Betting on live and over-the-top

At its core, there is no great mystery (or great strategic vision) behind AT&T’s acquisition of DirecTV. As more services are delivered via IP over broadband networks, previously distinct business such as voice, media delivery, home automation and data, are becoming much less distinct. No matter their industry of origin, service providers of all stripes increasingly are all in the same business (or collection of businesses). So the real battle has become one simply of subscriber bases and customer lock-in rather than the value or margins of any one service. Eventually, every service provider will be delivering everything to everyone.

In buying DirecTV, AT&T is spending $67.1 billion (net of debt) to buy 24 million subscribers, full stop. The details of what it ends up selling them, and when, will be worked out later. All the talk now of bundles, build-outs and leverage with content owners is just to give Wall Street and the federal regulators who will need to sign off on the deal something to chew on in the meantime.

Notwithstanding AT&T officials’ protests to the contrary, the DirecTV deal was certainly hastened by Comcast’s deal to acquire Time Warner Cable. The latter deal was the opening gun on what is likely to be a land rush for subscribers — any subscribers —  and there are only so many large blocks of subscribers out there ripe for the picking. AT&T picked DirecTV because it was the largest such block, and because the companies had been circling each other since 2009 so the rough contours of the deal were already known by both sides and could be finalized quickly. Speed was of the essence.

It also didn’t hurt that the deal will be cash flow accretive to AT&T at a time when analysts were starting to worry about its dividend commitments.

That’s not to say the deal has no strategic value to AT&T beyond the raw number of subscribers, however, or at least potential value. As has been widely reported, the deal includes an out-clause for AT&T in the (unlikely) event DirecTV is unable to renew its deal with the NFL for the “Sunday Ticket” package at a reasonable price.

“Sunday Ticket” has been crucial to DirecTV’s growth. One in 10 DirecTV households subscribe to the package of out-of-market NFL games and pay $240 a year for it. The merger will allow AT&T to extend that franchise to non-DirecTV subscribers via its mobile platform, giving it an answer to Verizon’s deal with the NFL to stream in-market games to mobile devices.

The importance of “Sunday Ticket” to the AT&T/DirecTV deal underscores the degree to which the extent to which live streaming is starting to drive deals and investment in the over-the-top video space, on both mobile and fixed platforms, just as it is driving retransmission deals in the traditional TV space.

It’s no coincidence that rumors of Google’s possible $1 billion acquisition of live-stream gaming site surfaced at the same time news of the AT&T/DirecTV deal broke. YouTube has stumbled in its efforts to date to establish a robust live-streaming platform, but has come from nowhere to become one of the top 15 applications on fixed platforms worldwide, according to Sandvine, and now accounts for more than 40 percent of live-streaming traffic by volume during peak hours, according to Qwilt, putting it well-ahead of YouTube.

As I discussed in a post last month, the tools for managing and monetizing live-event streaming are getting better and more scalable, at a time when advertisers are increasingly focused on live, DVR-proof programming. Twitch attracts 43 million monthly users in real time, weighted heavily toward a hard-to-reach demographic, in a setting where they are highly engaged. That would be a highly desirable audience for many advertisers if Twitch were on a real, grown-up platform with the tools target and reach them.

Live events are also likely to be critical to the growth of the mobile video business, particularly as more spectrum becomes available after 2015 and technologies like multicasting develop. Consumers may be wary of paying data charges to watch on-demand content they could watch at other times on non-metered platforms. But for most consumers, live events still need to be watched live, and they’ll pay for the ability to watch them. Next month’s FIFA World Cup soccer tournament is likely to be the most live-streamed event ever, and could drive 40 percent of all network traffic in some countries, according to Sandvine.

Increasingly, if you want to make an impact going over-the-top you need to go live.