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AT&T drops atomic bomb on pay TV with device embracing OTT rivals

AT&T is about to throw another catalyst into the cord cutting fire ripping through its traditional pay TV business, partly fueled by its own DirecTV Now streaming service. The company revealed in its earnings call this week it will debut a new streaming device for accessing OTT video services including DirecTV Now and Netflix. This is as close as AT&T has ever come to partnering with pay TV’s arch nemesis Netflix – and the significance of such an announcement cannot be overstated.

Over in Europe, UK operator Sky recently launched a new Roku-type streaming device to access its Now TV streaming service, but Now TV only, no Netflix in sight. Sky has made its intentions crystal clear, sacrificing its ailing satellite business in a ballsy shift to an all-IP video future. From this position, Sky can drive Now TV and whatever streaming service its soon-to-be parent Disney releases in Europe, to fend off Netflix.

Meanwhile, AT&T’s road map is less evident, yet is riddled with hints of gradually moving towards a similar eventuality, one where it can sell video services to subscribers of rival broadband lines. Allowing Netflix to sit side by side with DirecTV Now in an AT&T-branded streaming device was an unexpected move, but a necessary one.

Can they cohabit harmoniously? If Netflix sticks to its guns by not bidding for live sports, then we believe the two can be complementary, and AT&T has come around to that way of thinking. Of course, moving subscribers over to DirecTV Now, costing between $35 a month to $70 a month, will come at the cost of ARPU declines meaning the AT&T Entertainment business will ultimately see revenues fall by some $2 billion by 2021.

Subscribers will be waiting some time though, as AT&T CEO Randall Stephenson said the new streaming device will launch towards the end of 2018. “Before year end, we plan to launch a very thin hardware client. And just think about it this way, it’s a very small, inexpensive streaming device plugged into your TV and then you connect it to any broadband service. There will be a voice-controlled user interface with an integrated search feature and will allow you to search across any streaming video service that you subscribe to. So, it can be DirecTV Now, Netflix, Amazon, Hulu, or even YouTube. It also gives you a premium live video experience in your home with the flexibility and ease-of-use what you would expect out of an OTT service,” said Stephenson on this week’s earnings call.

DirecTV Now added 368,000 subscribers in the fourth quarter to total 1.2 million users, helping to plug the sinking ship of its satellite and U-verse businesses, losing 207,000 between them. DirecTV Now exceeded our own optimistic estimate for the quarter of 350,000 new sign ups, and at this rate DirecTV Now will be well on its way to 2 million subscribers by the mid-point of 2018.

AT&T was helped by a major tax overhaul in the last quarter, which will inject an extra $3 billion in cash this year, which it plans to put towards enhancing network infrastructure and financing the acquisition of Time Warner. This also helped the operator post net income of $19 billion for the quarter, up from $2.5 billion in Q4 2016, but revenue was down 0.4% to $41.7 billion to total $160.5 billion for the year, a drop of 2%.

In its wireless business, it added 6.7 million subscribers to reach 141.5 million in the US. Broadband subscribers increased by 0.7% to 15.7 million, with IP gains of 623,000 offsetting DSL losses of 515,000.

Following a slow start by DirecTV Now since its launch in November 2016, the service has picked up pace and the last quarter marked the first time DirecTV Now gains managed to offset pay TV subscriber losses – welcome to the new AT&T.

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