Fortune's Stephanie Mehta speculates that embattled DirecTV and Dish could find a home with rising rural phone companies.
New York (Fortune) -- It has been a tough week for satellite television operators DirecTV (DTV) and EchoStar (DISH): First FCC Chairman Kevin Martin signaled his unwillingness to approve a merger of the two companies, a deal that investors seemed to like.
Then came word that Rupert Murdoch's News Corp. (Charts) was souring on satellite and was in talks to swap its 38 percent stake in DirecTV for Liberty Media's (Charts) stake in News Corp. CNBC reported that Murdoch even called DirecTV a "turd bird" - not exactly a term of endearment.
Meanwhile, the operators of small local phone companies are flexing their muscle. Earlier this week Citizens Communications (Charts), a Stamford, Conn.-based carrier that operates in markets such as Rochester, NY, said it would acquire Commonwealth Telephone for $1.6 billion -- a deal that would make Citizens, with 2.6 million phone lines, the 7th largest local phone company in the United States.
Analysts believe other small local carriers, such as Embarq (Charts), spun out of Sprint, and Windstream (Charts), the former local phone business of Alltel, also could be on the cusp of bulking up, scooping up smaller rivals and rural local phone lines that big guys such as AT&T (Charts) and Verizon (Charts) don't want. And that could be very good news for, of all companies, the satellite guys.
Here's why: Murdoch - and plenty of investors - are down on satellite because it can't deliver the "triple play" of communications and video services that the cable and phone companies increasingly are offering customers: telephone, high-speed data and video. In fact, though satellites can offer some two-way Internet service, the price is high and the speeds often are barely better than dial-up. Basically, satellite is really good at one thing: video.
The rural phone companies are good at two things: telephone and broadband. And they are unlikely to embark on expensive construction projects like their bigger brethren, AT&T and Verizon, to bring pay-television services to their customers.
Right now many smaller phone companies (and plenty of big ones, too) have deals to essentially "resell" satellite service to their customers to match cable operators' offers. But Mitch Mitchell, a director with Mercer Management Consulting, contends that these deals are not big wins for the rural phone companies because they do most of the work signing up the customer, then cede much of the revenue to the satellite operator.
"It would be interesting to have a number of these rural companies get together and buy out one of the satellite guys," he says.
It certainly is an intriguing idea. After all, satellite got its start serving remote markets that cable didn't reach. (If you've ever vacationed in the Adirondacks or at a ranch in Wyoming, you've probably seen dish after dish on the locals' houses.) And each side has something the other covets -- a piece of the triple play, which consumers really seem to like based on the numbers the cable operators are reporting.
Control would be a big issue. Right now, not one of the rural phone companies would have the balance sheet to acquire DirecTV (market cap: $23 billion) or even EchoStar, with its $14 billion valuation, outright. Mitchell thinks they could all team up and secure financing from one of the flush private equity players trolling telecom these days, but telecom consortiums rarely work.
Does anybody remember Tele-TV, a television venture backed by a group of the Baby Bells in the mid 1990s.? The business was marred by infighting and indecision, and yes, the phone companies are still trying to get into the pay television game.
Of course, Mitchell notes that we also are seeing the emergence of a super-class of rural telcos, and that companies such as Citizens, Embarq and Windstream are going to get even bigger. Might one of them get big enough to someday acquire a satellite operator on its own? Maybe, but our guess is that Rupert Murdoch isn't holding his breath.