AT&T shareholders can be forgiven for their apparent lack of enthusiasm over the company’s $67.1 billion purchase of DirecTV — they sent its stock down 64 cents to $36.11 per share in midday trading in their first session after the deal’s announcement. After all, they’ve been through this before, and it didn’t go so well.
Sixteen years ago, in 1998, AT&T’s then-Chief Executive C. Michael Armstrong spent close to $100 billion buying up cable companies to pursue an ambitious plan to bundle video, internet, and phone service. He first spent $48 billion acquiring what was the largest cable distributor at the time, Tele-Communications Inc., run by John Malone. A year later Armstrong paid $44 billion for MediaOne Group. Together, the two deals transformed the legacy phone company into the biggest cable operator in the country.
In its press release announcing the TCI deal, AT&T said the acquisition would “provide the broadest set of consumer communications services — including local, long distance, wireless and international communications, cable television, dial-up and high-speed Internet access services — all under the AT&T brand name.” It added that, “following the merger, the new unit intends to significantly accelerate the upgrading of its cable infrastructure, enabling it to begin providing digital telephony and data services to consumers by the end of 1999, in addition to digital video services.”
If that sounds familiar, it should. AT&T’s current CEO Randall Stephenson basically said the same exact thing about the DirecTV deal.
“This is a unique opportunity that will redefine the video entertainment industry and create a company able to offer new bundles and deliver content to consumers across multiple screens — mobile devices, TVs, laptops, cars, and even airplanes,” said Stephenson. “DirecTV is a great fit with AT&T and together we’ll be able to enhance innovation and provide customers new competitive choices for what they want in mobile, video and broadband services.”
The parallels should strike fear into the wallets of AT&T investors given how things turned out the first time around. Armstrong’s plan to use the TCI and MediaOne deals to build a nationwide phone service never took hold in part because he failed to secure the support of other cable operators needed to roll out the service in regions where AT&T did not operate. Wall Street didn’t understand how cable fit with the rest of the company and its core phone business was dying, sending its stock price spiraling downward. Even worse, both the TCI and MediaOne cable systems needed heavy upgrades, making integration difficult and resulting in costly expenses.
After only four years, in 2001, Armstrong was forced to sell the company’s cable assets, which by then had been renamed AT&T Broadband, to none other than Comcast. Ironically, Comcast’s $72 billion purchase of AT&T Broadband is what vaulted it into the position of the country’s largest cable operator, and served as the platform that has since allowed it to acquire Adelphia Communications, NBC Universal, and now Time Warner Cable, among others.
A lot has changed between then and now, and in hindsight Armstrong’s timing is likely more to blame for the failure than his vision. Indeed, there is little question that his belief that consumers would want a bundled offering of video, internet, and phone service was ahead of its time. And the rise of wireless communication, faster internet speeds, and larger broadband capacity has changed the technological landscape to better serve up bundled services to consumers.
But, there is an eery similarity to the TCI and MediaOne deals in terms of where AT&T is today and what it is buying in DirecTV.
For one, AT&T’s lucrative wireless business in the U.S. is facing slowing growth as competition from upstarts like T-Mobile USA and others are taking a larger share of the market. As a result, AT&T has been a bit all over the place strategically, trying to buy T-Mobile for $39 billion in 2011 in a deal that was ultimately rejected by regulators or earlier this year exploring a deal for European wireless operator Vodafone.
Integrating the two companies won’t be simple either since they currently deliver video via different methods — AT&T uses fiber optics and wireless, while DirecTV uses satellites. Further, achieving the broadband rollout and over-the-top streaming delivery executives are championing as a key rationale for the deal means AT&T will need to invest heavily to upgrade the quality of both its wireless and broadband networks.
Moreover, while the deal is structured in a way that is financially beneficial to AT&T, it also isn’t cheap. Indeed, AT&T is paying top dollar — $95 per share, or $67.1 billion total, in cash, stock, and assumed debt — for a company that apparently had no other interested buyers and is facing its own strategic challenges, owed to the fact that its lack of a broadband or telephony service means it can’t offer its own bundled package of products to consumers. That’s to say nothing of the regulatory risk inherent in the deal, which won’t cost AT&T money in the form of a breakup fee, but could certainly depress its stock price if rejected.
None of this is to suggest that acquiring DirecTV is bad move for AT&T or that Stephenson’s vision is unsound. To be sure, his timing may even prove prescient given the pace of technological advancement and the increasing cracks in the traditional television distribution landscape.
But against the backdrop of what happened 16 years ago, one can understand if AT&T shareholders are feeling more anxious than excited about this deal. History does have a way of repeating itself.
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