Weekly Telecom Notes: Verizon and AT&T

+1.21%
Upside
42.03
Market
42.54
Trefis
VZ: Verizon logo
VZ
Verizon

The rumor mill was active this week as Verizon (NYSE:VZ) reportedly announced intentions to enter the online video streaming business next year. After Netflix looked at buying Hulu last summer, reports surfaced that Verizon may partner with Redbox to offer a joint streaming service. Later, Netflix (NASDAQ:NFLX) was also pitted as a possible acquisition target for Verizon. Meanwhile, AT&T’s (NYSE:T) T-Mobile deal inched closer to its demise after both the companies, along with the Justice Department, sought to postpone any further hearings on the case until January 18th.

Verizon

The online streaming market has seen tremendous growth, enabling market leader Netflix to grow its revenues by almost three times in the last four years. Launching its own streaming service will therefore enable Verizon to enter this high growth market and make a profitable venture out of it. It could also bundle this service with its existing wireless service and gain a competitive edge in the wireless market by differentiating itself from its rivals.

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However, a sticking point for the launch could be a lack of relationship with content providers who might think twice before striking deals with Verizon that might jeopardize their existing long-time relationship with cable operators. (see Verizon Will Ride New Streaming Service to $43.50)

This is where Verizon is looking for partners with an already existing relationship with content providers to fill in. Among all the possible options, we believe AT&T may favor Redbox or choose to go it alone. (see Verizon Should Partner with Redbox, But Could Stream Solo Otherwise)

This is because we believe content owners might be more welcoming to a disruptive force that could challenge the supremacy of Netflix in the market and enable content providers to demand higher pricing for their movies and TV shows to avoid devaluing their content. Moreover, Netflix has overpaid for the content deals it has signed. Its current content obligations stand at $3.5 billion, almost thrice of what it was at the start of the year. With a market cap of $3.8 billion, obligations of $3.5 billion to content providers and a declining subscriber base to boot, Netflix has its hands full. (see If Verizon Buys Netflix, Juicy FiOS Revenues are at Risk)

Whichever way Verizon enters the video-streaming business, the clear losers here are the cable operators that recently signed deals with the carrier to give away their wireless spectrum and with it, their chance to return the favor and challenge Verizon in its core business. The timing behind Verizon’s revelation of its online streaming plans couldn’t have been more impressive.

See our complete analysis for Verizon stock here

AT&T

AT&T’s T-Mobile acquisition seems all but dead now. The company and Deutsche Telekom, T-Mobile’s parent, announced Monday that they have asked the District Court Judge to stay any further hearings until January 18th, 2012 so that they could “evaluate all options.” This came after the Justice Department announced its intentions to postpone or dismiss its lawsuit seeking to block the deal. The DoJ believes that with AT&T’s withdrawal of its merger application with the FCC, it has no reason to pursue the case. With this delay it seems increasingly unlikely that the merger will go through in its current form before the September 20 deadline next year.

Whether the deal goes through or not, there is one company that stands to gain in both cases. Dish Network had acquired some wireless spectrum earlier this year in a couple of deals with smaller wireless companies, DBSD North America and Terrestar Networks, and was looking to put this spectrum to use “to create a national wireless network, video, voice and data”. If AT&T sells some of T-Mobile’s assets to gain approval, Dish could lap up some of it. If the deal doesn’t go through, Dish could still partner with T-Mobile and further its wireless ambitions. (see Dish Could be a Key Beneficiary of AT&T’s Hunt for Spectrum)

See our complete analysis for AT&T stock here

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