AT&T warns of video sales nosedive, but adds 300k to DirecTV Now

We have issued warning after warning about AT&T’s DirecTV merger, and especially the ability of AT&T to sustain the number of pay TV customers going forwards. It lost close to 1 million subscribers while the merger deal was waiting to be approved and the launch of DirecTV Now offers consumers an opportunity to downgrade their service to substantially, which may drive lower profits.

Now in an 8K form just filed this week, AT&T has issued a Trading update, suggesting that some financial damage has been wrought by the hurricane season, and its pre-occupation with fixing its networks, but the giant also suggests that while it will have signed 300,000 DirecTV Now customers in the current quarter, it will lose a net 90,000 pay TV customers. That suggests that it has lost 390,000 DTH and U-Verse customers in the current quarter.

That should bring its new DirecTV Now service up to 791,000, making it one of the fastest growing OTT skinny bundles services out there. But total pay TV subscribers will be down to around 38.7 million and skinny bundles never carry as much profit as the traditional broadcast one.

AT&T dressed this up under a statement which said that it still maintained its guidance for the year, and its share price, which had been drifting down of late, rallied, rather than falling further.

The guidance it reiterated was that its full-year 2017 guidance of mid-single digit adjusted earnings growth, with better margins and sticking to its capex promise of only spending $22 billion and it will drive free cash flow of around $18 billion.

Hurricanes cost AT&T almost $90 million in revenues and will take $210 million off its profits and it expects to announced more asset damage.

The video losses however were a complete surprise, which is the real reason it issued the warning. They were driven by “heightened competition” in traditional pay TV markets, said AT&T, but we all know that most of the damage has been done by the flight to OTT skinny bundles, both at AT&T and at rival groups. AT&T mentioned stricter credit standards, and that goes back to the early days when DTH TV in the US was considered beneath cable, and was sold primarily to lower income families. This was always going to come home to roost under AT&T.

The decline of video subscribers will bring down the Entertainment Group revenues and margins, making it essentially flat for the year.

While it was at it AT&T thought it worth getting all the bad news out and added that while it has continued expanding its postpaid smartphone base it had 900,000 fewer handset upgrades than in the year-ago quarter. This won’t affect gross adds, just the amount of money it gets for them, the company said.