AT&T Eyes Higher DirecTV Now Margins

AT&T executives think they've got this next-gen video business all figured out.

Although the company's OTT video service, DirecTV Now, barely makes a profit now because subscribers pay relatively low prices for its skinny-bundle TV packages, don't sign up for long-term contracts and can churn out quickly, AT&T Inc. (NYSE: T) officials believe they can boost margins by adding such premium product features and enhancements as cloud DVR, more pay-per-view options, more video streams, an improved VOD service and advanced advertising. They are also counting on cutting capex and opex as they shift more customers from the legacy DirecTV satellite service, with its high subscriber acquisition, equipment and installation costs, to the newer, cheaper OTT video platform. (See AT&T Spotlights Next-Gen Video Plans.)

"We do expect revenue and margin pressure as we manage through this, especially this year, but we're excited about DirecTV Now's product improvements" planned for later this year, said AT&T Senior EVP & CFO John Stephens, speaking on the company's first-quarter earnings call late Wednesday. "We'll see a replacement of the margins and a growth in those margins on an extremely low capital expenditure basis."

With a next-gen version of DirecTV Now featuring cloud DVR service now in beta trials, Stephens reiterated AT&T's plans to introduce the new platform before the end of June. He said the company intends to add the planned PPV, VOD and additional video stream options later in the year. (See DirecTV Now Inches Toward Cloud DVR Debut.)

The AT&T CFO made his comments as the company's earnings report showed that the ARPU for its linear video services dropped about 7% to $113.43 in the first quarter as more DirecTV customers either dropped their satellite service entirely or downgraded their packages to cheaper bundles. Analysts expressed concern about that decrease.

"Transitions such as this are never easy, but we have shown that we're able to do this time and time again, whether it'd be with our voice or broadband or wireless services, " Stephens said, acknowledging the concerns. "We don't expect video to be any different.”

Stephens stressed that AT&T is now at least adding more OTT video subscribers than it's losing satellite TV and IPTV subs. In the winter quarter, the company added 312,000 DirecTV Now customers, boosting its total to nearly 1.5 million. That gain more than offset the 188,000 subs that the DirecTV satellite service shed. Surprisingly, AT&T’s other legacy linear TV service, U-Verse, actually gained 1,000 subs, contributing to the company's overall increase of 125,000 video subs.

Stephens also noted that AT&T now has more total video subscribers than it did two years ago "because of the success of DirecTV Now." Indeed, the company, which is the biggest pay-TV provider in the US, closed out March with almost 25.4 million total subscribers, up about 100,000 from two years ago and about even with the year-ago figures.

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AT&T officials didn’t have much to offer about either AT&T's ongoing legal battle with the US Justice Department over its proposed acquisition of Time Warner Inc. (NYSE: TWX) or the company's plans to launch a new sports-free skinny TV bundle, AT&T Watch, to its mobile customers and other consumers for $15 per month or less, depending upon their packages. AT&T Chairman and CEO Randall Stephenson mentioned plans to launch that service shortly during his testimony in the AT&T-TW antitrust trial earlier this month. (See Ovum: US Pay-TV Crashing but May Not Burn .)

"I think the more important message is that we are willing to innovate, try some different things," Stephens said. "We want to grow the overall business on a bundled basis."

— Alan Breznick, Cable/Video Practice Leader, Light Reading

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