The ongoing pay-TV transition, where consumers are increasingly embracing OTT, mobile TV, and SVOD options over traditional linear video, is a difficult one for a company like AT&T. But according to AT&T CFO John Stephens, the communications conglomerate is not only weathering the storm, but succeeding.
On today’s quarterly earnings conference call, Stephens cited AT&T’s successful legacy of working through product transformations, including home telephone to wireless phone and DSL to IP broadband. The suggestion is, “AT&T’s been there, done that,” and will do the same for video.
The primary means by which AT&T is accomplishing this transition is the introduction of its OTT platform, DIRECTV NOW (DTVN), one of several vMVPD options. AT&T added 312K DTVN subscribers in 1Q18, and now counts 1.5 million OTT subscribers, in addition to their 23.9 million linear satellite and IPTV (U-verse) video subscribers.
In fact, the addition of DTVN subscribers allows AT&T to make a claim that few traditional pay-TV providers can make in this day and age. They actually have more video subscribers today (25.4 million), than they did two years ago (25.3 million), according to Stephens. Even in the face of losing 187K linear video subscribers in 1Q18, and over 1 million in all of 2017.
AT&T is trying to use their other network assets to drive video subscriptions. Approximately 12.2 million subscribers have some form of bundled offer with the company, and roughly half (48%) of those are bundling video. Indeed, having an embedded base of wireless and broadband subscribers to upsell bundled OTT video has its advantages.
Bring the Pain
The challenge with this transition boils down to money. And less of it. OTT customers generate less revenue than traditional linear video customers. That puts pressure on revenue and earnings growth and is where much of the pain lies. Add a competitive marketplace with strong rivals to the equation, and the challenges multiply.
AT&T’s strategy to deal with this pain is to hope the lower cost of delivering OTT, combined with the incremental revenue they hope to gain from the next generation of DTVN, will make up the difference.
“The OTT model also is low touch with significantly lower subscriber acquisition costs and less capital investment,” Stephens noted on today’s call.
OTT customers are less costly to serve, given the self-serve aspect of the product and the elimination of costly truck rolls. The next generation DTVN, scheduled to launch in the second half of the year, will offer cloud DVR, VOD, PPV, and additional streams. All of which offer incremental revenue opportunities.
“We do expect revenue and margin pressure as we manage through this, especially this year,” said Stephens. “But we’re excited about DIRECTV NOW’s product improvement. These new services will add new revenue streams and help counter some of the revenue and margin pressure we’re dealing with.”
AT&T is in a unique position with this. No other carrier with both a wireline and wireless broadband access network, combined with a huge embedded base of legacy pay-TV subscribers is making these potentially ‘cannibalizing’ transition bets. At least not right now. Their closest rival in that regard is Comcast, who has stated on multiple occasions that they are no fan of skinny OTT bundles. Comcast seems to be weathering the transition very fine with this approach, especially from a financial position.
Verizon has also been less adventurous with OTT and doesn’t appear to be as aggressive with bundling video and wireless. The addition of 5G may change that position. DISH is betting on OTT with Sling TV, but they lack the broadband access component and the bundling advantage it brings.
AT&T appears totally sold on OTT. They’re on record as saying the next generation of DTVN, which will include a ’thin client’ in the home and a comparable mobile experience, will be their primary video offering. Some form of DTVN will eventually be made available to any broadband subscriber, in true OTT form, according to previous comments from AT&T Chairman & CEO Randall Stephenson.
Comments that were confirmed in court this week when Stephenson revealed AT&T is open to being creative with DTVN bundles, citing a sports-less $15 DTVN option to come, available to anyone with broadband access. It’s a tactic the company hopes may help support their arguments in the ongoing Time Warner merger antitrust case.
AT&T is banking on using multiple versions of DTVN to be the competitive answer in a complex video marketplace, where a diverse group of rivals include Comcast, Amazon, YouTube, DISH, and Sony, among others. They are betting adding DTVN to a 5G and fiber broadband access network will put them in a position to achieve the transition success predicted by Stephens today.
This post has been updated.