Is AT&T Wrong about DirecTV?

It is not hard to find critics of the business strategy AT&T has in buying DirecTV. Subscription TV is a mature business, in decline, even if DirecTV is a well-run company throwing off lots of cash flow.

Critics say the other satellite provider, Dish Network, also sees the danger inherent for a satellite video provider, and is itself potentially aiming to become a mobile service provider, in some way. Dish Network CEO Charlie Ergen has said that, if  he were entering the subscription video entertainment business today, he might well not use satellite for delivery.

Instead, he’d do something like Sling TV, an over the top, Internet-delivered service.

AT&T has argued it gains a nationwide video footprint, adds scale efficiencies in its purchasing of content and creates a national triple play or quadruple play capability (video, Internet access, mobile voice and messaging).

Some of us would say those are helpful, but not decisive. Instead, DirecTV is an important tactical move. First of all, AT&T alway has grown primarily by acquisition.

So DirecTV grows free cash flow and revenue.

But what if the gains are not necessarily permanent? No problem. Nothing is permanent, for any service provider. In the meantime, AT&T gains needed free cash flow, while it is in the process of building the new lines of business to replace declining voice, messaging and eventually video revenues.

Transitions matter, especially for large firms such as AT&T that have been through large transitions before, such as the shift from long distance voice to mobility as the strategic growth driver.

But those transitions can take a decade to play out fully. During the transition, cash flow matters.
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