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May 22 (The following statement was released by the rating agency)
AT&T's agreement to buy DirecTV is the latest in a wave of deals that highlight the growing appetite for content and pay-TV acquisitions among telecom operators, Fitch Ratings says. AT&Ts deal gives it the opportunity to capitalise on growth in mobile video and diversify its revenue stream, but deals in the more competitive European market are largely defensive to stabilise fixed and mobile market shares, rather than generating profits from TV services.
Telecom companies are using a variety of strategies to acquire this content. Telefonica has offered to buy the struggling Spanish satellite operator Digital+, while Telecom Italia has agreed a content-distribution deal with Sky Italia and BT is going a more direct route by bidding aggressively for sports rights.
AT&T's acquisition strengthens the company's position in the evolving video market and diversifies AT&T's revenue stream, but the longer-term strategic benefits are less clear, while the expected increase in leverage from the transaction led us to place AT&T's 'A' IDR on Rating Watch Negative.
The European pay-TV industry is under-penetrated compared with the US at around 40% of households covered. In particular, Southern European markets like Italy and Spain have some of the lowest levels of pay-TV penetration in Europe.
Under the agreement with Sky Italia, TI will distribute all Sky's content over its fixed line and LTE mobile networks under a revenue-sharing model. This approach means that TI does not have to invest significant amounts of capital. The deal will help TI defend its market share by differentiating its offering from rivals Vodafone and Wind and could accelerate the take-up of fibre.
However, TI's fibre network footprint remains small with a relatively slow roll-out target. Combined with the low margins in content distribution for telcos and the potential for increased competition from free-to-air broadcaster Mediaset, this is likely to limit TI's ability to improve profitability via its TV service.
Telefonica's offer to acquire control of Digital+ would allow TEF to access Digital+'s 1.6 million subscribers and its exclusive video content, including Spanish football rights. The deal would support the company's key strengths of fibre-to-the-home and premium TV content, helping to defend it against competition from Vodafone/Ono, Jazztel and other regional cable operators.
While Telefonica is investing more than TI in its home market, its potential gains are also likely to be higher. This is due to better cross-selling opportunities, a more aggressive investment plan in fibre network and direct content acquisition, as well as potential savings on programming costs from the distribution of Spanish language content within its Latin American footprint. Competition for premium programming and subscribers is also less intense in Spain.