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8 March 2018

AT&T CFO chat underscores timing of DirecTV Now 2.0

The CFO of AT&T John Stephens dropped a few more clues into his address of the Deutsche Bank Conference this week on how AT&T sees the benefits of its proposed merger with Time Warner, presuming that ever happens.

The key, as we have said in the past, is that AT&T believes that it has better data about its customers, than Time Warner could possibly have about its viewers, and that buried in this data is a revolution in advertising. We’re not so sure.

When you think about operators who rely on big data and analytics, you think of Netflix and Amazon first and foremost, and Netflix knows who its customers are by maintaining a direct relationship with them, and by never allowing operators to sit between Netflix and its viewers. It also has analytics to see which programs customers are viewing, how well this works out for each customer, and it has taken on its own CDN, so that delivery can be assured, and QoE can be virtually guaranteed. From there it has developed recommendation systems which dilute its millions of video assets, to the handful each person sees on a screen.

It has even gone further to create a cloud architecture with no single point of failure and introduced graceful degradation into its services in case its fault tolerant architecture ever fails.

The difference is that Netflix is married to the SVoD business, and does not sell advertising, and has an entire global footprint to play in. The highly advertising driven USA for the most part is where AT&T and DirecTV Now operates, and Stephens was mostly talking about an uplift strategy to DirecTV Now where a new advertising analytics platform is laid over the top of DirecTV Now, which leads to only relevant adverts being shown to all of its customers.

If AT&T can develop the type of analytics platform that Netflix has, but put it more to the use of something like Adobe’s Advertising analytics, then perhaps it can get 3 or 4 times the amount of advertising revenue from the same number of views, simply by never wasting a single ad, and always showing people things in adverts which they might purchase.

Disney on the other hand sees its future in copying Netflix, and eliminating adverts from its next generation SVoD service, and not in introducing advertising into the formula. You have to ask, would you gamble $85 billion on buying Time warner, to introduce a strategy which has not so far been tried before?

Stephens said, “When the purchase of Time Warner closes, the company will deploy a new advertising and analytics platform that will use customer data to develop new advertising capabilities within premium video.”

He also talked about the 1 million customers that DirecTV Now has already accumulated. Even if we assumed that the rate of customer acquisition accelerates or even doubles, AT&T will be unable to generate more than a tiny fraction of Time Warner revenues from addressable advertising during the next 5 years. Are we to assume that addressable advertising will come for the DTH customers of DirecTV as well? That can only come through push VoD advertising, which has been around for years. So no.

But is AT&T right that its operator data is any better than that which Time Warner might develop on its own. This issue is with its business model, not its analytics, in that unlike Netflix it does not have direct access to its viewers via contract. What companies like Dish with Sling TV and CBS All Access are trying to do is fix that business model, as is HBO, a Time Warner company.

Stephens added that having a million customers meant AT&T was learning and gathering data about what the DirecTV Now customers want.

We think it is fairly naïve to think that DirecTV now will be up against rivals like Dish and CBS, who, theoretically, will know less about their customers. A strong analytics showing in either, will tell them plenty, and that’s all about writing a few pieces of fairly intricate software, not spending $85 billion on a company which AT&T acknowledges has no such software.

The new platform is meant to be ready before the second half of the year, ready to apply to Time Warner the moment that AT&T wins its battle to take ownership of Time Warner, from the US Department of Justice, if indeed it does.

Verizon too has been obsessed with a cheap or free video experience attached to a phone contract, which is monetized using advertising, and it has already proved that if you do not have the best content, it definitely does not work.

Stephens said that next generation software will see customers using Cloud DVR and then AT&T will introduce Pay per view assets, including “most”  sporting events as well as movies. And yet A&T has yet to enter any major sports rights auctions, unlike Verizon, which has already won a few.

Bringing to Time Warner just a bit of data about which shows are popular and offering data insights for advertising revenues, seems to us a flimsy basis for one of the largest mergers in the media industry.

One of Stephen’s throwaway lines was to suggest that soon AT&T would pass the inflexion point where DirecTV Now was growing faster than the degradation of legacy video – a pretty small ambition for another $48.5 billion merger like that of DirecTV, in its own right.