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November 20, 2007

AT&T-Echostar Has Implications For Comcast

With an AT&T acquisition of Echostar apparently imminent, I want to reiterate that while in the short-term investors will see the deal as negative for cable, in the long run the outcome may not be nearly as dire feared.

On its most recent conference call, Comcast specifically pointed to AT&T discounting using the satellite bundle (Dish or DirecTV + AT&T wireline + AT&T DSL) as a cause of lower than expected subscriber additions. In fact, Comcast said that the wireline TV offerings form AT&T (U-Verse) and Verizon (FiOS) had not had a material impact. If this is to be believed, then in the short-term an acquisition of Echostar by AT&T looks ominous for cable. AT&T has shown a willingness to discount aggressively and with Echostar in house will be able to more easily execute the strategy nationally. Cable stocks were down 2-3% yesterday and I suspect that this is the reasoning.

While I can't argue with this near-term reaction, I think the long-term is a little trickier. By using Echostar as its primary multichannel TV offering, AT&T is foregoing massive cost synergies available to cable and Verizon which are able to offer the triple play across a single network. Maintenance, billing, and customer service will al be less efficient for AT&T than its peers. This should mean that AT&T's discounting strategy has a limited life. The high cost producer can not maintain the lowest price for long.

An AT&T-Echostar tie-up will surely sour the mood of potential cable investors even further. But if it hastens the day when a stable oligopoly re-emerges it might not be as bad a thing as feared.

Posted by Steve Birenberg at November 20, 2007 12:21 PM in Comcast