AT&T plus Echostar: Dumb Money

There are rumors afoot that AT&T might buy Echostar, or maybe DirecTV, as a shortcut to obtain a meaningful subscriber base in multichannel video services. Why would AT&T do this? One reason might be that AT&T's ongoing buildout of its hybrid-fiber-wirepair network for U-verse is seen as progressing too slowly to make a difference in its strategic competition with cable. U-verse's 126,000 subscribers as of September 2007 are a long way down from the millions served by the larger cable MSOs and by the DBS operators, which translates into much higher per-sub programming costs. Perhaps more significantly, AT&T is accustomed to carrying the biggest guns in each of its markets. Being the little, tiny guy in video is uncomfortable culturally for the biggest kahuna in fixed and wireless telecoms.

It is true that by offering Echostar's DISH (in the former SBC territories) and DirecTV (in former BellSouth territories), AT&T can claim to have a video play that serves a respectable ~1.9M video subs. But these are, after all, DBS subscribers. AT&T is only one of several DBS distribution channels.

By acquiring Echostar and its 13M subs, AT&T would gain immediate entry in its own right into the club of big multichannel video service providers, with all that that entails. Buying DirecTV and its 16M subs would make it the second largest video provider, after Comcast.

Either way, Echostar or DirecTV, this would be a big blunder for AT&T. While each of the DBS operators is a highly credible competitor in linear multichannel video, the game is changing to include interactive, on-demand and bundled products. In these areas, DBS is crippled. The DBS operators have no effective response to VOD; downloading video content to DVRs for replay later does not compare in terms of connvenience or choice. They have no broadband Internet access solution that can compete in the data rate arms race with cable and Verizon FiOS. While the DBS national footprints are an advantage for Echostar and DirecTV as national providers, AT&T could only exploit the DBS coverage within its own regional area for purposes of bundling with its telecoms and Internet access products. Elsewhere, AT&T would simply offer DBS service, probably less effectively than current DirecTV or Echostar managements.

Echostar's market cap is currently north of $20B. Charlie Ergen can be expected to demand a healthy premium such that AT&T's total acquisition cost for 100% of the company would likely approach or exceed $30B. What else could AT&T do with this money? Well, with this kind of investment, AT&T could upgrade its network build-out to provide truly competitive broadband connections to subscribers, like Verizon FiOS does with its fiber-to-the-premises. AT&T has put forward its hybrid-fiber-wirepair network architecture as a much lower cost (and therefore smarter) approach than Verizon's FiOS, so adopting Verizon's approach after all might be embarrassing for some AT&T execs, at least for awhile. And it would take 3-5 years before AT&T could show results from this investment. By comparison, it might seem easier to buy Echostar (or DirecTV), avoid the embarrassment, and obtain a quick hit of millions of video subs now; but, to paraphrase Richard Nixon, for AT&T's long-term strategic interests, this would be the wrong choice.