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Pay-TV field could shrink again with AT&T interest in DirecTV

EntertainmentTelevision IndustryTelevisionBusinessMergers, Acquisitions and TakeoversDirecTV Group Inc.Comcast Corporation
AT&T's interest in buying DirecTV adds to concerns over how industry consolidation will affect consumers
'This merger mania ... will only bring consumers higher bills and worse services'
A deal with AT&T would allow DirecTV to seamlessly package

A rush among the nation's largest pay-TV and Internet providers to get even bigger could have profound effects on consumers and competition.

Telecommunications giant AT&T has approached DirecTV about buying the satellite broadcaster in a bid to become more competitive in the rapidly consolidating pay-television landscape. A potential deal would create a chief rival to Comcast Corp., the nation's largest cable television operator that hopes to acquire Time Warner Cable and some customers of Charter Communications.

The deal-making spree has consumer activists, media watchdogs and some customers on edge. Consumers could end up on the losing end, they said.

"Because everyone is merging together there aren't a lot of choices anymore," said D'Jaris Yates, a 32 year-old pharmaceutical saleswoman who lives in the Mid-Wilshire region of Los Angeles. "Your bills can become very high when things merge together."

AT&T's talks with DirecTV have taken place at the board level but still are at a preliminary stage, according to people familiar with the discussions who were not authorized to speak publicly. There is no guarantee that an agreement will be reached, they said.

Neither company would comment on the discussions.

But that hasn't stopped industry analysts from speculating what the future holds for cable and satellite providers as the entire industry seems poised for a seismic shift. Driving the consolidation is a sense by smaller industry players that they need heft to compete against a bulked-up Comcast as well as new entrants from Silicon Valley such as Netflix and Google.

The corporate courtships have made other companies potential takeover candidates, including satellite broadcaster Dish Network and Cox Communications, which has cable systems serving Orange County and San Diego. Verizon, the chief rival to AT&T, is also expected to be looking around for its own deal.

"It is like the high school prom with everyone lining up dates," said Harold Feld, senior vice president of Public Knowledge, a Washington-based media watchdog concerned about the flurry of activity among media companies.

The greater Los Angeles area, which is the second-largest TV market in the nation, will be particularly affected by the changes.

If the Comcast deal is approved by federal regulators, the new company will swallow 1.5 million Time Warner Cable subscribers in Southern California. The Philadelphia company also would pick up about 300,000 Charter subscribers, bringing Comcast's total in the region to nearly 2 million.

An agreement between AT&T and DirecTV would also have a big effect on consumers. DirecTV has more than 1.2 million subscribers in the Southland, and AT&T's television service U-Verse has just over 300,000 subscribers.

The potential for such a radical shift has some analysts worried.

"The continued centralization of control over our nation's media and communications industries is nothing more than a recipe for disaster," said Derek Turner, research director of the media reform group Free Press.

For DirecTV, which has more than 20 million subscribers, a deal with AT&T would allow the satellite operator to seamlessly package its television and high-speed Internet services. One of DirecTV's shortcomings in the high-stakes battle for customers is that it lacks its own broadband service.

A combined AT&T and DirecTV would go head-to-head with Comcast, which has spent billions upgrading its networks to improve broadband Internet speeds. Comcast also is looking to take a bite out of the commercial market by offering high-speed Internet and TV service to businesses.

AT&T also pays billions of dollars in programming fees each year for U-Verse, and the company would like to gain more leverage against programmers such as Walt Disney Co., 21st Century Fox and Viacom Inc. In recent years, the programmers have had the upper hand in negotiations.

"If you think the cable business is all about video, you've got it wrong," said Gerald R. Faulhaber, an economics and public policy professor at the Wharton School of the University of Pennsylvania. "Now cable is all about providing broadband Internet to homes and businesses."

Companies have been invading one another's turf as more people get all three services — phone, Internet and pay TV channels — from one provider.

For AT&T, the value and implications of a DirecTV acquisition are enormous.

First, DirecTV's signal and quality are considered far superior to AT&T's U-Verse television service. This could allow AT&T to rely on DirecTV for broadcast, and free up its fiber lines to increase broadband speeds to U-Verse customers.

Another major reason is programming costs. AT&T already spends nearly $4 billion a year for programming on U-Verse, and it has just 6 million subscribers. DirecTV pays substantially less per-subscriber for channels than does AT&T.

But that won't necessarily translate to lower bills for customers. "The smaller number of competitors there are, the easier it is for the survivors to have a gentleman's agreement not to compete too hard," said Feld of Public Knowledge.

"This merger mania will certainly enrich top-level media and finance executives, but it will only bring consumers higher bills and worse services," said Turner of Free Press.

If DirecTV is acquired it could also be a blow to the local economy as the company exits its El Segundo headquarters for Dallas, where AT&T is based. DirecTV has 3,000 employees here.

The move could also give more leverage to distributors who are trying to control the fast-rising cost of programming. That could hurt the programming companies that rely on cable and satellite TV subscriber fees to underwrite the cost of making TV shows and feature films.

"The marriage between distributors and content providers has been a good one despite some flare-ups every now and again," said Viacom Chief Executive Philippe Dauman. "We've been able to grow the business together as partners. But this is a time when everyone wants good content, and that is our specialty — so we will be fine."

joe.flint@latimes.com

meg.james@latimes.com

Times staff writer Saba Hamedy contributed to this report.

Copyright © 2014, Los Angeles Times
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