Dish Approaches DirecTV About Possible Merger

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Dish Network (NASDAQ:DISH) has reportedly approached DirecTV (NASDAQ:DTV) about a possible merger between the two satellite TV operators. [1] This has likely come as a response to Comcast’s (NASDAQ:CMCSA) $45 billion acquisition of Time Warner Cable (NYSE:TWC) (See – What Does Time Warner Cable’s Merger With Comcast Mean For The Industry?), as it appears that the entire pay-TV industry is heading for consolidation. It should be noted that the satellite companies tried to merge in 2002, but the deal was blocked by the FCC as it would have eliminated competition. This time around things may be different; while the companies compete with each other in the satellite arena, the arrival of telcos has increased competition in the pay-TV industry. If one accounts for online video services such as Netflix (NASDAQ:NFLX), as competitors, then the deal should face fewer hurdles on competition front. Dish and DirecTV together have a subscriber base of 35 million, representing a 36% market share of the entire U.S. pay-TV industry. A merger could be meaningful as it would result in big savings on programming costs. It will be interesting to see how events unfold from here and how it would shape the pay-TV industry in the long run.

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Dish And DirecTV Merger Synergies

DirecTV has more than 20 million pay-TV subscribers while Dish has over 14 million. [2] Together they would be the largest pay-TV operator in the U.S. Both companies have been mulling content deals to offer programming over the Internet. A merger could help these companies to gather the necessary capital and develop a new television experience that suits viewers who want to view content at their preferred time and place, on any device. Another benefit of a merger would be reduced programming costs.

Beyond video, Dish has amassed some spectrum and has plans to roll out a nationwide wireless service in the U.S. Dish believes that the traditional pay-TV industry will decline in the coming years and the company sees growth in a viable bundling option where it can combine its satellite service and wireless spectrum. The value of Dish’s amassed spectrum is more than $21 billion, according to our estimates. However, it appears Dish’s spectrum would be more valuable for a telecom company such as AT&T (NYSE:T), which can boost its video and wireless capability and better compete with cable mammoth Comcast-Time Warner Cable.

The primary difference in the two satellite companies lies around the quality of subscriber base. DirecTV has benefited from its exclusive programming such as NFL Sunday Ticket, which has helped the company in maintaining higher average monthly revenue per subscriber (ARPU). In 2013, the company’s ARPU in the U.S. was $102. On the other hand, Dish’s ARPU was $80.37 in 2013, much lower than DirecTV’s. [2]

The rumors about a marriage between DirecTV and Dish Network may or may not come to fruition, but it is clear that consolidation in the pay-TV industry is feasible and can help the companies compete better against alternatives, including telcos such as Verizon (NYSE:VZ). Dish’s stock surged to a 14-year intraday high after the news first broke on Wednesday.

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Notes:
  1. Dish’s Ergen Said to Approach DirecTV CEO About Merger, Bloomberg, Mar 27, 2014 []
  2. Dish and DirecTV’s SEC Filings [] []
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