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25 April 2019

Forget WarnerMedia, AT&T set to pulverize satellite in H2

AT&T again made video losses at rival operators appear trivial as it bled out 627,000 subscribers in Q1 2019 – incurring 544,000 on traditional pay TV with an additional dent of 83,000 for DirecTV Now. A laceration of this magnitude – for the second consecutive quarter – would be fatal for most service providers, so in characteristic style AT&T shrugged off what it continues to address as a minor scratch – rather than the festering wound its video businesses have formed.

As for the new OTT video service, launching under the WarnerMedia division, the operator’s earnings call revealed an initial “detailed” showcase dubbed Warner Media Day is on the cards for around September-October time, which will include new and existing content centered around the portfolios of HBO and Warner Bros.

CEO Randall Stephenson described the original content strategy at Warner Bros. as an “impressive, scaled machine in terms of producing theatrical as well as TV productions.”

But AT&T is set to make an arguably even more significant move in 2019 which has gained little media attention. The second half of this year will see the launch of its thin client, ultimately a satellite replacement product – allowing the operator to penetrate the market at a lower price point.

“When you look at the DirecTV churn, what you see is not people at the high-end in terms of ARPUs that are churning. It’s disproportionally at the low end and where we don’t have broadband. And so this thin client gives us an opportunity to meet that low-end with a better price point and this should start to moderate the subscriber losses. And particularly as we get into 2020, we think this product is going to have a really good appeal for people down market in terms of their expectations of video pricing,” said Stephenson during this week’s earnings call.

This is the proprietary thin client streaming service AT&T began beta testing in Q4, with trials currently underway. The plan is to lower the acquisition cost of its premium video service over time, both of which use the common platform introduced with DirecTV Now. AT&T’s results this time next year could reveal a blood bath of DirecTV satellite subscribers.

So, on the one hand, AT&T admits pricing is too high and so is willing to cannibalize its core satellite TV business in order to steady the ship, while on the other, it is more than happy to hike DirecTV Now prices and incur hefty subscriber losses as a result.

No wonder AT&T is putting HBO front and center of the new service then, considering it added more HBO Now subscribers in the week leading up to the Season 8 Game of Thrones premiere than in any other week in the service’s history. Over 17 million people tuned in to episode 1 and more than 27 million have watched the first episode to date.

It was essential for AT&T to give the media some crumbs this quarter, following the streaming strategy details revealed by both Disney and Apple in recent weeks. Stephenson said he was “impressed” upon first look at Disney+, adding, “The Disney announcement gave us nothing but more optimism about what we’ll be able to bring to market.”

Circling back to the matter of results season, as with the previous quarter, the end of promotional pricing was blamed as the primary reason for DirecTV Now subscriber losses. Yet the escalating situation at AT&T cannot be attributed to this alone. Clearly DirecTV Now has suffered from a combination of performance issues, content challenges, pricing dilemmas, and increased competition since its arrival on the scene just two years ago.

Already we are talking about DirecTV Now in the same vein as its flailing DirecTV satellite and U-verse IPTV businesses, which is why the launch of WarnerMedia’s all new OTT video service cannot come soon enough as a much-needed revitalizer. But still Stephenson stands firm that DirecTV Now can survive at $50 a month, describing it as a sustainable product as long as it can get advertising revenues to where it thinks it can get them – which of course it won’t reveal.

“Now we’re in the market at this $50 price point, and we’re early on in terms of getting the new platform out there but we’re seeing good uptake on the new platform and new pricing,” said Stephenson. Apparently, good uptake looks like 350,000 fewer subscribers across two quarters. Not on our watch.

Stephenson therefore stood to reassure investors during the call, projecting growth in DirecTV Now subscribers in the second half of this year after additional losses expected in Q2, as price increases continue to flow through. The extent of subscriber losses might have been much worse were it not for introduction of a new promotional pricing of $20 a month, while DirecTV Now ARPU was up by $10 from last year.

So, how did another quarter of dramatic TV subs losses impact financials? Despite the crater, revenues for the Entertainment division were down just 1% year on year, while video revenues only experienced a slight drop of 1.8% to $8.1 billion, from total revenue of $44.8 billion.

WarnerMedia surprised by missing analyst expectations, despite growing revenue by 3.3% year on year to $8.4 billion. Within WarnerMedia, revenue at Warner Bros jumped 12.7%, while Turner grew by 7% and HBO 6%.

Xandr, the advertising technology division, grew advertising revenues by 26.4%, largely due to the acquisition of AppNexus. Progress is reportedly being made integrating the Xandr marketplace across the company and Xandr is now optimizing Turner inventory, as well as working with Viacom as a result of recent content negotiations.