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AT&T says merging with DirecTV would help it challenge Comcast. But how?

Randall Stephenson, Chairman and CEO of AT&T and chairman of the Business Roundtable, speaks at the Economic Club of Washington in Washington, DC, June 17, 2014. AFP PHOTO / Saul LOEBSAUL LOEB/AFP/Getty Images

AT&T hit Capitol Hill today to sell Congress on its proposed merger with DirecTV. Among its arguments? If the merger goes through, we can go head-to-head with Comcast.

This isn't exactly a new line. Ma Bell says it needs to buy DirecTV so it can go up against the nation's largest cable company — which stands to grow even larger if regulators approve its deal to acquire Time Warner Cable. AT&T claims that only another telecom behemoth could help rein in such a powerful player.

It's true that each company will be roughly on par in terms of subscribers, if both mergers go through. But beyond their relative size, what exactly would make AT&T a viable competitor to cable? What kind of leverage would AT&T actually enjoy against Comcast? Should we take the one company at its word that it'll be big enough to challenge the other? These are the key questions facing the Justice Department and the Federal Communications Commission, which are charged with reviewing these deals.

AT&T's case boils down to two arguments when it comes to challenging Comcast: A bigger AT&T will lower programming costs and offer a more efficient bundle of services.

Testifying before a House subcommittee Tuesday, AT&T chief executive Randall Stephenson dropped a fascinating statistic. He claimed that for every dollar the company makes off of its video subscribers, $0.60 goes straight to the people who make the content. In other words, 60 percent of AT&T's video revenue turns right around and leaves.

"Our video product is, on its own, unprofitable," Stephenson conceded. To compensate, AT&T has to upsell consumers to a bundle involving video plus another service, such as broadband.

This brings us to AT&T's second argument, which is that a DirecTV merger would promote cheaper bundles. AT&T took aim at what it and DirecTV called a "synthetic bundle" — taking, for example, broadband from one company, combining it with video from another, and then selling that as a package to consumers. Because AT&T and DirecTV each have to visit a home to make two separate equipment installations for the synthetic bundle to work, that drives up costs.

Comcast doesn't have this problem, because a single cable connection delivers both broadband and video. So by combining with DirecTV, said DirecTV chief executive Michael White, AT&T would be able to offer a true bundle in which the different services came from the same company. And that will drive down installation costs for AT&T — perhaps by as much as 20 percent, said Stephenson.

Would this actually help make AT&T more competitive relative to Comcast? Not everyone is convinced. House Judiciary Chairman Bob Goodlatte (R-Va.) raised questions about how effective the strategy would be.

Others, such as Rep. John Conyers (D-Mich.), questioned outright whether AT&T would present a big enough challenge to Comcast. While an AT&T-DirecTV merger may well result in cost savings for Ma Bell, putting it in a stronger position versus Comcast, the combination might cause collateral damage, he said.

"The merger proposed may result in reduced competition for paid television services in many of our nation's largest markets," he said. "The sheer size of an AT&T-DirecTV entity could raise prices for smaller video providers, potentially driving some of them out of business."

Brian Fung covers technology for The Washington Post, focusing on telecommunications and the Internet. Before joining the Post, he was the technology correspondent for National Journal and an associate editor at the Atlantic.



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