AT&T's video business got hammered in Q4 as 658,000 total subscribers rolled away, including many that were on promotional pricing and other deep discounts for AT&T's satellite TV and OTT-delivered pay-TV packages.
Broken down by offering, the satellite-delivered DirecTV service lost 403,000 customers, ending the period with 19.22 million, and DirecTV Now, AT&T's OTT video service, shed 267,000 customers, ending 2018 with 1.59 million subs. The lone video bright spot was AT&T's managed IPTV service, U-verse, which added 12,000 subs, extending that total to 3.68 million. AT&T ended 2018 with 24.49 million total video connections in the US.
Roughly six months ago, about 500,000 DirecTV Now customers were on a highly discounted package in which they were paying just $10 per month for the service. Essentially all of those customers are now gone or have upgraded to regularly priced packages. When those discounted subs are taken out of the mix, AT&T's OTT-TV base actually grew, the company claimed.
AT&T Inc. (NYSE: T) is not exactly sad to see those lower-margin, discounted customers depart as the company prioritizes its plan to have its broader Entertainment Group reach EBIDTA-positive levels next year. Aided by the departure of subs on discounted or promotional rates, the average revenue per unit for DirecTV Now rose by about $11 on a sequential basis.
Randall Stephenson, AT&T's chairman and CEO, noted that the company spent the last 12 to 18 months getting DirecTV Now into the market with multiple offers to learn about market demand and customer engagement. The focus has since turned to generating higher margins and more profits from that product, and to get more fixated on customers who will stick with this service longer.
"Our full-price customers grew," Stephenson said. "Now we have a customer base that's left on the streaming [product] that's growing," he said. "And it's a highly engaged customer base. It has good churn characteristics. We like where we are positioning the streaming product. It's a major driver to how we get to EBIDTA stability next year."
AT&T also won't be "horribly promotional" with its more traditional U-verse and satellite pay-TV products, but is finding that those products are doing well when bundled with broadband services offered in AT&T's growing fiber footprint.
To help that business get to EBIDTA-positive, AT&T is trying to drive down programming costs and be mindful of how it packages and "right-sizes" its various pay-TV offerings, particularly for its OTT products, Stephenson explained. (See AT&T Bets Big on OTT to 'Bend the Cost Curve' of TV & Video.)
"It's not one-size-fits all … The objective, as content deals come up, is to move the needle," he said, noting that AT&T can't continue to increase content costs as subscriber levels drop.
Stephenson also shed some light on Watch AT&T, a sports-free, skinny TV bundle that is being offered for free to AT&T's mobile subs and for $15 per month as a standalone service. Watch AT&T, launched last June, has about 500,000 "accounts established," he said. AT&T won't label them as "subscribers" yet, given that the bulk of those Watch AT&T users aren't paying the standalone rate.
AT&T did not expand much regarding its plan to launch a set of subscription VoD services in Q4 2019. But Stephenson reiterated that the company will use a two-pronged business model for them –-subscriptions and advertising, with the later piece to be aided by AT&T's Xandr advanced/targeted ad division. (See Analyst: AT&T Made 'Major Strategic Error' on SVoD Plan and AT&T CEO: Our SVoD Service Won't Be 'Another Netflix'.)
Mixed bag for broadband
AT&T is showing strength in its fiber markets as its DSL base continues to fade away.
AT&T shed 32,000 total broadband subs in Q4 -– adding 6,000 "IP" (U-verse) broadband subs, while losing another 38,000 DSL customers. AT&T ended 2018 with 13.72 million IP broadband subs, and just 680,000 DSL subs.
Aided by its fiber buildout, revenues for AT&T's overall broadband business grew about 6% year-over-year.
AT&T ended 2018 with about 11 million residential "locations" passed by fiber, and is on track to grow that to 14 million later this year. With business locations factored in, AT&T expects its fiber network to pass 22 million locations.
Stephenson said that fiber build is "foundational" to AT&T's 5G deployment.
In 2018, AT&T added more than 1 million broadband customers to its fiber footprint, and about 250,000 in Q4 alone.
AT&T has seen a 40% penetration in its fiber markets after 18 months, jumping to about 50% after three years. "There's a lot of growth left in converting and growing total customers," said John Stephens, AT&T's senior EVP and CFO.
Looking ahead, AT&T does expect to use standards-based 5G as a replacement product for fixed broadband. (See Fixed 5G a 'Supplement' to Home Broadband, Altice USA Exec Says and 5G Fixin' to Become 'Largest Existential Threat' to Broadband Providers – Analysts.)
"I am absolutely convinced that we will have that capacity, particularly as we turn up millimeter wave spectrum," Stephenson said. "That's where the capacity and the performance comes from … I have little doubt that, in the three to five year time horizon, you'll start to see substitution of wireless for fixed-line broadband."
— Jeff Baumgartner, Senior Editor, Light Reading