Why is AT-T getting rid of DIRECTV?

DIRECTV is to be spun off from AT&T, its parent company, in the next couple of months, more than 5 years after the telecommunication giant purchased the satellite television firm for $49 bln. This decision has been made as AT&T plans to reduce its debts and concentrate more on wireless and fiber internet services as well as the business of HBO Max streaming. There are several key reasons why AT&T ultimately decided that divesting DIRECTV made strategic and financial sense:There are several key reasons why AT&T ultimately decided that divesting DIRECTV made strategic and financial sense:

Declining Satellite TV Industry The whole satellite TV business has been declining in recent years mainly due to the availability of cheaper streaming TV services like Netflix, Hulu, Disney+, and Sling TV. Cable television providers such as DIRECTV and DISH have been experiencing a decline in millions of video subscribers due to the cord-cutting phenomenon. DIRECTV, for instance, has shed nearly 7 million of its satellite TV customers since their number peaked in 2015. As this industry was positioned in structural decline, DIRECTV was not emphasized as a significant growth opportunity for AT&T.

High Content Costs Offering satellite TV service implies paying big affiliate fees to the media organizations for their cable programs and content. These content licensing costs escalated as competition between pay TV operators increased. Although DIRECTV has been generating substantial revenues, its profit margins were gradually sliding over the years, thus, diluting the attractiveness of the business for AT&T. The decision to divest DIRECTV also helps AT&T to reduce billions in annual programming obligations in the future.

Debt Reduction Thus, the primary driving force for AT&T to spin off DIRECTV into a new company is debt reduction. It also embarked on acquisitions of both DIRECTV and Time Warner through incurring huge debts with the intention of consolidating on its growth. Currently, AT&T has more than $180 billion in debt from the company’s balance sheet as at June 2021. These actions will help AT&T free cash and improve its balance sheet: Shedding DIRECTV will help AT&T pay down debt. The DIRECTV transaction and other asset sales could potentially lower AT&T’s net debt by up to $150 billion by through 2023.

Focus on Core Priorities Leveraging the pressure on the balance sheet and with cord-cutting intensifying throughout the pay TV market, DIRECTV was no longer a promising growth driver for AT&T. Instead, AT&T sought to focus its efforts and spendings on more promising segments – its nationwide 5G and fiber networks, HBO Max streaming service, and wireless services segments. Thus, AT&T can devote more completely to competing in these “connectivity and content” domains by divesting from DIRECTV.

Lack of Cross Sell and Synergies The acquisition of DIRECTV by AT&T in 2015 was done to leverage on the strengths of DIRECTV in video distribution with the wireless, internet and content strength of AT&T. Yet, the expected complementarity of satellite TV with AT&T’s core services was negligible. The attempt to counter cord-cutting by providing packages of DIRECTV / AT&T wireless did not have a great impact. Also, DIRECTV was not completely assimilated to AT&T’s technological infrastructures. A split from AT&T was reasonable given that few material benefits were achieved from maintaining DIRECTV as a wholly owned subsidiary only five years after the merger.

What does this mean for the future of DIRECTV?

DIRECTV having a free run as a stand-alone entity for the second time in its history is actually facing real issues in a shrinking pay-TV market in the US, let alone the growing trend of cord-cutting. Pursuant to the deal terms, both AT&T and TPG Capital, a private equity firm will own a minority stake in DIRECTV. The company intends to run it as a separate business venture under a new name, which is DIRECTV Stream.

Without the scale, resources, or balance sheet backing of AT&T, DIRECTV will have to strip down and adapt in one way or another to offer new value to shareholders if it hopes to thrive in the long term. It might mean paying increased attention to customer service advancements, new streaming TV offerings, or even evolution into a communications service provider. However, as pertains to broader industry trends away from satellite, subscriber losses at DIRECTV is expected to escalate further.

For AT&T on the other hand, it can focus on the development of 5G and fiber broadband, creation of more shows for HBO Max as well as catering for increasing wireless customers. These strategic areas are more in tune with AT&T’s vision of becoming the market leader in broadband connectivity in the United States and a streaming media giant that rivals Netflix, Disney, and Discovery. While unloading DIRECTV will cause DIRECTV to take some initial charges, in the long run it allows AT&T to reduce its balance sheet leverage and focus more on high-growth strategic business areas that are critical for the company. Instead of subsidizing a slowing satellite TV division, AT&T is now set to come out the other side more streamlined, less leveraged, and more committed to expanding the company’s connectivity and entertainment strategies in 5G, fiber, and streaming.