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AT&T defends benefits of proposed DirecTV merger

In two separate congressional hearings, AT&T's CEO makes the case for the $48.5 billion proposed merger with DirecTV.

AT&T CEO Randall Stephenson testifies before the Senate Judiciary Committee on its planned merger with DirecTV Screenshot by CNET/Marguerite Reardon

AT&T CEO Randall Stephenson was in the hot seat in two different congressional hearings Tuesday defending his company's promised benefits and rationale for a proposed merger with satellite TV provider DirecTV.

During judiciary committee meetings in both the US Senate and House of Representatives, CEOs from AT&T and DirecTV reiterated the benefits of their $48.5 billion proposed merger, which includes expanded broadband access for all AT&T customers. The companies also emphasized that without such a merger neither company would be able to compete against cable giants like Comcast.

Public interest advocates from Free Press and Public Knowledge called AT&T's bluff on its promises, stating the company has made similar promises and justifications for each merger it's proposed since buying BellSouth in 2006.

"Again and again, AT&T makes the same arguments and the same promises when it wants to acquire a competitor," said John Bergmayer of Public Knowledge during the House Judiciary Committee hearing. "Yet no merger ever seems to be quite enough for it to achieve its goals, leaving AT&T ample headroom to re-promise and re-commit to the same goals the next time around."

This merger is the second major marriage between communications companies that the government is considering this year. Regulators are also reviewing a merger between the nation's largest and second largest cable operators Comcast and Time Warner. There are also rumors that the two smallest national wireless operators, Sprint and T-Mobile, will strike a deal to merge.

Even though the public opposition to the Comcast/Time Warner merger has been more intense than criticism of possible AT&T/DirecTV or Sprint/T-Mobile mergers, for many consumer advocates the deal between AT&T and DirecTV is another sign that the market is in danger of too much consolidation.

What is AT&T promising?

Generally speaking, AT&T is promising improved Internet access for rural customers, faster speed services for many of its customers, and greater efficiencies, which will allow it to invest more in its network. Specifically, in its public interest statement with the Federal Communications Commission it said it will "upgrade two million additional locations to high-speed broadband with GigaPower fiber to the premise and expand our high-speed broadband footprint to an additional 13 million locations."

Bergmayer of Public Knowledge said in his House testimony that it's hard to know if these promises are really above and beyond what AT&T has already promised. Matt Wood of Free Press reiterated this argument in his Senate testimony. AT&T has already allocated billions of dollars through its Project VIP to upgrade its wireless and wireline broadband networks, including the deployment of more fiber to at least 21 additional markets.

These critics each pointed out that when AT&T was seeking approval for its merger with T-Mobile in 2011, the company made similar arguments Then, AT&T said that it needed T-Mobile's spectrum in order to cost-effectively expand its 4G LTE network to 294 million potential customers.

At the time, AT&T's Stephenson said, "this transaction represents a major commitment to strengthen and expand critical infrastructure for our nation's future."

Regulators actually rejected AT&T's arguments, and the company withdrew its acquisition of T-Mobile. As a result, AT&T ended up giving T-Mobile wireless spectrum and paying a hefty break-up fee, which T-Mobile used to upgrade its own network. In spite of these setbacks and the loss of the merger, AT&T still managed to expand its 4G LTE network. The company is on track to cover more than 300 million potential customers with the service by the end of this summer.

The advocates also accused AT&T of not fulfilling its stated promises after previous mergers were approved. For example, when AT&T bought BellSouth in 2006, it promised to offer broadband access to every household within its territory within a year. AT&T had said that 85 percent of its customer base would access the Internet via its wireline broadband service, and 15 percent would access it via wireless services.

But five years later, AT&T said it was unable to fulfill this promise because it was "economically unfeasible" to provide the high-speed access to about a quarter of its customers. Instead in 2012, AT&T said it would provide broadband access to these customers via its more expensive 4G LTE service, which generally offers slower speed service and also requires data caps.

Stephenson denied during the House hearing that AT&T has not met its earlier merger obligations and called the accusation "patently false."

During the Senate hearing Sen. Al Franken (D-Minn.) stressed AT&T's broken promises. He pointed out that even when AT&T supposedly fulfilled its merger obligations, it did so half-heartedly. Specifically, he said that in its merger with BellSouth, AT&T promised to provide standalone broadband access. It did offer that service, but the company didn't advertise it nor make it easy to find.

"Most customers didn't know (the option) existed," he said. "It sounds like a broken promise to me."

Franken asked Stephenson if AT&T would commit to selling such a standalone plan as a condition of this merger, and if the company would ensure it was clear and visible to all its customers.

Stephenson didn't respond to the accusation that AT&T had broken its promise in the merger with BellSouth, but he said AT&T would indeed commit offering standalone broadband and making it visible to customers.

The argument for merging

Even with the criticism of AT&T's past behavior following its previous merger, it still maintained that without this deal with DirecTV, there is no way it can compete against big cable operators. AT&T emphasized that this is especially true as it looks like Comcast will be allowed to merge with Time Warner, creating an even larger rival. Franken noted that this argument on its own is not enough to justify the AT&T/DirecTV merger, but Stephenson and DirecTV CEO Michael White maintain that it is.

DirecTV CEO Mike White. DirecTV

The argument goes like this: Consumers want to buy bundles of broadband and TV service, instead of buying these services separately. DirecTV has never been able to effectively compete against cable companies because it lacks an integrated broadband solution. And AT&T, even though it offers its own TV service, can't get the necessary scale to make this service profitable.

Only by combining the two companies can AT&T truly compete against cable, the argument continues. This is especially true when it comes to video. Stephenson noted in both the House and Senate hearings that AT&T pays $0.60 for every $1 it makes on video to programmers. White admitted that the fees it pays for programming is less than what AT&T pays for the same programming.

"We lose money on our video product," Stephenson told lawmakers during each hearing.

Stephenson was unable to guarantee that AT&T would actually benefit from the lower programming costs if the merger was approved. He stopped short of promising that if it was able to negotiate lower programming costs that those savings would be passed on to consumers. But he emphasized that AT&T would be able to use this money to invest further in its broadband market.

"The fiber TV product becomes more profitable with the DirecTV," Stephenson said in the House hearing. "So this allows us to build more fiber to the home. It makes fiber more compelling."

What's it all mean?

While both hearings provided lawmakers a platform for discussing their concerns about the merger, neither chamber actually has any say over whether the merger is approved or not. It is ultimately up to the FCC and the Department of Justice to determine whether the merger benefits the public interest and doesn't violate antitrust laws.

But the hearings do offer a glimpse into the arguments the companies are using to support their bid.