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AT&T pins brutal DirecTV Now subs loss on promotional changes

Although virtually unrecognizable from each other today as technology businesses, AT&T made Verizon’s video losses look insignificant as not only did 403,000 subscribers scrap their DirecTV satellite subscriptions during the fourth quarter, but 267,000 fled the DirecTV Now streaming service. A disastrous end to the year for AT&T and an ominous omen for the operator’s impending HBO-fronted Netflix rival due to launch later this year.

It’s the second surprise kick in the teeth, after last week’s logic-less revelation by Disney of Hulu’s huge $469 million operating loss for the year despite a 48% increase in subscribers, prompting similar concerns around the launch of the Disney+ streaming service later this year.

DirecTV Now, at a little over two years old, sunk from 1.86 million subscribers in Q3 to just 1.59 million in the following quarter, while the satellite business ended 2018 on 19.2 million subscribers – a gaping hole almost the size of its entire streaming subscriber footprint as over 1.2 million cut the cord over 12 months.

Crucial to this was a promotional strategy shift by AT&T which it claims boosted ARPU, although despite what executives might say, there’s no way in hell such dramatic bleeding from the DirecTV Now jugular was projected. That said, CEO Randall Stephenson claims if these promotional customers were pulled from the equation, the remaining DirecTV Now customer base paying regular prices actually grew, although no figure has been given out.

“If you exclude the losses, there were no losses,” is how we read this statement.

“Six months ago, we had half a million customers on highly discounted DirecTV Now offers, generally offers that require the customer to pay $10 a month for the service. At the end of the year, essentially none of these customers remained on those offers,” said Stephenson, defending the performance. “Eliminating these promotions for low value, high churn customers clearly elevated subscriber losses of the quarter, but it had a positive impact on streaming ARPUs and lowered content costs. In fact, DirecTV Now ARPU was up about $10 sequentially from the third quarter.”

ARPU increase is one thing but video entertainment revenue down 5.7% to $8.68 billion for the quarter and down 7.8% for the year is another. It’s a sign DirecTV Now is becoming a financial burden falling well short of offsetting the rapidly shrinking satellite sector, and AT&T needs to figure out a way to heavily monetize its Time Warner assets; and fast.

That said, revenue in the WarnerMedia segment grew 6% in Q4 with double-digit operating income in all three business units – seeing growth across the theatrical and TV businesses.

“We don’t yet have the Xandr platform stood up to really monetize meaningfully on the digital side, the streaming side and advertising revenue,” was Stephenson’s response to total video entertainment revenues sliding, although Xandr itself performed well. The newly formed advertising and analytics business unit saw revenues spike 49%, or 26% excluding AppNexus, which it attributes to a strong political ad season – with Stephenson highlighting how Xandr is radically outperforming the market.

AT&T is currently in the process of integrating Xandr’s advertising marketplace across its business, with much of its programmatic spending moving to the Xandr platform to drive efficiencies, and it has recently made the digital data available for Turner’s ad inventory.

With competition heating up and NBCUniversal talking up a good game for its 2020 OTT video launch, it will be interesting to see how the new look AT&T, with its hefty content assets through Time Warner, will balance the scales in terms of licensing content to streaming rivals and holding back titles for its own services. Stephenson dropped some insights this week which we see as highly significant.

“There’s not going to be a cookie cutter approach,” was how Stephenson described the content strategy in the earnings call. “I don’t think all content is equal in that decision making process. When the Friends rights came up from Netflix late last year, there was a situation where you ask yourself a question, how important is it to have that content on an exclusive basis versus allowing others to license and use it? Exclusivity is probably not that critical on that type of content, but it’s critical to have on our platform. So, we did license it to Netflix as you saw, but on a non-exclusive basis. Each of these decisions on significant content like that are going to be evaluated in terms of how critical it is to our platform to have it as exclusive versus the economics of licensing it to others.”

These are the words of the CEO of a satellite TV operator, clearly embracing the role as a top studio executive – forced by pressure from streaming rivals into addressing the politics and economics of content licensing which will become ever more complex.

AT&T closed out 2018 with total operating revenues up a healthy 15.2% to a shave under $48 billion, but with net income suffering a 74.5% decline to just $4.8 billion. Even the broadband business took a small hit, with subscribers down by 0.1% to 15.7 million.

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