May 21 (Bloomberg) -- Verizon’s top executive scoffed at a report that his company wants to buy a satellite-TV company, calling it “someone’s fantasy.”
Take note, AT&T.
The remarks yesterday by Verizon Chief Executive Officer Lowell McAdam underscore a key difference between the two companies’ strategies. Verizon Communications Inc. spent $130 billion this year to buy out its joint-venture partner in one of the nation’s most advanced wireless networks. By contrast, AT&T Inc. agreed this week to a $48.5 billion acquisition of DirecTV, the biggest satellite-TV provider in the U.S.
The Verizon approach is the smarter one, said analyst Walt Piecyk of BTIG LLC, because wireless data has more potential for revenue growth than satellite. While AT&T’s transaction gives it a steady source of cash and a bigger video business, it doesn’t add much technology to help the company offer an Internet TV service.
“Verizon is positioning the company for the next five years,” Piecyk said. “AT&T settled for a more conventional transaction to fund its dividend and hide slowing growth.”
McAdam dismissed a report that his company would buy Dish Network Corp., DirecTV’s biggest competitor, saying he didn’t need to do a big deal to catch up with rivals.
“I don’t feel that owning a satellite company is something I’m finding intriguing at this point,” he told investors yesterday. “We did our big deal.”
Spending on wireless data continues to surge as consumers connect smartphones, tablets and even cars to networks. U.S. mobile-data revenue climbed 20 percent to $24.8 billion in the fourth quarter of 2013, according to industry consultant Chetan Sharma. DirecTV’s U.S. sales rose 7.2 percent to $6.78 billion in the same span.
While Verizon will need more wireless capacity down the road, it has built a robust, national wireless network to handle the surging demand for video over the Internet. And it’s started to put the technical knowhow together to give customers a service to deliver that programming. CEO McAdam took a look at his options and decided that the best place to put his cash was in Verizon Wireless, the business that was already pursuing the strategy he preferred.
“We are much more interested in the video transport over- the-top, mobile-first application, versus a linear play,” McAdam said yesterday. “That’s where we are focusing.”
Satellite dishes are an older technology that isn’t going to support the Internet-based video AT&T agrees is the next big thing. In fact, to free up space on its Internet network, AT&T may even have to encourage some of its U-verse TV subscribers to switch to DirecTV’s satellite dishes, according to MoffettNathanson LLC.
The satellite-TV industry is down to almost no customer growth, with DirecTV and Dish adding less than 200,000 subscribers between them in 2013. It’s part of an overall U.S. pay-TV business that declined for the first time last year in overall users, with a growing number of people deciding to watch online video instead.
Essentially, AT&T did a deal to prepare for online video by buying a traditional provider of what is known as linear video, since it is delivered on a set schedule for all users. What’s more, AT&T can only offer its fastest Internet speeds to DirecTV customers in one-quarter of the U.S., since it doesn’t own landline networks outside those areas.
“How will AT&T ever justify to its shareholders that it is buying a company where in 25 percent of the country the best they can hope for is to preserve revenues they already have, while in the other 75 percent of the country they are consigned to secular decline?” Craig Moffett, an analyst at MoffettNathanson, said in a research note last week.
To be sure, AT&T is investing heavily in its wireless business too, including $9 billion it has pledged to acquire capacity in a government spectrum auction. The company has owned all of its mobile-phone unit since 2006, long before Verizon. And when AT&T tried to make a big bet on wireless in 2011, with the $39 billion purchase of T-Mobile US Inc., it was derailed by regulators.
“We are gaining 20 million customer relationships, we gain a much broader consumer reach and nearly the same broadband coverage that a combined Comcast and Time Warner have,” said Larry Solomon, an AT&T spokesman. “It makes financial sense and strategic sense.”
Verizon isn’t ignoring video, either. Yet unlike AT&T, Verizon has focused on smaller deals to expand its online-video capability, such as a January acquisition of Intel Corp.’s OnCue service and an agreement to carry National Football League games on mobile devices.
AT&T has done transactions like that too. Last month, it announced a pact with Chernin Group to invest more than $500 million in Internet-video services.
And DirecTV has experience that can help AT&T in many ways. After all, it’s been doing deals for decades to carry cable networks in its channel lineup. It sells the Genie set-top box, a multiroom digital video recorder. And it has its own exclusive pact with the NFL, the popular Sunday Ticket package, which is so important that AT&T has the right to walk away from the DirecTV takeover if the football relationship isn’t renewed.
Most importantly, DirecTV has 20 million subscribers, more than AT&T and Verizon combined. AT&T is betting that heft will give it bargaining power to extract better programming deals from cable networks, whether it be for satellite or for Internet video.
“AT&T showed it’s of the mindset that the technology and content will take care of itself,” said Colby Synesael, an analyst at Cowen & Co., in a research note. “It’s more important to get the subscriber base to leverage future mobile content licenses, providing an immediate cost advantage out of the gate.”
AT&T’s foray into video has a familiar ring. One of its predecessor companies, the old AT&T Corp., got into the cable-TV business in 1999, acquiring Tele-Communications Inc., only to sell the assets three years later to Comcast Corp. That company also spun off its mobile-phone business in 2001 to create AT&T Wireless, over which AT&T Inc. gained full control in 2006.
Now the new AT&T will have satellite-video and mobile-phone subscribers under one roof. The question is whether it needs all those satellite subscribers when it’s already developing a wireless Internet-based TV platform that might lure them away from satellite altogether.
“There’s a greater future in wireless than linear television,” Piecyk said.
--With assistance from Scott Moritz in New York.