When you examine whether the acquisition of DirecTV was successful for AT&T, you have to start from the right place, and that’s where the two were back in May 2014 when the deal was announced, and we have regularly done that.
Last week AT&T came out with news that video customers would be down and this week it came out with financial figures that impressed pretty much no-one. AT&T investors are in for a long period of doubt, we suspect.
Not only were video customers down, but total mobile subs were only up 14,000 across the board, with more losses in postpaid than pre-paid gains. AT&T characterized this as gains for both pre-paid and postpaid, but with losses among resellers of some 394,000 mobile subscribers, with another 18,000 connected device subscribers being lost also.
But it’s the video subs that made the headlines. Back in May 2014, when the merger was announced, DirecTV had 20.2 million video subs and AT&T U-Verse had 5.85 million, a total over 26 million.
For a while there in Q4 2016, the two businesses combined looked like they would overhaul that 26 million number, but then began to falter. Today it has almost 1 million less video subscribers than when it announced the merger, and this includes 800,000 which are low paying DirecTV Now customers. Entertainment revenues have fallen since the merger was completed from a high of $9.6 billion in Q4 2016 to $9.2 billion when annualized. It is no longer something that AT&T can describe as being part of a “plan.”
At best it can say that DirecTV Now customers are growing more rapidly, and it will be able to complete the transition over the next five years from a company with 26 million video paying an ARPU of $107 a month, to one with about 23 million with about 4.8 million of those paying a reduced ARPU of some $50 to $60 a month – a dramatic fall in revenue. We calculate that if this many customers slide towards DirecTV Now at $60, and that losses in video are sustained at the current level, then by 2021 AT&T Entertainment video revenues will fall by about $400 million each year, or by $2 billion over the entire period. Some merger.
At present it has managed to cope with reductions without there being a fall in EBITDA, but if revenues continue to fall at that rate, it will be tough to keep it quite so profitable.
AT&T also said that business solutions added 15,000 postpaid subscribers and 2.3 million connected devices in the third quarter. It also said that IoT devices were mostly now accounted for in Pre-paid, so actually its mobile subs ARPU will take a bit of a bashing once all of that comes home to roost. IoT and connected car connections are likely to bring in far less per connection going forwards.
On the good news front AT&T says it has passed 6 million homes with fiber, and if you look at DirecTV outside of the US, in Latin America it has gone since the merger was announced in May 2014 from 12.3 million to 13.5 million, and Sky Mexico which it part owns, has gone from 6.5 million subs to 8 million.
It is understood that permission to acquire Time Warner has been made dependent upon AT&T selling off its Latam video assets, by both Brazil and Mexico. It can perhaps argue the case on those, because in those territories it is up against America Movil, which owns assets in both video and cellular. But the likely outcome is that AT&T will sell off some, if not all of its Latin American pay TV assets to local interests, and use the money to pay down debt.
Video subs are not the only potential bad news, as AT&T launches the iPhone X this week, accompanied by rumors that Apple can only make about half of the devices it forecast, due to parts shortages. Given that almost no-one is going for the Apple 8 as an interim, that means phone upgrades may not be so plentiful in AT&T’s next quarter.