march of the US cable operators. MSOs have, for the past few years finally embraced VoIP voice and have been taking 500,000 customers a year away from the Telcos and the need to hit back was so urgent that AT&T had to work with the DTH suppliers rather than just wait for their networks to be IPTV ready.
AT&T, when it was SBC, cut a deal with EchoStar to integrate billing and bought a chunk of the company and has since taken the service into its Homezone offering where the satellite TV service is integrated at the set top with internet access and telephony into a $100 triple play and a $120 quadruple play.
Back in December 2005 the AT&T IPTV network supplier, Alcatel-Lucent, was convinced to buy the set top manufacturer that had created this integration, 2Wire, for $120 million.
We asked at the time why Alcatel would want to own a set top company, especially when it was forced to work alongside other set top makers within the AT&T IPTV environment? The answer, of course, is so that it can benefit from any rethink of AT&T’s TV strategy, including one potential future that US finance analysts have continually harped on about, where AT&T could potentially buy EchoStar.
Another potential rethink is that Homezone could become increasingly important and replace IPTV in the AT&T triple play.
The clues of how this will play out are there for anyone to see. EchoStar initially felt a slowing of orders and a cooling of the relationship with AT&T, but has recently felt an improvement once the Homezone offering was finalized and brought to market. DirecTV has lost the support of Bellsouth which has sold less and less subscriptions each quarter, and it’s unlikely that this support is coming back, especially with the tendency for the acquirer in any merger (AT&T Bellsouth in this case) to end up preferring its own suppliers. AT&T is almost certainly to favor EchoStar on pure familiarity principles.
But there are two other important issues, with the impending change of ownership at DirecTV from being a News Corporation company to being part of the Liberty Media empire, and the new strategy at DirecTV to become profitable on a stable number of subscribers instead of its previous strategy for the last three years, of driving up the total number of subscribers.
All of this points to a deal with EchoStar, unless John Malone of Liberty can find a convincing way forward for AT&T with DirecTV. One way, of course, is if he offers up all the Liberty Media stable of content at decent rates, while at the same time merging DirecTV and EchoStar, so that it takes the decision away from AT&T but of course EchoStar would have to want that. But Malone cannot even get his hands on the wheels of the DirecTV vehicle until very late in 2007, early 2008, by when all the regulatory hurdles to the merger may have been dealt with.
Malone may find that he takes control at DirecTV just in time to inherit a negative decision by AT&T which means the biggest RBOC partners up wholeheartedly with his new fiercest rival.
AT&T says that its decision to rationalize down to one DTH supplier will happen by the end of the year, and insists, that despite all of the pro-EchoStar evidence, that no-one at AT&T has yet considered which of the two suppliers it will go with. But it will almost certainly be EchoStar.