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.
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.
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