There are a lot of reasons why a merger between DirecTV and Dish Network wouldn't make long-term sense — it would cost too much, it would be the combination of two business that are in rapid decline, it’s anti-competitive, it’s just plain dumb — but that doesn't stop people from bringing up the possibility from time to time. And while talk about a possible deal probably will never truly die, Moffett Nathanson principal and senior analyst Craig Moffett said in a research note Tuesday he may have found the final nail in the Dish/DirecTV merger coffin: President Joe Biden’s $2 trillion infrastructure bill.
In a 19-page research note, Moffett pointed out that the infrastructure bill, which includes about $100 billion for broadband expansion into rural areas, could remove one of the barriers to a DirecTV-Dish combination — the fear that it would reduce TV distribution competition in rural markets from two players to one — but creates another. By giving cable, telco and other operators financial incentives to extend broadband into areas that didn’t make economic sense in the past, it also gives consumers the final reason to dump their satellite TV subscription.
“The Biden infrastructure bill explicitly targets taking the rural core of customers historically served exclusively by satellite providers to zero,” Moffett wrote.
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While opening up the rural broadband market would appear to remove one roadblock to a satellite merger — that such a deal would take down the number of competitors in less populated areas from two to one — it poses another challenge in that it could eviscerate satellite TV’s last stronghold.
“Given the option, for the first time, of choosing not just cable but also OTT alternatives, it’s a safe bet that many customers will simply leave,” Moffett wrote of the satellite TV subscriber base.
The old arguments for a DirecTV/Dish merger appear compelling on the surface — putting the two together would create a satellite TV juggernaut with 23 million subscribers (more than Comcast!) and would produce cost efficiencies and synergies in the billions of dollars per year. But despite the plusses, those that would push for a merger between the two companies are ignoring the one very big minus — consumers are abandoning traditional pay TV structures for more flexible streaming relationships that ensure that a combination would only prolong the inevitable breakdown of the business.
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And it already is breaking down pretty rapidly without any external help. Moffett estimated that pay TV (cable and satellite) has been losing customers at a 7+% clip over the past four quarters. Gross additions for both DirecTV and Dish have also been plummeting — from a combined 6.45 million subscribers in 2016 to 2.36 million subscribers in 2020.
In his report, Moffett wrote that the Biden bill would be a “body blow” to the satellite TV business, but especially for Dish, which has made a focus on rural markets its main focus over the years. The same strategy, according to Moffett, has kept DirecTV’s subscriber losses from going totally in the tank.
While Moffett added that the actual size of the rural subscriber pool is unknown, it is obviously large enough to keep these companies going as it becomes an increasingly important part of their respective businesses.
“As the subscriber bases of the two companies spiral lower, the rural core has been steadily growing as a share of what’s left,” Moffett wrote. “Merging the two companies would not change this dynamic at all.”
And now, he continued, “The federal government wants to spend $100B to make this market segment disappear.”
Dish Network chairman Charlie Ergen has said on several occasions that he believes a DirecTV/Dish merger is “inevitable,” but given that Dish’s future is tied to whether it will be able to successfully build a wireless network, merging with DirecTV shouldn’t be top of mind, according to Moffett.
Dish has about $16.5 billion in debt ($10.5 billion of which is pledged toward the satellite business) with about $2 billion in maturities due in June. Dish could make that payment with cash on hand, but according to Moffett, that would starve the wireless effort of needed cash to fund its buildout.
Dish has said that it will spend about $10 billion on its wireless network, a figure that Moffett has said in the past he believes is strikingly low. Adding pressure to that aspect of the business can’t help the situation.
DirecTV relies on the rural markets as well — Moffett estimates that most of the churn in rural markets is actually between the two satellite companies, so any reduction in that base will adversely affect both companies. In addition, AT&T’s deal to spin off its DirecTV, AT&T TV and U-verse businesses with TPG Capital earlier this year carries a high interest loan (10%) from TPG that also includes a “warrant for 30% of the excess value in the event DirecTV ever realizes an exit at a valuation of greater than $16.2 billion, as it might in the event of a Dish merger,” Moffett wrote.
Dish and DirecTV tried to merge in 2002, when both were much stronger companies and the threat of broadband was minuscule, and the government blocked it. Even as satellite’s fortunes began to wane during a presidential administration that was supposedly open to more deals, the feds reportedly made it pretty clear that they would block a merger, and the current administration appears to be even less inclined to allow a big combination. But ultimately, whether a deal is done will come down to what these things usually come down to — economics. And with the government ready to fund satellite TV’s competitors in its most stable market, those economics don’t look so good.
