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8 August 2019

US Q2 video losses overshadowed by fall out from T-Mobile Sprint merger

Once again AT&T stands out as the biggest loser of video subs after the round of Q2 results, because of the continuing DirecTV Now crash. But the results overall have been overshadowed by the fallout from the proposed $26.5 billion merger between T-Mobile and Sprint, which now faces a legal challenge from 14 US States including Texas. That trial has been postponed until December 2019 just after the proposed merger gained regulatory approval.

The immediate ramifications for pay TV are that this puts Dish Network in limbo as it is the linchpin of the deal by agreeing to acquire Sprint’s prepaid businesses and spectrum for $5 billion, as well gaining access to T-Mobile’s network, in order to appease regulators and the other wireless carriers. The key point is that Dish would become a significant cellular operator in its own right, with a pledge to cover 70% of the US with 5G by 2023. This would meet the regulators’ requirement of having four strong cellular competitors, although the objective of the merger is to ensure there are three rather than two major telcos overall in the US. This is why the rationale for the merger depends on whether the focus is on leveling the field at the very top or restricting the consolidation that reduces wider competition, especially in the impending 5G field. Currently Verizon and AT&T are dominant, but a combination of Sprint and T-Mobile would be a more comparable force, albeit only about half the size of the former and 40% of the latter.

With the final outcome still unclear now at least until the end of the year, Dish Network is the party most affected by the delay as it seeks more fertile ground in 5G for new video revenues to make up for the churn in DTH. It has been eyeing opportunities in OTT bundling services opened up by the higher capacity and performance of impending 5G networks. This field is in its infancy now, worth just a few million dollars this year but set to soar past $5 billion by 2024. This will comprise four main sectors: SVoD, music streaming, cloud gaming and live sports. Next year the first three will predominate but then we anticipate live sports overtaking to become the biggest category of 5G OTT bundling by 2022 and accounting for more than half by 2024, approaching $3 billion in value. No wonder Dish Network is salivating and desperate to get a stake in the ground, even though there would not be much revenue until well after that Sprint/T-Mobile merger has either been consummated or annulled.

Dish can at least console itself that its video losses have been cut, coming in at 79,000 legacy pay TV subscribers in Q2 which, as we observed, the operator has been lauding as a spectacular reduction from the 151,000 cord cutters in Q2 2018. That leaves Dish perched on 12 million total video subscribers, including 9.5 million for the Dish TV satellite service and 2.5 million on Sling TV. The latter in fact gained 48,000 subscribers to offset those DTH losses, adding up to an almost respectable net decline of 31,000 video subs.

AT&T would have wished to emulate such results, but it seems DirecTV Now, futilely we suspect renamed AT&T TV Now, is in terminal decline after initially offsetting legacy churn as is still happening at Dish. While that new name joins the list of desperate corporate rebranding howlers, the decline has been caused by ill-timed price rises coinciding with poor levels of service and quality at a time when there is strong competition from SVoD and other OTT players for churning subscribers.

As we observed when reporting the results, DirecTV Now’s persistent subscriber losses throughout late 2018 and early 2019, with the latest quarterly losses clocking in at 83,000, mark a dramatic downturn from the 342,000 net subs added in the same period last year. At least AT&T has then acted relatively quickly, and we can expect DirecTV Now and AT&T TV to be folded together in the future, noting also that AT&T’s WarnerMedia will launch its streaming video service in beta later this year as HBO Max. This will bundle HBO, Cinemax, and a library of Warner Bros. movies and TV, costing around $16 a month. AT&T may well then bundle further by combining HBO Max with AT&T TV, much as Disney is planning with Hulu, ESPN and the forthcoming Disney+ streaming service.

Meanwhile, Verizon continues to stumble along with modest video losses, as we report separately in this issue in greater detail. The headline is that Verizon’s Fios saw video connections decline by 52,000 to just under 4.3 million, making it 217,000 net losses for the year to date period. As with Dish, hopes are staked on 5G OTT bundling, although it is currently putting its weight behind YouTube TV which it offers at a reduced rate, rather than developing its own streaming offering.

A common theme to all these results is continued churn from legacy pay TV with OTT failing to atone fully in subscriber numbers or especially revenues. Hopes are pinned on mobile TV in the 5G era.