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30 July 2020

AT&T’s Stankey slams Amazon, hints at DirecTV sale

While few batted an eyelid at AT&T experiencing another 954,000 pay TV subscriber losses in Q2 2020, what continues to frustrate us is how outlets cannot seem to understand how this is the calm before the storm. Lockdowns have played into the hands of operators, some more so than others, and the new OTT video platform HBO Max came at an opportune time for AT&T – papering over the cracks (more like full-on structural ruptures by now) which will be emphasized by trends to come in Q3 and Q4 to devastating effect.

AT&T isn’t completely stupid, despite the board accruing more than its fair share of red flags in recent years. What the bizarre trends of 2020 have allowed AT&T to do is pay off an extraordinary $2.3 billion in debt during the second quarter, despite revenues falling in every department, while maintaining a resilient free cash flow to help make it through the next two quarters relatively unscathed.

Shipping around a million video subscribers a quarter has become par for the course now for AT&T, as its total video footprint withered further to 17.7 million at the end of Q2. As Faultline likes to underscore, AT&T is perfectly capable of churning out its entire traditional pay TV base within 5 years, although it will likely take drastic measures to sell the DirecTV satellite business long before such a doomsday scenario. Under former CEO Randall Stephenson, parting with DirecTV was never going to happen, but his successor John Stankey has sowed the seed for AT&T’s necessary next step.

Bringing live TV and on-demand content under the same streaming roof is one of the near-term goals for AT&T in its transition to a software-based entertainment provider. To do that, DirecTV needs to go and Stankey is prepared to bite the bullet. “I don’t necessarily view satellite technology as the place that’s necessary to make that happen,” he stated on the company’s Q2 2020 earnings call.

“We liked the satellite customer base, and it was an opportunity to move that customer base into the right technology platforms moving forward. That’s clearly where we’re investing and what we’re doing right now, which is building those software platforms that can deliver either live or on-demand entertainment-based content and have that relationship with the customer, using data and analytics we pulled from that, and hopefully bridge off other services that those platforms can ultimately deliver,” added Stankey.

With every quarter, the prospect of selling DirecTV (most likely to Dish Network) is elevated in importance. This quarter, the need to cut ties has reached urgent levels.

The only thing stopping AT&T from putting DirecTV assets on the market is the continued strategy of converting as many high ARPU customers over to AT&T TV services as possible – extracting value from a customer base that either has no desire to change, or is on the cusp of switching to a rival. At least with HBO Max, AT&T can dangle a carrot to cord cutters and convert them from pay TV to OTT video with broadband, or OTT video with mobile, albeit at a fraction of the ARPU. It sounds like common sense, but it’s a strategy nonetheless.

“We still have work to do to educate and motivate the exclusively linear subscriber base,” was a gross understatement from Stankey during the company’s earnings call late last week.

HBO Max has therefore become the operator’s saving grace in video, as Stankey and the gang celebrated a “flawless launch” for HBO Max which came with the prize of 4.1 million active subscribers. However, HBO Max should prepare for headwinds as even Netflix has issued severe Q3 subscriber guidance to the tune of 2.5 million new sign ups globally, compared to the 10+ million gained in Q2, as the SVoD champ predicts people swapping screens for the great outdoors.

Stankey noted how subscribers to both HBO Max and traditional HBO pay TV services reached 36.3 million in the US, an increase of 1.7 million from the end of 2019. But with HBO Max’s early influx of 4.1 million users, this means HBO actually saw 2.4 million cancellations during the first six months of 2020. He continued to glaze over this skewed perception of success, pointing to the average number of weekly hours spent viewing Max being 70% more than on HBO. For a hotly anticipated SVoD service launching during a pandemic, this is hardly mind boggling stuff. Meanwhile, AT&T injected an additional $4 million in HBO Max in the last quarter, in line with full year estimate of $2 billion in HBO Max investments.

Despite describing a spotless launch for HBO Max, there were unsurprisingly a few blips, most notably on the hardware support front. Credit to Stankey then for standing up to Amazon, after throwing shade over the launches of HBO Max, and more recently NBCU’s Peacock, by reportedly demanding scandalous distribution terms. Interestingly, Roku was spared any vitriol during the earnings call, suggesting the two parties could be close to agreeing a deal that would bring HBO Max to Roku devices, while any compromise with Amazon looks a tall order.

“We’ve worked hard to make HBO Max available to consumers through nearly every content distributor in the US. We’ve tried repeatedly to make HBO Max available to all customers using Amazon Fire devices, including those customers that have purchased HBO via Amazon. Unfortunately, Amazon has taken an approach of treating HBO Max and its customers differently than how they’ve chosen to treat other services and their customers. We’re glad to have agreements in place with, among others, Apple TV and Google Chromecast to give customers the right to stream HBO Max on those devices,” said Stankey.

Stankey also turned the spotlight to selling HBO Max with 5G packages, while underscoring the importance of gigabit-capable fixed line infrastructure to a business like AT&T. “I don’t believe in the near term that 5G is the right fixed line replacement strategy in what I would call the typical single family home infrastructure,” he commented.

Another important development at AT&T is the recent ushering of its ad tech unit Xandr into WarnerMedia, in a move designed to accelerate progress in building software-based entertainment platforms across SVoD and AVoD – which will eventually produce the AVoD tier of HBO Max next year. However, the WarnerMedia segment took a hit from Covid-19, as revenues tumbled 22.9% year on year to $6.8 billion for the quarter, from total revenue down 8.9% to $41 billion.

The Android-based AT&T TV service also apparently drove broadband attach rates, despite AT&T experiencing a broadband net loss of 102,000 subscribers in the second quarter, falling to 15.2 million broadband connections.

For us, the standout silver lining from AT&T’s second quarter is that finally it has a CEO with grit.