Broadband Cable Association of Pennsylvania

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May 20, 2014

AT&T Inc.'s proposed $49 billion acquisition of DirecTV comes with a big caveat: Without football rights, there may be no deal. AT&T can walk away if the satellite-TV provider isn't able to renew its prized "Sunday Ticket" offering with the National Football League on "substantially...the terms discussed between the parties," the telecom company said in a securities filing Monday. DirecTV's current deal with the NFL expires at the end of the 2014 football season.

The "Sunday Ticket" provision highlights the outsize importance of football rights to AT&T in pursuing a takeover of DirecTV. The nation's largest satellite operator has held the rights to the "Sunday Ticket" package since it started offering TV service in 1994. The package allows DirecTV to broadcast every out-of-market NFL football game on Sunday afternoons to TVs and mobile devices.

Football has been crucial to DirecTV's business: Roughly one out of 10 subscribers has the "Sunday Ticket" package, which starts at $240 a year. The offering is a big reason DirecTV has been able to establish a strong brand as a premier sports powerhouse, which has helped the satellite firm consistently take share from cable over the years. Under the current deal, DirecTV pays about $1 billion a year for the rights. Lee Berke, a sports media consultant who has advised companies in rights negotiations, noted that AT&T's deal caveat puts the NFL in a prime negotiating position. "A $49 billion deal is contingent on the NFL's television rights," Mr. Berke said.

The exclusive negotiating window for the NFL and DirecTV to hammer out a renewal has expired, meaning the league could approach other companies about a "Sunday Ticket" deal, according to a person familiar with the situation. But for now, the two sides are continuing discussions toward a renewal and there isn't another serious contender, the person said. A member of the NFL's broadcasting committee, which is made of up team owners, expressed optimism Monday that a deal with DirecTV is coming soon.

On a call with analysts Monday morning, DirecTV Chief Executive Mike White reiterated he is "highly confident" DirecTV can renew the deal "before the end of the year." He noted that both he and AT&T CEO Randall Stephenson met with NFL Commissioner Roger Goodell and New England Patriots owner Robert Kraft to convey "why this transaction is great for the NFL…as well as great for us." DirecTV shares fell 1.8% to $84.65 on Monday, a sharp discount to the $95 in cash and stock that AT&T is offering. AT&T shares slipped 1%.

By gaining control of "Sunday Ticket"—via a purchase DirecTV—AT&T would become a major broadcasting partner of the NFL, a critical move given its rivalry with fellow telecom giant Verizon Communications Inc. Verizon last year signed a four-year, $1 billion deal with the NFL for the rights to air more NFL games on Verizon phones—including Sunday night, Monday night and Thursday night games, as well as home-market Sunday afternoon games starting this season. AT&T said in a separate filing Monday that part of the reason it didn't pursue rival satellite firm Dish Network Corp. is that Dish "doesn't have the premier pay TV brand…or the premier content relationships."

Both AT&T and Verizon view tie-ups with the NFL as a way to lure new wireless subscribers in a saturated U.S. marketplace. Streaming of NFL games can also help the companies earn more in wireless data fees, an important source of growth as their core voice business has matured. Verizon subscribers can watch the games over an app for $5 a month, plus data charges. Verizon Wireless and AT&T have both positioned themselves in recent years to move away unlimited data offering and into plans that charge subscribers more money as they use bigger chunks of data. For wireless carriers, Mr. Berke said, "the differentiators will be sports properties and other key pieces of content" to "retain subscribers and increase the amount they're spending." UBS analyst John Hodulik said AT&T and Verizon will likely end up on opposite sides of the table when it comes to getting these types of high-impact programming rights. "I think they will be bidding against each other in areas where it is exclusive," Mr. Hodulik said.

Before its recent pursuit of DirecTV, AT&T was already working to develop deeper ties with the NFL. Last year the company won the naming rights for the Dallas Cowboys' stadium, now called AT&T Stadium. As part of the deal, AT&T promised to keep beefing up the fourth-generation wireless broadband network in the stadium and nearly double the Wi-Fi access capacity. The Cowboys owner, Jerry Jones, is on the NFL's broadcasting committee, which oversees programming rights deals. AT&T has also expressed interest in joining with teams to provide "in-stadium" content, so that fans watching the game in person can use their smartphones to see instant replays and different camera angles of highlights, according to people familiar with the matter.

While the NFL controls broadcast rights, the individual teams control such in-stadium rights. Others, including Verizon, are also jumping into the fray. "This has become a substantial battleground," Mr. Berke said. While AT&T is confident that DirecTV can renew the "Sunday Ticket" deal, the telecom company wanted to make sure it was protected, so it added the NFL provision allowing it to call the deal off if the league's talks with DirecTV break down, according to a person familiar to the situation. AT&T said it won't be able to seek damages if DirecTV fails to renew the deal "so long as DirecTV used its reasonable best efforts to obtain such renewal." Wall Street Journal

If AT&T's $49 billion purchase of DirecTV is approved by regulators, it will be the fourth time since 2003 that the company has changed hands. It could also be the first time it finds an owner capable of realizing its full potential as a competitor to the cable monolith.

The potential of the satellite-TV company, which incumbent cable operators dubbed the "Death Star" in its early years, has appealed to owners for decades, attracting everyone from General Motors to telecommunications giants and media tycoons. John Malone's Liberty Media was one of those high-profile owners, but it eventually spun off the service into an independent company. Liberty still has faith in the power of satellite media, and it is using satellite technology to shake up the radio industry via ownership of Sirius XM. But in an analyst call last year, Mr. Malone said satellite TV makes the most sense if it can be paired with a broadband service, giving subscribers a two-way connection that can also offer the kind of streaming, on-demand services that are all the rage today. That is something AT&T, with almost 18 million broadband subscribers, would be able to do.

Even though Mr. Malone spun off the satellite service, "I'll swear on a Bible that they would not have been able to pry DirecTV out of my hands if I had a solution for terrestrial broadband that I could marry to DirecTV," he said. The company's potential to shake up the cable business was clear to its first owners, Hughes Aircraft Co., General Motors' aerospace unit. Flush with cash from a defense business that made Tomahawk missiles among other things, Hughes began launching satellites and signing up programming deals, aiming to launch a commercial TV service in 1994.

At the time, so-called wireless cable was a tiny niche of the $10 billion cable-TV industry, used by an estimated 400,000 subscribers. The predominant technology involved broadcasting from ground-based transmitters, not satellites. It was no Death Star. But Wall Street loved the sector and its promise of doing an end-run around the cable companies, reaching millions of houses without doing the literal groundwork of laying all that cable. In the 12 months leading up to June 1994, six wireless cable companies went public. One wireless cable company acquired eight competitors in a single month.

DirecTV and other satellite players quickly took the lead in winning new converts to cable-free cable, and by that December, DirecTV was bringing in 3,000 new subscribers each day and projecting 10 million by 2000 (it met its target). "The cable-TV industry is watching," The Wall Street Journal reported at the time. "It has already dubbed the venture Death Star, after Darth Vader's world-destroying space station." Freed from the physical burden of laying and managing copper lines, satellite TV had advantages that sound plenty familiar to those who have witnessed the mobile-phone boom. The industry could rapidly scale up its user base without waiting to physically connect it to a cable grid, and it could manage pricing and marketing on a national level, rather than working with myriad regional fixed-line systems.

By the time GM considered selling DirecTV in 2000, at the peak of the tech and telecom craze, its bankers were floating possible valuations of $45 billion or more. But as the company spent years stumbling through the sale process, that valuation fell, thanks both to the bursting of the dot-com bubble and a slowdown in the growth of satellite TV. Propelled by the dot-com era's huge investments in fixed-line capacity, the cable industry was on the rise again. But News Corp’s Rupert Murdoch, who had spent decades building profitable satellite-TV operations in Europe and Asia, was still interested. News Corp. snapped up 35% of DirecTV for $6.6 billion in 2003, a much lower valuation than the $25 billion it offered for the entire company two years earlier. At the time of the successful deal, Mr. Murdoch was still a big believer in satellite-TV, calling it the "best chance to break cable's still-dominant hold."

Breaking cable's hold seemed as lucrative in 2004 as it did 20 years earlier, but News Corp. would spend only a few years working at it. In 2007, the company sold its DirecTV stake to Mr. Malone, who still sings the service's praises despite spinning it off. "It's a better video package, it always has been," he said on the call last year. "When you can deliver a ubiquitous national North American service...and you can advertise it as such and you can promote it as such and you can make those collaborative decisions centrally, it's a wonderful machine." Wall Street Journal

The chairman of the Senate Judiciary Committee raised alarms Monday about the proposed mega-merger of AT&T and DirecTV, saying the panel will be "looking closely at this transaction." "With this latest proposed merger, I am concerned that the telecommunications marketplace is trending even further toward one that favors big companies over consumers," warned the chairman, Sen. Patrick Leahy, Vermont Democrat. He's not the only one. The House Judiciary Committee ordered hearings on the deal within hours of the announcement Sunday that AT&T planned to buy DirecTV for $48.5 billion.

Similar hearings were held when Comcast announced a merger with Time Warner Cable in February. Sen. Al Franken, Minnesota Democrat and member of the Senate Judiciary Committee, said the AT&T purchase of DirecTV, the biggest U.S. satellite TV provided, showed that the telecom industry was "going exactly in the wrong direction." "The fewer players there are in this space, I believe it's worse for consumers. My constituents in Minnesota will be paying more for cable," Mr. Franken said Monday on CNN's "New Day." Washington Times

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