AT&T Gambles on DirecTV

AT&T on Sunday announced it had agreed to acquire DirecTV in order to expand its consumer offerings across additional platforms and better compete in the ever-evolving telecom industry.

The merger of the U.S.’ second-largest wireless provider and second-largest pay-TV company would be worth about US$48.5 billion. With the inclusion of DirecTV’s net debt, the total transaction value would rise to $67.1 billion. AT&T will pay $95 — $28.50 in cash and $66.50 in stock — for each share of DirecTV, about 10 percent above DirecTV’s closing price last week.

Major Expansion

AT&T pointed to DirecTV’s brand recognition, its content relationships and its growing business in Latin America as reasons the company would be a good partner. With DirecTV’s offerings, AT&T said it would be able to expand its broadband offerings to 70 million locations, especially in rural areas, and be better equipped to manage customer demands for content on a variety of platforms.

The acquisition is the latest example of consolidation within the telecom industry. Comcast recently announced its $45.2 billion deal with Time Warner Cable that, if approved, would create the U.S.’ largest television and Internet provider.

Both deals face regulatory hurdles. AT&T’s acquisition must be approved by the FCC, the Department of Justice, a few U.S. states and some Latin American countries, a process that AT&T says should be able to close within 12 months.

Good Move?

The rewards AT&T may reap for the billions it intends to shell out for DirecTV are unclear, said Jonathan Chaplin, analyst at New Street Research.

“The deal marginally augments the value of the consumer wireline business,” he told the E-Commerce Times. “However, this business is in decent shape today and accounts for just 15 percent of AT&T’s value. The business most at risk is wireless, and this deal does little if anything for wireless.”

What AT&T really needs from this merger is better negotiating power, Chaplin said. A bigger, more powerful company has more leverage when trying to navigate the content deals that are increasingly important in a media industry full of digital entertainment options.

“AT&T could have acquired all the rights they wanted on a standalone basis, and it is not clear that AT&T will get a significantly better rate on over-the-top content rights because of DirecTV’s scale,” he added.

Industry Consolidation

Regardless of how the deal works out for AT&T, the move is one more indication that companies within the telecom industry are moving toward consolidation. Federal regulators now have their hands full when considering mergers.

That trend won’t end with AT&T’s acquisition, said tech analyst Jeff Kagan. In addition to the pending Comcast-TWC deal, SoftBank, which recently acquired Sprint, also is considering a bid for T-Mobile.

“We are entering the next era of consolidation,” Kagan told the E-Commerce Times. “We have seen this happen several times over the last several decades. This wave of mergers is part of a longer-term process of reinventing the industry. I definitely think we will see more mergers announced in coming months and quarters. There are still plenty of large companies who want to get larger.”

Rachelle Dragani is a freelance reporter based in Brooklyn, NY. She enjoys staying on top of e-commerce deals, reporting on what new gadget is coming your way, and keeping tabs on anyone trying to hack into your info. Feel free to e-mail her at rachelle.dragani@newsroom.ectnews.com. You can also connect with her onGoogle+.

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CRM Buyer Channels

Walmart Announces Merchandise Hub for Netflix

Walmart and Netflix are teaming up to sell merchandise pegged to the streaming media provider’s content.

“Through this new partnership, Walmart will not only offer products that bring the imagination of Netflix creators into reality, but Walmart customers and Netflix superfans will also find a new, exciting entertainment destination,” Walmart Executive Vice President Jeff Evans wrote in a news release Monday.

“The Netflix Hub brings together some of its most popular shows in its first digital storefront with a national retailer,” he added.

Merchandise will be tied to such shows as “Stranger Things,” “Nailed It!,” “CoComelon” and “Ada Twist, Scientist.”

Among the items offered when the Hub opens this fall are the Ada Twist Cuddle Plush ($10.97), “Squid Game” t-shirts, the “Stranger Things” Bluetooth cassette player ($64.88) and the Witcher Netflix Transformed Geralt Dark Horse Collectible Statue ($59.88).

Evans also noted the Hub will also offer a feature called Netflix Fan Select. It offers fans of Netflix shows an opportunity to vote for merchandise they’d like to see from the service’s stable of favorites.

Competing With Amazon

The new partnership will have benefits for both Walmart and Netflix.

Walmart wants to compete with Amazon, and part of that competition includes streaming services, maintained Ross Rubin, the principal analyst with Reticle Research, a consumer technology advisory firm in New York City.

“A partnership with Netflix could be used for further collaboration. Walmart might start offering select content from Netflix, for example,” he told the E-Commerce Times.

“There’s a lot of ways it could work without Walmart offering the full-blown Netflix service,” he added.

Zain Akbari, the equity analyst for Walmart at Morningstar, an investment research company in Chicago, noted that the partnership allows the retailer to capitalize on media-linked commerce without making the kind of investment Amazon made to do it.

Although Walmart sold its Vudu streaming service in 2020, its interest in interactive and shoppable media remains, he explained.

“From its standpoint a deal like this allows Walmart to focus on what it does best while leaving the content side of the equation to an established leading player,” Akbari told the E-Commerce Times. “Ultimately, it’s another avenue by which Walmart can expand its building e-commerce footprint.”

Good Business Move

“Allying itself with one of the two streaming market leaders — Netflix and YouTube both capture about six percent of total TV time — makes good business sense for Walmart,” added Charles King, the principal analyst at Pund-IT, a technology advisory firm in Hayward, Calif.

“The new storefront should please the company’s existing clients and attract new customers, and also provide a point of competitive differentiation from Amazon,” he told the E-Commerce Times.

Having exclusivity on products from Netflix’s hit shows is another benefit of its new partnership.

“Squid Game is a perfect example,” noted Michael Inouye, a principal analyst atABI Research.

“You can imagine what the opportunity would look like if this partnership was already in place and Walmart was the only place for official Squid Game Halloween costumes,” he told the E-Commerce Times.

He added that there is a lot of value but also a lot of cost in original programming, but to date, no one has done as well as Netflix with it.

“This allows Walmart to generate some of the same benefits to their core operations of an in-house streaming service without having to make those investments in original content,” he said.

Bricks and Mortar Prize

Netflix, too, benefits from the new arrangement.

“Walmart’s massive size and geographic reach make it a great partner for Netflix to reach shoppers,” King observed. “The new store should help drive sales during the upcoming holiday shopping season.”

“Netflix has tried for a while to monetize its content other ways. Selling merchandise is one of them,” added Morningstar Netflix equity analyst Neil Macker.

“Netflix is not an e-commerce company,” he continued. “It’s a streaming company. It has a different business model than a pure e-commerce company. By working with Walmart, they can get help with building a site, fulfillment, shipping and things like that.”

Netflix is also looking to diversify beyond subscriptions for its streaming service.

“It’s already announced its movement into games,” Rubin noted. “This is a way to take a page from Disney’s playbook.”

“Disney is very skilled at driving merchandise from characters in its franchises,” he continued. “Walmart offers a strong retail presence from which Netflix could potentially build that and realize more revenue from its original content and franchises.”

Netflix may also be looking beyond online involvement with Walmart.

“If Netflix could get into Walmart’s brick and mortar stores, that would be the bigger prize for Netflix,” he said. “To have a section of the stores promoting its properties would be a big win for Netflix.”

Crucial Channel

Inouye believes that in time, Walmart will become a crucial distribution channel for Netflix.

“Since many of Netflix’s shows are launched all at once — although there are a growing number that launch on a timed schedule — it can be extra challenging for Netflix to keep excitement up around a TV series when the next launch may be more than a year away,” he explained.

“Having merchandise and content to keep fans invested and engaged in this popular IP is massive for Netflix,” he said.

Creating original content can be a hit or miss proposition, he noted. Selling merchandise can help offset the cost of the misses.

Like Disney, Netflix would like to leverage its IP well beyond the video content itself, he maintained.

“Netflix is still in its early days here,” he said, “but it is starting to expand into new territories and opportunities and the Walmart deal could become a key piece to that strategy.”

“This is particularly critical in those markets, like North America, where future subscription growth is limited,” Inouye added.

“In these more mature markets revenue growth has to come from price increases or these alternate channels,” he continued. “The latter allows them to keep engagement higher, bring additional revenue, while ideally slowing the rate of subscription price hikes, which helps maintain — and slowly grow — the installed base.”

“Other content companies have looked to marketing and selling merchandise to bring additional revenue by capitalizing on hot IP — Rovio for example has done this with its “Angry Birds” IP — but with Netflix, this could be on another scale,” he concluded.

John P. Mello Jr. has been an ECT News Network reporter since 2003. His areas of focus include cybersecurity, IT issues, privacy, e-commerce, social media, artificial intelligence, big data and consumer electronics. He has written and edited for numerous publications, including the Boston Business Journal, the Boston Phoenix, Megapixel.Net and Government Security News. Email John.

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