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Success of AT&T-DirecTV deal hinges on rural America

May 19, 2014

FORTUNE -- Tucked within AT&T Inc.’s (t) $49 billion agreement to buy DirecTV (dtv) is a promise to build and enhance high-speed broadband for 15 million U.S. customers, many of whom live in rural areas that can be difficult to reach at a viable cost.

The commitment to expand broadband services in rural America, mostly in areas where AT&T does not provide high-speed service today, was seen by Wall Street analysts as a “shout out” to the regulators that must sign off on the deal. In a conference call with analysts on Monday, AT&T acknowledged the promise to expand broadband, among other guarantees, was designed to “get out in front” of concerns regulators might have about the potential acquisition of the satellite TV provider.

“This [deal] unlocks our ability to better serve rural areas,” said DirecTV's president and chief executive Michael White. "We have been salivating to be able to do one bill and one install experience for the customer and not have two different people show up on two different days.”

MORE: AT&T bids $49 billion for DirectTV to become a pay-television titan

The AT&T-DirecTV merger would allow the companies to bundle broadband, video, and mobile services. AT&T intends to use synergies from the merger to expand high-speed broadband, using a combination of fiber and fixed wireless local loop capabilities. The company expects to complete the broadband enhancement within four years after the deal closes, though AT&T hasn't yet said how much it would cost to invest in expanding broadband to millions of new customers.

The Federal Communications Commission, which is among the agencies that will decide whether to approve the AT&T-DirecTV merger, has touted the importance of providing fast broadband services to rural areas. According to the 2010 Census, roughly 59 million Americans, or 19% of the U.S. population, live in rural areas.

MORE: AT&T and DirecTV CEOs: Expect more original programming, no 'a la carte' surprises

Wells Fargo analyst Jennifer Fritzsche was keen to learn how much capital AT&T would need to spend to expand broadband to rural parts of the U.S.

“If I were to guess, the expansion will probably be more wireless than digging the ditch for wired and dragging copper or fiber to rural farmhouses,” Fritzsche said. She added it would be more capital efficient for AT&T to focus on the wireless side to build out broadband.

MORE: AT&T learns from past mistake on DirecTV deal

A number of factors have made it a challenge for telecommunications companies to justify an investment in rural-region broadband infrastructure. Those parts of the U.S. are geographically dispersed and have a low population density. Rural areas also have a higher percentage of elderly residents, who tend to use broadband less often. Another challenge rural areas face is there are a disproportionate number of low-income Americans in those regions.

Matthew Harrigan, a Wunderlich Securities analyst, called the broadband promise “the biggest regulatory carrot” in the proposed merger.

Harrigan believes AT&T could utilize wireless solutions to make the build-out economically viable. Though mobile data have limited capacity, as LTE technology advances, Harrigan said the company could obtain faster data speeds and thus make the broadband delivery on a wireless basis a reasonable way to deliver the service.

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