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Here's why AT&T is trying to buy DirecTV

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It's all about football and broadband internet

Yesterday's news that AT&T had agreed to acquire DirecTV for a whopping $48.5 billion came as no surprise to observers of the pay-TV industry. "If you think back to the ’90s the marketplace was full of small companies. We've seen wave after wave of mergers and now there are fewer and larger companies," says Jeff Kagan, an independent analyst. "Going forward we're going to see even fewer and even larger competitors going forward or moving toward a national, competitive marketplace for television, telephone, internet, wireless."

For AT&T, the deal is mainly about gaining scale in video and acquiring the bargaining power that comes with that to license premium content — particularly with the looming specter of a tie-up between Comcast and Time Warner Cable. AT&T will combine its 5.7 million U-verse TV customers with DirecTV's roughly 20.3 million US subscribers. "All of a sudden you're talking about the number-two pay-TV provider in the country," says Dan Rayburn, an analyst with Frost & Sullivan. "That means you can negotiate for better programming, and at a better price."

NFL Sunday Ticket is a huge deal

Having access to premium content is key to AT&T's ambition to become a major player in the world of streaming video. "DirecTV is way ahead of AT&T in terms of licensing deals. Something like NFL Sunday Ticket is a game-changer for AT&T if they can offer it as part of a package to their wireless customers," says Rayburn. AT&T CEO Randall Stephenson said on an investor call this morning the deal will allow AT&T to offer premium video on all screens, from TVs to smartphones, from cars to airplanes.

Just how important is big-ticket content like the NFL? The deal terms actually stipulate that AT&T can walk away from the merger if DirecTV doesn't win the contract with the NFL to renew that exclusive.

There are synergies on the DirecTV side as well. Currently DirecTV can't offer its customers competitive high-speed internet as part of its satellite package. "AT&T can bring high-speed internet to those same customers," says Rayburn. AT&T's Stephenson says that he expects the deal will mean 15 million DirecTV customers, many in rural areas, would be given access to broadband internet using a combination of technologies, including wireless. (DirecTV currently offers its customers satellite internet through packages with Exede, which can deliver download speeds of 12Mbps.)

AT&T helps solve DirecTV's broadband internet problemIn a world where double- and triple-play packages are virtually ubiquitous, this kind of upgrade will help ward off competition. "The one big thing we’ve been missing is a two-way broadband pipe to the home," says DirecTV CEO Mike White. "With this deal we can bundle video and broadband to combat the dominance of cable." Of course, the cry to combat "the dominance of cable" overlooks what White and Stephenson would prefer to obfuscate: DirecTV already counts over 20 million subscribers in the US alone, compared to 26.8 million for Comcast. By that metric, the satellite provider is no underdog.

DirecTV also gives AT&T a boost to its bottom line — it reported a free cash flow of around $2.6 billion last year — and gives the telecom giant substantial new inroads in Latin America: DirecTV currently counts more than 18 million customers there. On the call this morning, Stephenson made several mentions of AT&T's desire to expand aggressively in Latin America, especially Brazil.

"If you thought the net neutrality folks were angry before, this is really gonna set them off."

The deal, like Comcast–Time Warner Cable, will need to pass regulatory scrutiny before it's approved. If both the mega-mergers do succeed, the media and communications landscape in America will have shifted dramatically. "You're talking about a world where two companies control 60 percent or more of the paid-TV and internet market," says Rayburn. "If you thought the net neutrality folks were angry before, this is really gonna set them off."