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AT&T unfazed by alarming 1m churn rate as new TV launch nears

AT&T suffered total video losses of 946,000 during the second quarter of 2019, incurring 168,000 DirecTV Now cancellations on top of a satellite TV mass exodus of 778,000 subscribers. The US operator is precariously close to churning out 1 million subscribers a quarter and rising fast, which would see its 22.9 million existing video footprint (21.6 million satellite and 1.3 million DirecTV Now) disappearing in maybe 6 or 7 years if this snowballing effect intensifies.

After reporting a total video base decline of 627,000 subscribers in Q1 2019 (544,000 on traditional pay TV and 83,000 on DirecTV Now), AT&T’s second quarter results represent a 50% increase across both services. Separately, pay TV losses increased by 43% and DirecTV Now losses by 102.4% – a severely disappointing run rate but with plenty of positives on the horizon.

The launch of its much anticipated WarnerMedia streaming service which was recently christened HBO Max – as well as the less talked about but equally significant skinny client – therefore cannot come soon enough. But while WarnerMedia’s input will have to wait until Spring 2020, the new live video over broadband service with Android TV-based skinny client, simply called AT&T TV, is expected to start trials in Q3, as revealed by AT&T this week.

“Later this summer, we’ll beta launch AT&T TV in a few markets, that’s our live TV service over broadband. We have some really high expectations for this product, and we’re going to learn from the pilot, and then we’ll expand to more cities as we go to the year,” said CEO Randall Stephenson during the company’s earnings call. Of course, he wouldn’t tell investors there were low expectations.

Also during the earnings call, AT&T didn’t specifically point the finger at any factors for hitting the video businesses, merely conceding that it expected losses to intensify, although there was a suggestion the CBS blackout was a mitigating factor, although technically that occurred in Q3 so expect lots of CBS finger pointing in the next set of results. The blackout affects DirecTV, DirecTV Now and U-verse services, losing CBS broadcast stations across 17 states as the broadcaster claims unfair carriage fees. AT&T said its new offer posted to CBS has received radio silence. DirecTV Now’s subscriber base shrinkage was likely a knock-on effect of price hikes rolled out earlier this year.

AT&T has recorded a year to date decline of 2.5 million video subscribers. This time last year, DirecTV Now added 342,000 net subscribers to more than offset pay TV losses but in a few short months it has switched dramatically from solution to part of the problem. Soon AT&T TV will be handed the baton which will later be passed onto HBO Max.

Until then, despite the exacerbation of cord cutting running through the current AT&T video business like a knife through butter, financial figures within the Entertainment Group look relatively steady, with operating income growth of 2.6% on the back of video and broadband ARPU increases and revenue flat, declining just 1% year on year. IP broadband revenue jumped 6.5% in the second quarter, boosted by 318,000 AT&T Fiber customer gains and boasting nearly 14 million customer locations now passed with fiber.

It gained 100,000 broadband connections in the quarter, totaling 14.4 million, while IP broadband net adds were flat, with 13.8 million subs ended June 2019.

WarnerMedia also saw solid growth in revenue and operating income, reporting gains in all business units, specifically original content which is driving strong HBO digital subscriber growth – boding well for HBO Max. WarnerMedia subscription revenues were up $3.5 billion in Q2, comprised of $1.9 billion from Turner properties and $1.5 billion from HBO, plus advertising revenues of $1.3 billion.

Together (but mainly WarnerMedia) these helped drive total consolidated revenue for Q2 up 15.3% to $45 billion, offsetting revenue declines in legacy wirelines services, domestic video and wireless equipment. Operating income spiked to $7.5 billion, from $6.5 billion in the year-ago quarter, again due primarily to the Time Warner acquisition contribution.

Not forgetting Xandr, AT&T’s ad technology unit, which performed well with revenue rising 23.7% over a year to $485 million, including the acquisition of AppNexus.

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