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OTT

Why DirecTV Now May Flop

Picking up a Google Chromecast device for $35 is an easy impulse buy. Paying $35 per month for DirecTV Now is something else altogether.

One thing that strikes me in the lead-up to the launch of AT&T Inc. (NYSE: T)'s new DirecTV Now streaming service is that $35 -- which is the confirmed baseline fee for the service -- is an odd price point for what the telco is trying to sell. On the one hand, analysts believe AT&T can't possibly make any money with a $35-per-month price tag. Analyst Richard Greenfield of BTIG Research points out in a research note that if AT&T gets all of the major broadcast networks included in its DirecTV Now bundle, it will cost the telco $35 just in programming fees, meaning AT&T "appears willing to make little-to-no money or even lose money" with the streaming service.

On the other hand, $35 is a high enough cost on a monthly basis that users will think twice before subscribing, and that gives DirecTV Now a higher barrier to entry than services like Netflix and newer over-the-top offerings like CBS All Access and the new Starz app.

Leaving Netflix Inc. (Nasdaq: NFLX), Amazon.com Inc. (Nasdaq: AMZN) and Hulu LLC aside -- all of which have a significant head start on the newer OTT entrants -- there are some reasonable comparisons to be drawn between DirecTV Now and other OTT services. The chart below shows the cost of competitive OTT apps, along with an estimated number of subscribers and how long each service has been on the market.

OTT Services Comparison
Sources: Earnings transcripts as well as  reports by Bloomberg and The Wall Street Journal
Sources: Earnings transcripts as well as
reports by Bloomberg and The Wall Street Journal

Besides the variables in the chart, there are a number of other factors in determining the take rate of an OTT service, including where it's available, what content is included and how well the service is marketed. But at a high level, the numbers here still suggest a pattern. By and large, as price point goes up -- and with it the variety of content available -- customer numbers go down.

The trend doesn't bode particularly well for AT&T. It suggests that for people who want an alternative bundle, $35 won't be cheap enough. That's the amount of money cost-conscious consumers might spend once on a Chromecast device before using the gadget to stream free Internet video and maybe one or two cheaper OTT services.

It follows then that, assuming the trend holds, AT&T will have to attract subscribers who already pay for a bigger bundle. If AT&T is lucky, those subscribers will come from its competitors. If it's not, the telco will cannibalize its more traditional DirecTV service.


Want to know more about video and TV market trends? Check out our dedicated video services content channel here on Light Reading.


Importantly, there are ways for AT&T to take more control over the trend line for subscription growth. It can make the new DirecTV Now service easier and more fun to use than other OTT offerings. It can market the service aggressively and incentivize new users by bundling it with other AT&T services. We already know AT&T will zero rate the service, which means users streaming content from DirecTV Now won't see it count against their monthly usage caps. That's a serious advantage, but one that AT&T may have to downplay as it seeks regulatory approval for the acquisition of Time Warner Inc. (NYSE: TWX). (See AT&T Shakes Industry With $85B TW Bid.)

There's also the issue that other companies have had some of the same advantages as AT&T, and haven't been able to use them effectively. Dish Network LLC (Nasdaq: DISH) is increasing its number of Sling TV subscribers, but not quickly enough to counter a loss of traditional pay-TV subs. Verizon Communications Inc. (NYSE: VZ) has zero-rated its Go90 video service, but that doesn't seem to be helping it attract very many customers.

As Frost & Sullivan analyst Dan Rayburn reports, AT&T is reserving capacity today to support about 1 million concurrent DirecTV subscribers. But if recent history is any guide, that may be an optimistic short-term goal.

And if AT&T gets those subscribers only by sacrificing its higher-paying DirecTV customers, it's not a goal the telco should be aiming for.

— Mari Silbey, Senior Editor, Cable/Video, Light Reading

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KBode 11/14/2016 | 12:09:30 PM
Re: I think a lot miss the point of these services I cut the cord 8 years ago and haven't really looked back. Netflix, Hulu, and HBO Now all serve me pretty well.
kq4ym 11/14/2016 | 11:45:31 AM
Re: I think a lot miss the point of these services I cut out DirectTV some years ago in favor of Chromecast and even better (for less than $100) a Roku box. Granted I'm subject to lots of advertising. I get many direct mail letters from DirectTV and Dish inviting me to subscribe for their basic service at a much lower price than I previously paid them. But, it's still not worth it for me to get lots of satellite service with a continuing monthly bill that will eventually rise.
KBode 11/8/2016 | 8:40:44 AM
Re: I think a lot miss the point of these services "I believe most people miss the point about why these services are coming about..  These services are being provided so that companies such as Dish and DirectTV can get their cord cutters back or to slow the rate they "Cut"..  Dish for example is loosing subcribers very quickly and slingTV has slowed that for now..  They still have subscribers dropping like flies, but not nearly as quickly..  This helps their finacials in the long run.."

 

Well it helps their overall subscriber count versus what would happen if they did NOTHING, but I'm not sure migrating your $120/month legacy customers over to $20-$40 streaming alternatives can be seen as great for anybody's bottom line.

That said, I still think Dish is doing the right thing in terms of at least addressing the problem. Most sector executives continue to deny that cord cutting is a real threat, or demonize these departing customers as not worth keeping anyway.
brooks7 11/6/2016 | 11:45:26 PM
Re: Caveats Direct TV still has to pay the actual content owners for their OTT service.

seven

 
danielcawrey 11/6/2016 | 5:15:06 PM
Re: Caveats I would agree, the prices for some of these services that require no infrastructure cost becasue they run on the internet is a bit high. 

However, I do believe that may change in the future. If every content provider starts selling a service, the competition should make prices go down for consumers. 
linkedin48118 11/2/2016 | 10:18:26 PM
Re: I think a lot miss the point of these services PS Vue has DVR capabilities. Shows are saved to the "cloud" for 28 days with the ability to pause, rewind & fast forward. This is in addition to a ton of OnDemand (or "Catch Up") episodes. They offer live locals in the 7 major markets it originated in (New York, Los Angeles, Chicago, Philadelphia, Dallas, San Francisco and Miami) and are adding them to other markets as quickly as they can get the rights. They went Nationwide in March offering a $10 discount in markets where live locals aren't available. Its available on every streaming platform except Apple TV (although it is available on iPads & iPhones). They also allow up to 5 streams per subscription, which makes it ideal for households with multiple TVs & family members who want different programs at the same time. The lineup is great with the option of adding several premium channels (HBO, Cinemax, Showtime, Epix) as well as NFL Redzone. For us its been great & performs far better than Sling ever did. My son is a big fan of The Walking Dead & he hasn't missed a single live episode on Vue, whereas he could never watch it live on Sling. Its a home-based subscription, so when using the app on mobile devices outside the home, some channels are mobile restricted, but subscribers have access to every channel's individual app & PS Vue is an authorized TV provider for logging in. The biggest complaint most users have is the Roku app, which is lacking & inferior to the app on other devices like the PS4, Amazon Fire TV (box & stick) and IOS devices. Otherwise, they've got a great interface with a 14 day Guide (thats missing on Roku). We're in Chicago, so we get live locals (even though we use an antenna & TiVo for OTA) & pay $45 for the mid tier of channels. We watch on the PS4 and Amazon Fire Boxes. Considering we were paying $50 for just DVR/box rentals when we had cable, its totally worth it. They offer a 7 day trial so give it a try & see what ya think!
devin37354 11/2/2016 | 5:22:53 PM
I think a lot miss the point of these services I believe most people miss the point about why these services are coming about..  These services are being provided so that companies such as Dish and DirectTV can get their cord cutters back or to slow the rate they "Cut"..  Dish for example is loosing subcribers very quickly and slingTV has slowed that for now..  They still have subscribers dropping like flies, but not nearly as quickly..  This helps their finacials in the long run..  I feel DirectTV is having the same issues.. This will help reduce their churn..  They have to get this out and have to get it RIGHT with bugs worked out BEFORE Hulu has their version of live TV out.. This is the reason for the lower price.. Hulu is expected to release the same type of service in early 2017 and with Hulu already having the majority of cord cutters, this could be drastic for the sat companies such as directTV.


THe only thing holding me back from Sling or This is the lack of DVR.. Yeah, Hulu has some stuff the day after it airs BUT not everything such as The Walking Dead..  When this happens I will be dropping my DISH for a service like this..  Or when HULU has everything I watch the day after it airs, I will be gone.. 

 

Services like these allow cord cutters access to live sports and news..  It allows them access to specials on the networks they might watch.. A lot of specials never make it to Netflix and Hulu..  If they are home it allows them access to shows BEFORE the general public can ruin them! I don't know how many times I heard who was killed on the Walking Dead before I got to watch my DVR of it! That's why I try to watch the shows I love, when they air..
TelecomS62532 11/2/2016 | 12:35:30 PM
Directv now is BIG! I will be the first customer! With DirecTV now we are talking "LIVE" broadcast... we are not talking neflix or hulu. The only comparable service would be SlingTv in my opinion. And DirecTV now will edge out Sling TV in no time with 100+ live channels .... I cannot wait for DirecTV now to be available, I am so ready to be the first subscriber!
nashafi949 11/2/2016 | 11:42:43 AM
Just The first step in future Strategy is not to compete in OTT space. It is to actually have a pre wireless home with no boxes and wires whatsoever. Just devices only.  a 5G CPE that connects all devices and sits in a corner. a TV that is connected to a cloud DVR and works on a voice avtivated Remote model.

Home automation and any thing else IoT powered via the same 5G CPE

Now if you own content too then thats where TW deal makes sense as your bundle will have Free HBO etc.
VPArchit55164 11/2/2016 | 10:56:22 AM
maybe I agree in spirit that the industry will adopt new and cheaper services as consumers identify what it is they want to spend their money on.  Big bundles are in question, but I don't think that a $35 bundle from Chromecast is comparable to what DirecTV might offer in an OTT play.  The article is a little bit of a wind up.  Sure, DirecTV could create a bundle that competes with the $35 dollar bundle, but is that really the same customer that they already have?  

Good topic, but needs more focus.

 
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