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AT&T – free of satellites, embracing SVoD, fiber, machine learning

The headline catching comment that came out of AT&T’s discussion with financial analysts this week, was all about the company and DirecTV in particular, not planning to launch satellites any more.

It came out of the Q&A at the end, when John Donovan, CEO of AT&T Communications, joked, that “There will be no more satellites anymore” because his boss Randall Stephenson, who fielded him the question, “has just said so.”

But the get together was one of the most far reaching assessments of where AT&T is its transition from Communications behemoth to Communications and Media behemoth, after the acquisition of both DirecTV and Time Warner, taking in how the two businesses interact, and dragging in Brian Lesser, the CEO of Xandr to talk through how advertising would be revolutionized in the process. The aim was to target the $300 per month per US household that is today spent, roughly 50/50 on communications and media. We assume that advertising was on top of that.

One query from the stock market analysts in the audience asked if AT&T was going up against the duopoly of Google and Facebook, with its Xandr advertising play. No-one took that question seriously, offering instead platitudes about Google not being bothered by anything, but the unspoken answer was “Of course,” with AT&T talking about reaching more than 370 million customer relationships.

The other big headline news was hearing WarnerMedia CEO John Stankey talk about the development of DirecTV Now and Watch into fully fledged bundles, which would effectively replace the satellite DirecTV services, with the formula SVoD + AVoD + Wholesale, which defined the company’s across the board content strategy. The aim is to straddle from $15 to $80 with OTT video options which are all separately profitable and then push up with new services to $150 a month.

That wholesale mention was across existing Time Warner partners, but even in the longer term it will still apply fully to business outside the US, meaning that AT&T has no intention of exporting the Watch, DirecTV Now and other service outside the US. Which is perhaps why it was happy to recently renegotiate a Friends deal with Netflix for a rumored $100 million.

And Donovan said that its trial of 6,000 OTT set tops, which we understand to be Android TV based, is about how to deploy, price and work out operational execution, before switching this service on right across its entire footprint in early 2019. Stankey forecast that by 2022 55% of all TV would go OTT, and this provides the perfect opportunity to change the advertising model, while Stephenson talked about reaching over 370 million direct-to-consumer relationships across mobility, video, broadband and digital properties, with live data about them, to drive advertising.

He also felt that all the offers, including additional options around a home bundle, which is not expected to be with us until Q4 2019, would position a Warner Media bundle at that $150 a month mark which would eat up the entire home entertainment budget, across fixed and mobile broadband delivery.

Lesser positioned the ad issue, “No major player in digital has all the ingredients right and they are not well placed for TV; Advertisers and agencies are frustrated with the advertising fraud issues and the weakness of addressable advertising’s economics.”

Lesser rose to the comment, “Now let’s talk about the real topic, Advertising,” which fell on deaf ears, with not a snigger in the audience, but he then talked up huge amounts of data, harnessing machine learning to help make sense of it and to ramp addressable advertising to 370 million relationships. Already advertising represents a nearly $7 billion annual revenue stream for AT&T.

But to grow this AT&T’s broadband will have to get a lot stronger over the coming years in order to build a TV media/ advertising play around it. Donovan had told us that AT&T fiber now passes 10 million US homes, and that a year from now it would pass 14 million. When asked at the end of the session, why stop at 14 million, he made it clear that this was not the plan. Instead he saw the leap to 14 million as getting AT&T on the page, and from then onwards, it would be piece by piece based on what fiber might give the entire company, around backhaul for cellular, enterprise opportunity and FTTH, which would define future spend. That way the capex can split across 3 service revenues and take the sting out of spending. “Think of its as being more opportunistic after the 14 million,” Donovan said.

Stephenson had summed it all up at the beginning – video had been declining in revenues and EBITDA , and during 2019, it would be flat, “You have to go past flat to get to growing,” he quipped, and it shows the company is thinking for the long term and promised that in a little over a year AT&T would pay down $12 billion of debt to get to the right side of 2.6 x EBITDA to debt ratio, and then added that some unspecified asset sales would add another $6 billion to $8 billion to that, and that it would all come off debt.

When quizzed at the end about whether or not that would be affected by spectrum auctions, he did a “read my lips” quote, suggesting that whatever happened that debt would come down, and we would still have cash for dividend, spectrum auctions and that 2020 would begin and end on a positive note. CEOs have made such long distance promises before.

On the mobile side Donovan talked about continuing to grow, and taking 5G to retail, healthcare, public education and enterprise, and cited Samsung’s robotics factory which used it and a relationship with Magic Leap to support its mixed reality services, as well as evolve services out of 5G at the 400 Mbps in spectrum already owned, and 1 Gbps using LAA, which is already built out in 31 cities, some of them off its traditional network.

This particular clutch of AT&T executives have a clear idea of how the future looks and how all the pieces fit together. Execution on this plan is about all the people who work at AT&T getting it in the same way, and no surprise business models emerging from rivals to cut its legs out from under it.

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