DBRS Comments on AT&T Inc.’s Agreement with The DIRECTV Group, Inc.
DBRS notes that the recent announcement by AT&T Inc. (AT&T or the Company) to market and sell video services with The DIRECTV Group, Inc. (DIRECTV) on a co-branded basis after January 31, 2009, continues to support AT&T’s overall video strategy and has made its satellite service offerings more upscale with DIRECTV’s programming packages rather than its current offerings with its agreement with DISH Network Corporation (DISH). The current agreement with DISH expires January 31, 2009.
This upscale move in conjunction with its AT&T U-verse Internet protocol (IP) video service positions AT&T to more effectively compete with cable operators by bundling video services with voice, high-speed Internet and wireless services. DBRS notes that new AT&T DIRECTV subscribers who sign up for a bundle of services will receive a discount from AT&T and have the option to receive one bill for all of these services.
AT&T is investing heavily to deploy its U-verse video service (expected to pass 30 million households by the end of 2010), with a goal of retaining its subscribers while gaining a share of the video market. Currently, AT&T has more than 500,000 U-verse video subscribers and has a goal or reaching one million subscribers by the end of 2008. Outside of this territory, AT&T relies on selling and marketing a co-branded video service with a satellite operator to offer video service as part of its bundle.
While this does not affect DBRS’s ratings of AT&T (“A” and R-1 (low) with a Stable trend) nor those of DIRECTV Holdings LLC (BBB (low) and BB (high) with a Positive trend), which will likely benefit from increased subscriber growth and lower subscriber turnover as a result of this agreement, any resulting impact at DISH (BB and BB (low) with a Positive trend) may result in a delay in any possible rating improvement. DBRS had indicated in October 2007 that rating improvement at DISH was predicated on (1) ongoing subscriber growth and scale benefits, (2) continued increases in profitability as evidenced by expanding EBITDA margins and (3) increased free cash flow and EBITDA through most of a business cycle.
DBRS notes that more than two million of DISH’s 13.8 million subscribers came from the AT&T sales channel, with 15% of its gross subscriber additions coming from that channel in Q2 2008. While DISH will likely have additional challenges in retaining and growing its subscriber base as a result of this announcement, DBRS expects DISH to focus on subscriber retention. DBRS believes that the current agreement with AT&T has provided DISH with benefits such as lower subscriber turnover, compensating for its lack of bundled services.
DBRS believes that DISH’s focus on subscriber retention is increasingly important in an operating environment for DISH that includes (1) strong competition from the U.S. cable operators in the urban markets, whose ratings range from BBB (high) to B (high), and (2) economic pressures creating cyclical pressures in terms of its gross subscriber additions.
In addition to AT&T Inc. and other operators in the U.S. telecom industry, DBRS rates the following issuers in the U.S. cable and satellite industry (see the link below for the most recent peer comparison information sheets):
– Comcast Corporation, BBB (high) and R-2 (high), Stable trend.
– Time Warner Cable Inc., BBB, Under Review – Developing.
– DIRECTV Holdings LLC and DIRECTV Holdings LLC/DIRECTV Financing Company Inc., BBB (low) and BB (high), Positive trend.
– Cablevision Systems Corporation and CSC Holdings, Inc., B, Stable trend, and BB (low), BB (high) and BBB (low), Stable trend.
– DISH Network Corporation and EchoStar DBS Corporation, BB (low) and BB, Positive trend.
– Mediacom Broadband Group and related entities, from B (low) to BB, Negative trend.
Note:
All figures are in U.S. dollars unless otherwise noted.
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