Stephenson: DirecTV Helps Us Challenge Cable Dominance

Also pledges to meet or exceed net neutrality standards
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AT&T Chairman Randall Stephenson will tell Congress this week that AT&T needs to become bigger to compete in the video space with cable operators.

"The cable companies already dominate both broadband and video," he says in prepared testimony for hearings on June 24 in the House and Senate about AT&T's proposed $48.5 billion purchase of DirecTV.

"This transaction gives AT&T the combination of capabilities to be a more effective competitor to cable and to anticipate and lead in the fast-changing world of communications and entertainment."

AT&T is echoing Comcast, the nation's largest cable company, in arguing that it needs to bulk up to be more competitive. "[V]ideo entertainment services are essential to success in the marketplace," he says, "and ours cannot meet the needs of enough consumers. Due to technology and economic limitations, we can offer video in only a small portion of the country – less than a quarter of American households and even in our wireline service territory, only in more densely populated areas. The cable companies, on the other hand, have a complete overlap of their broadband and video offerings."

And even in that 25% where AT&T does offer programming, it is at a competitive disadvantage he says, something the DirecTV deal will help address.

"Where we offer video, we lack the scale needed to forge strong relationships with programmers and compete effectively against the dominant cable companies. A case in point is our cost to acquire video content. Today, 60 cents of every video dollar we earn goes straight to programmers, before we spend a penny to market our service, install a set top box, send a bill, or answer a customer’s call. As a result, our video product is, on its own, unprofitable."

He argues that allowing AT&T to buy DirecTV and its satellite video assets will still lead to lower prices for consumers, something legislators and regulators are particularly keen on.

"[T]he substantial cost savings and other synergies associated with the transaction will allow us to price all of our services more competitively, which will drive cable and other competitors to lower their prices and improve their own offerings," he said.

AT&T has told the Securities and Exchange Commission that it expects the proposed DirecTV merger to result in more than $1.6 billion in "synergies" in the first three years and that should increase with the addition of video subs, primarily from the reduction in programming costs. AT&T says at least 40% of that total will be realized within two years.

He says AT&T will develop new over the top services, and pledged to "meet or exceed" the FCC's network neutrality "standards."

Stephenson also says the deal will be a "game changer" for rural broadband, bringing new infrastructure to millions and high-speed broadband (15-20 MBps) to at least 15 million more customers via fixed wireless, mostly in rural areas where the business case for buildout is problematic. Most of those (80%) are currently outside AT&T's wireline footprint.

Stephenson says that almost 20% of the rural consumers who will be getting the fixed wireless service currently have no access to high-speed broadband, while another 27% are "hostage" to a single provider.

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