DirecTV breaks free from AT&T
Six years after AT&T swallowed DirecTV with ambitious plans to modernize the satellite TV business, the telephone company has retreated, returning DirecTV to its roots as a stand-alone company.
On Monday, AT&T completed its spinoff of DirecTV, taking $7.1 billion in cash and 70% interest in the new DirecTV. Private equity giant TPG, which contributed $1.8 billion, owns 30% of the new privately held company.
The new DirecTV is made up of AT&T’s three TV distribution businesses: the namesake satellite TV service, the legacy U-verse and the streaming offer AT&T TV. The AT&T brand will be stripped away as part of DirecTV’s efforts to simplify its message and repair its reputation among consumers.
“It’s a new day and a new DirecTV,” Bill Morrow, DirecTV chief executive, said in an interview.
AT&T’s ownership of DirecTV was disastrous. The Dallas company paid $49 billion to acquire El Segundo-based DirecTV (and absorbed another $18 billion in debt) with the goal of selling its customers a bundle of TV and phone services. When that deal closed, in July 2015, AT&T became the nation’s largest pay-TV provider with 26 million customers.
Now the three former AT&T television platforms — DirecTV, U-Verse and the streaming service AT&T TV — have about 15.4 million subscribers, according to the company. In six years, AT&T lost nearly 40% of its TV subscriber base, resulting in one of the highest levels of so-called “churn” in the industry.
“Some of our churn was self-inflicted,” Morrow said. “It wasn’t because consumers didn’t like the service — it was because we were doing different things internally.”
AT&T’s DirecTV has lost 4 million customers in two years. Cost-cutting and big decisions loom, including whether to pay to keep exclusive rights to NFL Sunday Ticket.
Morrow, a former CEO of Pacific Gas & Electric in San Francisco, has spent more than a decade in the industry. He worked about five years spearheading New Zealand’s efforts to build a nationwide broadband network.
AT&T hired him in late 2019 when the company was under pressure from an activist investor that demanded that AT&T pay down its debt and get rid of non-core assets.
“Although AT&T starts with a 70% stake in DirecTV, they will likely wind down their investment over time,” said Steve Nason, research director for Addison, Texas-based consulting firm Parks Associates. “For all intents and purposes, AT&T is now out of the pay-TV space.”
DirecTV will have a five-member board: two representatives of AT&T and two representatives of TPG, as well as Morrow, who plans to bring a different focus to DirecTV.
Morrow believes the satellite TV business, while declining, will be around longer than some analysts have projected. Company research and customer surveys, he said, have shown that many consumers still want bundles of their favorite TV channels in addition to streaming services, like Netflix.
Rather than offering a jumble of brands, all products will be marketed as DirecTV.
At its core, DirecTV’s strategy is to return to handling “aggregation, curation and distribution ... of content that consumers want brought to their doorstep,” Morrow said.
Most of the unit’s workers have transitioned to the new DirecTV. Morrow said he doesn’t envision restructuring the workforce, which already has endured multiple rounds of reorganizations — and multiple management teams — in recent years. DirecTV also said it will honor terms of existing collective bargaining agreements covering union-represented employees.
The new company will be based in El Segundo and in Denver.
But there will be other changes eventually, including to one of DirecTV’s signature offerings, the NFL Sunday Ticket package.
DirecTV maintains the rights to out-of-market Sunday afternoon football games through the 2022 season, but when the NFL deal expires the company will probably discontinue the package.
“The NFL Sunday Ticket was a great idea when it first started,” Morrow said. “But then the NFL began spreading games across various days of the week and giving the rights to other distributors.”
In recent years, DirecTV has been losing tens of millions of dollars a year on its partnership with the NFL, and it can no longer stomach the losses. In addition, the NFL has grown more interested in experimenting with streaming partners and granted a partnership with Amazon.
Morrow said DirecTV was “not interested in any way, shape or form” in extending the current arrangement with the NFL beyond the 2022 season.
AT&T has agreed to cover the NFL losses, according to a regulatory filing.
The spinoff comes as AT&T tries to streamline its holdings. It also has been under pressure to get rid of assets to generate cash to pay down its debt from its buying spree, which included the $85-billion purchase of WarnerMedia, parent of HBO, CNN, Turner and the Warner Bros. studio, three years ago. This spring, AT&T announced that it would sell WarnerMedia to smaller rival Discovery.
The companies are expected to announce their proposed joint venture as early as Monday, creating a new company that would reshape Hollywood.
The company’s DirecTV foray was problem plagued from the start.
After the takeover in 2015, AT&T offered rich severance packages to much of DirecTV’s senior leadership, who then stampeded out the door.
DirecTV had long been known for sterling customer service, but AT&T dismantled that, moving customer-relations functions into its “shared services” unit that was geared toward dealing with phone service issues. That meant AT&T customer service representatives suddenly had to troubleshoot satellite TV problems over the phone.
“After a year or two, AT&T probably realized the acquisition was a colossal mistake,” Nason, the analyst, said.
Customer defections began accelerating within a couple years of AT&T’s purchase. The company turned its attention to building a streaming service that it could pair with its broadband offer. It launched various versions of a streaming service — DirecTV Now, AT&T Now and AT&T TV, all of which sputtered in the market.
Morrow said there is untapped potential in the AT&T TV product, which will be relaunched as DirecTV Stream to capture the so-called cord-cutters.
“Traditional television is still a huge part of the ecosystem,” Nason said. “But long-term it is not a sustainable business model because people are continuing to migrate away.”
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