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AT&T hides TV losses behind hints of Time Warner future

AT&T’s second quarter earnings call this week hinted at how it plans to regurgitate Time Warner once it swallows the business, a deal which looks an increasing inevitability to close by year end. The strategic direction seems on the surface to be a carbon copy of the DirecTV acquisition, by bundling OTT video with wireless packages to reduce churn.

The company talked up a successful quarter in achieving churn reduction, but we’d like to highlight straight away that it would take a miracle to stem losses from its satellite and U-verse TV sectors, while reducing churn in its cellular business is a different story altogether.

Time Warner and its content clout, which includes HBO, Warner Brothers, TNT, CNN and TBS, could head in two directions, either adding extra muscle to the DirecTV Now streaming service or, given the popularity of Time Warner’s titles, launch more standalone paid streaming services. DirecTV Now has seen a successful uptake in the first half of its fiscal year, but given the various technical hiccups along the way and HBO’s already successful streaming services, the latter option to build another might be swerved for now.

AT&T focused on the benefits of bundling mobile, TV and internet services together as a key strategy in its latest earnings release, but declined to comment on more pressing analyst questions about Time Warner’s bundling potential. A key strategy over the last quarter was to offer a DirecTV Now subscription for $10 a month, rather than the standard $35 fee, as part of an unlimited data package.

This suggests HBO services might face the same fate, possibly targeted at reducing TV churn rather than as an incentive for taking an unlimited mobile subscription. The concern then would be that DirecTV Now pricing would be hiked if premium Time Warner channels were integrated.

However, CFO John Stephens shot down recent suggestions that AT&T CEO Randall Stephenson could be involved in a reshuffle of positions following the $85.4 billion merger. “Randall Stephenson is still the chairman and CEO of AT&T, and I expect him to do that for a long time. I don’t expect any changes there, before or after the Time Warner merger,” said Stephens.

This came as reassurance, given Randall Stephenson’s comments a few months ago that Game of Thrones episodes would be better on mobile if they were cut down to 20 minutes each. Mobile-first, short form content has its time and place, but if Stephenson eventually does take over HBO’s activities and starts pulling strings to this effect, it could be potentially disastrous.

Stephens added that the company’s merger integration team were close to completing plans for advertising and bundling opportunities, “our goal is to hit the ground running once we receive final approval and build our leadership in telecoms, media and technology.”

AT&T cited DirecTV Now’s growth as “helping to offset traditional TV subscriber decline.” The service is doing its best to plug the hole, but the quarter clearly showed that DirecTV Now cannot block the flow all by itself – cue HBO to the rescue?

DirecTV Now ended the second quarter just shy of half a million subscribers, adding 152,000 subs to end the period with 491,000, but this failed to offset losses from its traditional pay TV base, losing a total of 351,000 subscribers. Satellite accounted for 156,000 disconnections to slip to 20.86 million in total, while U-verse continued its dismal performance with 195,000 losses to total 3.83 million. U-verse is dangerously close to churning out 50% of its subscriber base from two years ago in the next few quarters. U-verse had almost 6 million subscribers in Q2 2015.

Today, AT&T has a total of 25.17 million video connections – an annual loss of 123,000 on paper, but a figure which would be over 600,000 had its DirecTV streaming strategy not paid off.

Diverting back to Time Warner, reports emerged this week that US antitrust officials gathered for talks with AT&T execs to discuss conditions that would secure the stamp of approval on the deal, according to Bloomberg. Channel owners will be hoping for a “must carry” condition to be imposed, meaning DirecTV would have to include their channels wherever HBO is sold, as well as restrictions on substituting channels for Cinemax, which is owned by HBO.

In a busy week for the US operator, AT&T finally pulled its finger out and decided to give DirecTV Now a long overdue national promotion campaign, filming a series of anti-cable ads starring Creed actor Michael B. Jordon. The ads feature Jordan shredding cable contracts and focusing on the freedom of OTT video.

AT&T spokesman Steven Schwadron said, “This marks the first time we’ve dedicated an entire national advertising campaign to DirecTV Now. In our previous campaign starring Mark Wahlberg, we had one spot dedicated to DirecTV Now. This campaign is completely dedicated to showing the benefits of the service. We launched the new DirecTV Now ad campaign on primarily digital platforms because it is one of the key ways people discover and use this product.”

AT&T beat analyst estimates in the last quarter with revenue of $39.8 billion, but this was down slightly from $40.5 billion in the same period last year. In broadband it added 8,000 connections overall, with 112,000 IP gains offsetting a DSL decline of 104,000, ending the quarter with a broadband base of 14.3 million subscribers.

“It’s pretty clear this ability to bundle, whether it be TV Everywhere, whether it’s DTV Now, whether it’s the ability to get all of your video on your phone, is making a huge difference,” said Stephens in a fitting comment to summarize AT&T’s strategy moving forwards.

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