While the industry narrative continues to push the illogical idea that AT&T is leading the pack internationally as a transformational player, the operator has seemed to be more concerned in remaining a copper service juggernaut. It appears to us that perhaps the most important, although not apparently stated reason for its acquisition of DirecTV, was to provide extra capacity for data transmission on its U-verse/DSL modems (to become more competitive with CATV providers) as the video services would now obviously be increasingly provided by satellite. One of the biggest ironies is that while incumbent providers have maintained their historical reluctance to move to new solutions offered by their equipment suppliers, they have no problem in overspending billions, if not tens of billions of dollars in purchasing companies to primarily, if not totally, bring in novel technology – only later to discover that new developments in the market will either match or surpass those in-house capabilities.
In AT&T’s case, close to the approval of the $67 billion deal (including net debt, etc.) by the FCC, there were optimistic signs that G.fast had commercial viability, which would allow for dramatically higher capacity levels on copper. Although the service provider has been involved at least indirectly with the technology, it is notable that when the standard was brought up at an investment conference this month, the AT&T executive did not address the matter. It is hardly out of the question that such a heavily bureaucratic entity would not have been able to stop on a dime with such an involved process, especially after all of the rhetoric about the importance of this merger to its future business.
So, at present, AT&T may be between a rock and a hard place. It needs to show the market that the DirecTV pickup was a good one, and will be aggressively selling a two-platform solution (as well as encouraging existing customers to move to a second platform). Yet, probably sooner than it initially anticipated, the economics will dictate that AT&T will need to move back to a single IP-based device, and eliminate the satellite dishes. (In addition to the concessions that permitted this deal to go through, our understanding is that the Communications Workers of America are in talks with technicians at DirecTV, and it goes without saying that if an agreement is reached, keeping costs down will involve more than just having “one truck roll,” but to convert to a more simplified setup process.)
This situation appears to be at least a little similar to when Sprint bought Nextel at a whopping $35 billion in 2005 because the former wanted the push-to-talk functionality of the latter. Of course, that created an even greater mess in introducing a totally incompatible wireless network. Also, it was all for naught because Sprint’s competitors eventually caught up with that capability.
In comparison, when Verizon paid $4.4 billion for AOL for its mobile video platform, we came up with a possible explanation for such an extravagant purchase. However, given the latest indications that Verizon may be interested in selling off its invaluable enterprise customers, it is quite possible that it will become evident that the carrier could have saved a lot of cash to obtain a means of providing such a wireless service without too much imagination.
[written by Mark Lutkowitz]