Reflecting the direction of the overall video market, AT&T lost a bunch more pay-TV subs in Q3 2020 but also saw significant growth for HBO Max, the new premium streaming service from corporate cousin WarnerMedia.
AT&T lost a total of 627,000 video connections in the period – 590,000 "premium" losses (a mix of DirecTV satellite TV subs and U-verse IPTV customers) and 37,000 OTT subs. AT&T ended the quarter with 17.78 million total video connections – 17.10 million premium subs and 682,000 OTT subs (a mix of AT&T TV Now and AT&T TV customers).
While Q3 took another bite out of AT&T's pay-TV base, the losses narrowed from a year-ago loss of 1.35 million subs as the company continued to focus on higher-quality, more profitable customers that aren't focused on heavy-handed pricing promotions.
Gains at AT&T TV, a new OTT-delivered, contract-based pay-TV service that uses Android TV boxes, helped to offset AT&T's premium TV losses, but AT&T did not break out those numbers. The introduction of AT&T TV, which became available nationwide in March, has been particularly helpful in AT&T's broadband footprint, AT&T CFO John Stephens said on Thursday's earnings call. AT&T TV Now, the company's other OTT-TV product formerly known as DirecTV Now, is a no-contract streaming service that features smaller channel packages.
"The AT&T TV product is a much more natural fit in terms of how customers want to use a pay-TV service today than the satellite product is," John Stankey, AT&T's CEO, said on Thursday's call. He declined to comment on M&A rumors centered on AT&T's struggling DirecTV business.
Meanwhile, HBO Max "activations" more than doubled in Q3 – to 8.61 million compared to 4.14 million at the end of Q2. HBO Max's wholesale base (those secured through cable operators and other pay-TV distribution partners) totaled 25.10 million at the end of the quarter, compared to 3.62 million "retail" HBO Max subs obtained through the direct-to-consumer, standalone channel. AT&T ended Q3 with 38.03 million total domestic HBO Max and legacy HBO subs, beating an original target of 36 million for all of 2020.
AT&T invested about $600 million in HBO Max in Q3 and is on track for a full-year investment of $2 billion, Stephens said.
Stankey, AT&T's CEO, said HBO Max's sub base growth is ahead of schedule, but noted that the pandemic tightened the funnel of new original content that could be used to acquire more customers through the direct-to-consumer conduit.
"The customer acquisition is an originals game. The customer retention game for SVoD is a library game," Stankey said, noting that production on new originals have been picking back up.
International expansions of HBO Max are set to begin in 2021, with an initial focus on Latin America and parts of Western Europe. HBO Max is also expected to introduce a less expensive, ad-supported tier next year.
Fiber-fueled broadband growth
Led by its fiber-to-the-premises (FTTP) product, AT&T added 158,000 total broadband subs in Q3, extending that total to 14.1 million. AT&T added 357,000 net FTTP subs (for a total of 4.67 million) in Q3 against a loss of 29,000 DSL subs and a loss of 170,000 IP non-fiber customers.
AT&T remains bullish on a fiber strategy that, so far, touts a footprint of more than 14 million homes.
"My intent is to exit next year … where we are gaining subscribers, gaining share and growing the broadband business," Stankey said. "We still have a lot of fallow fiber that we can sell into. You saw that this quarter."
AT&T is on track to add 1 million new FTTP subs this year and grow that overall fiber base by 25%, Stephens said.
Stankey said AT&T will look to expand its fiber footprint but didn't elaborate. But the company is keeping an eye on how the election might alter buildout incentives.
"We think policy in the country, where it stands right now, is attractive for investment in infrastructure and attractive for investment in fiber," he said. "I don't think we need policy to get better. We just need to ensure that the policy doesn't whipsaw back to some place that is inconsistent with incenting infrastructure investment."
On the wireless front, lower churn helped to drive solid postpaid net adds of 645,000, beating expectations of 55,000 adds. AT&T's Q3 postpaid figures include 151,000 "Keep Americans Connected Pledge" subs from the FCC program. AT&T prepaid net adds of 245,000 also beat an expected gain of 75,000.
"The subscriber results in Mobility were better than just 'good.' They were a genuine positive," Craig Moffett, analyst with MoffettNathanson, wrote Thursday in a research note. But he wondered if AT&T can sustain that amid a 5G investment cycle "that favors T-Mobile today, and that will require big spending tomorrow." He believes that AT&T's steep promotions for the new Apple iPhone 12 "are all about churn reduction."
Total Q3 revenues dropped to $42.3 billion, versus $44.6 billion in the year-ago period, and were likewise down at various divisions – $10.05 billion at AT&T's Entertainment group versus $11.19 billion a year ago, including $6.96 billion in video entertainment compared to $7.93 billion.
WarnerMedia revenues dropped to $7.51 billion compared to $8.35 billion in the year-ago period. Stephens estimated that WarnerMedia was hit by a $1.6 billion revenue impact resulting from a pandemic that closed theaters and paused production.
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— Jeff Baumgartner, Senior Editor, Light Reading