AT&T's proposed takeover of DirecTV is a bad deal for consumers in a landscape littered with other bad deals.
Announced Sunday, the multibillion-dollar deal would combine the nation's second-largest pay television company with the nation's second-largest broadband and wireless provider. In the process, it would leave some 27 million American households -- including hundreds of thousands here in the Bay Area -- with one fewer choice for pay TV service and would further entrench an already powerful company in AT&T.
The deal comes on the heels of another proposed mega-merger in the telecommunications space, that of Comcast and Time Warner Cable, and of a third deal that is apparently being discussed between wireless carriers Sprint and T-Mobile. And it follows about two decades worth of consolidation in the industry that has winnowed the number of players -- and more importantly, consumer choices -- to a handful of giant companies.
"For consumers, they're seeing the universe of providers continue to shrink," said Harold Feld, a senior vice president at Public Knowledge, a consumer advocacy group. With the three potential deals under consideration, "This is a really defining moment" for the industry.
To acquire DirecTV, AT&T proposes to pay about $48.5 billion in cash and stock and to take on nearly $19 billion in the satellite TV company's debt. AT&T plans to come up with the cash by using some of the cash it has on hand, selling some of its assets -- and taking on additional debt.
From the standpoint of the company or investors, the deal makes a certain amount of sense. It would make AT&T the nation's largest pay TV operator and would instantly give it a national footprint; right now, the company's U-verse service is only available in about 27 million households scattered within the regions where the company offers local service. In the process, the deal would eliminate a competitor, meaning that AT&T would likely face less price competition for its service.
Meanwhile, the deal would secure a future for DirecTV. The company has seen its subscriber growth slow in recent years. And its inability to offer a phone, broadband or wireless service puts it at a potential disadvantage to other competitors who can offer deals on triple or quadruple-play bundles.
But the deal makes little sense for consumers. Think about it: Is your chief complaint about pay TV that you have too many choices? Do you really think that the customer service you receive or the prices you pay will get any better if one of the main competitors goes away -- and the remaining company has billions of dollars in debt it needs to pay off?
One of the few successes in telecommunications policy over the last 20 years has been the encouragement of competition in the pay TV industry. Twenty years ago, consumers' only choice was the local cable monopoly. Today, they can also choose from two satellite providers and many can also choose TV service from the local phone company.
This deal has the potential to undo that success. From four choices, many consumers would now have just three. Instead of encouraging AT&T to fully build out another competitor, it would allow the company to simply rely on an existing one. And you've got to believe that AT&T's rivals would start sniffing at DirecTV-rival Dish Network next, potentially shrinking the choices further.
To be sure, AT&T has promised to throw some bones to consumers if the deal is approved. For three years after the deal closed, it would continue to offer both standalone broadband and standalone satellite TV service instead of forcing consumers to buy them as part of a larger service bundle.
It also said that it would abide for those same three years by the net neutrality rules that were thrown out by a court earlier this year, regardless of how the FCC ultimately decides to replace those rules. And it promised to build out or enhance its broadband services to 15 million additional households, mostly in rural areas.
While those promises may seem enticing, they're hollow under scrutiny.
You don't need to merge AT&T and DirecTV to be able to have standalone broadband or satellite TV service. You can get both of those today, when the two companies are competitors. And there's no indication that those standalone plans would go away in the next three years without a merger.
Assuming that the FCC puts in place net neutrality rules later this year, AT&T would be governed by them anyway without the need for a merger-related promise. And those rules would be permanent, not subject to a three-year expiration date.
And $67 billion is a heck of a lot of money to pay to bring broadband to just 15 million more households. By contrast, AT&T's ongoing "Project Velocity" initiative envisions spending $6 billion over three years to bring broadband services to 8.5 million additional households. At that rate, AT&T could reach the 15 million additional customers it proposes with the DirecTV deal for less than $11 billion -- about a sixth the cost of this deal.