AT&T (T) has put in a $49 billion offer for DirecTV (DTV). And as an T stock holder myself (I have personally owned AT&T stock for many years), I think the AT&T-Direct TV merger is the right move for the telecom giant.
Whether or not it will succeed, however, remains an open question.
Long-Term Growth Questions Remain for AT&T
The AT&T buyout of DirecTV remains up in the air, as it’s waiting on regulatory approval. But the merger is a necessary step for AT&T to remain relevant in the telecommunications business by juicing its paid TV subscriber base.
The DirecTV deal would push AT&T’s paid TV subscribers to 26 million when you add up DTV and existing U-Verse subscribers, making it the No. 2 television player behind Comcast (CMCSA)-Time Warner Cable (TWC) at 30 million … should that merger go through, too, of course.
That would give it scale in the short-term … but, of course, the broadcast business is shrinking. The number of total pay-TV subscribers in the U.S. fell in 2013 for the first time ever, according to reports.
At the same time, AT&T’s wireless business faces increased competition with the comeback of T-Mobile (TMUS) … and this DTV move is far afield from the increasingly important wireless war AT&T is fighting. Some think DirecTV is actually a distraction from the vital wireless market that has long-term potential, as opposed to the declining pay TV market DirecTV serves.
It adds up to little bit of short-term pop with an influx of pay TV subscribers, and a bit of a strategic shift from the all-important wireless arm of AT&T.
Why AT&T Had to Bid for DirecTV
So why do the DTV deal at all?
Well, because the only realistic long-term solution to stagnant AT&T revenue is the establishment of an AT&T online video service. This would involve content delivered over AT&T’s network, replacing its existing TV business and capitalizing on video-hungry mobile users.
If AT&T can successfully get this kind of service off the ground in the next year or two, it could then be ramped up in a hurry over the next few years after a DTV deal.
AT&T reportedly is shopping for a “over the top” web video service it can run on both its wireless network and serve via landline cable, and has also backed a video venture headed up by media mogul Peter Chernin and funded with $500 million with the intent of figuring out online video content.
This is, frankly, the last best hope for growth at AT&T in my opinion. The best-case scenario is that AT&T will buy DTV, forge ahead into online video content and establish a new and impressive business model for the 21st century that moves beyond landline cable.
But I think that’s a tall order, and far from a sure thing.
Still, as an AT&T stock holder I think that buying DirecTV is the “right” move and one AT&T needs to make based on the necessary evolution of the company in the age of wireless and amid the decline of cable.
Of course, whether DTV can actually change the gloomy long-term growth prospects of AT&T — or fend off similar evolutions from competitors like Verizon (VZ) and Comcast (CMCSA) — remains an open question.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at email@example.com or follow him on Twitter via @JeffReevesIP. As of this writing, he was long T.