This is the satellite-TV business AT&T paid $49 billion for just three years ago?
Coming off a record bad third quarter, during which it lost 359,000 customers, the DirecTV satellite-TV platform is probably up against more bad news in Q4, as it grapples with expiring promotional deals and suddenly resurgent programming price increases.
Indeed, the linear side of the DirecTV business ended Q3 with fewer subscribers (19.63 million) than when AT&T closed on the business in the summer of 2015 (20.28 million). AT&T continues to shuttle at least some of the departing subscribers to its lower-margin virtual pay TV services. But in the meantime, average revenue per unit (ARPU) is down, churn is up and investors are nervous.
This angst is showcased in a new MoffettNathanson report, highlighting some of the challenges the satellite platform is facing beyond just the normal bad weather or the cord-cutting trend.
Promos Come Home to Roost
When it first took over DirecTV, AT&T signed up a lot of customers to expanded promotional deals, looking to goose subscriber growth early on while easing churn for other businesses. In June 2016, for instance, the telco added a second year of promotional pricing for new customers who also subscribed to another AT&T service, wireless in particular.
The promotion, which subtracted an average of $40 from the monthly bills of participating subscribers, succeeded in sparking DirecTV customer growth, with the platform adding 342,000 customers in the second quarter of 2016 and another 323,000 in Q3 of that year.
But this year, DirecTV’s promotional chickens have come home to roost.
As MoffettNathanson noted, even though AT&T cut the promotion back to one year, having a sizable portion of the subscriber base on two-year deals caused its total number of discount customer payments to spike — the expanded two-year promo deals weren’t coming off the books fast enough to make room for new standard one-year deals.
By April of this year, the research firm estimated that as much as 40% of the overall DirecTV customer base was on a promo deal. Coupled with the growth of the low-margin (zero margin?) DirecTV Now business, average revenue per user (ARPU) suffered.
Just as quickly, those two-year deals began to expire. By the third quarter, the percentage of the subscriber base on promotional pricing fell to 15.9%. It’s expected to fall to 15.2% for the fourth quarter.
AT&T has said it will work with customers facing sudden price increases for pay TV service, but not everyone seems to be sticking around.
Investors welcome the expected improvements in ARPU, but are concerned about subscriber losses.
“To the extent that rates do rise significantly for that much of the subscriber base, one might have reasonably expected elevated churn in response,” the MoffettNathanson report concluded. “There is no such thing as a free lunch.”
Further complicating AT&T’s outlook is a sudden flurry of program licensing renewals, which started with 21st Century Fox and could soon include The Walt Disney Co., Viacom and CBS Corp. This acceleration of program pricing will put even more pressure on AT&T not to raise consumer pricing and further elevate churn.
Of course, the same dynamics apply to DirecTV Now, the virtual platform to which AT&T freely admitted it was “transitioning” its satellite customers to earlier this year.
AT&T has talked of a future in which DirecTV Now — as well as a more robust, soon-to-launch virtual platform — will offer far greater advanced advertising revenue at a much lower operational cost.
“The key is, as we roll that out to full production or full availability to our customers, you will see subscriber-acquisition costs come down significantly because it’s the cost of that box as opposed to the cost of an employee rolling a truck, climbing the roof and installing the satellite,” AT&T chief financial officer John Stephens said at a November investor event, talking about AT&T’s upcoming DirecTV-branded pay TV service, which will be delivered via IP to proprietary set-tops.
Speaking to investors back in April, Stephens also pointed out AT&T’s advanced advertising objectives with IP-delivered video services. In the second quarter, he noted, “we were up 9% in [advertising] revenues. We have a base of about $350 million a quarter, in that range … So the team is actually proving that this works already with our existing [framework].
“We’re getting higher CPMs and getting higher revenue streams and making it more effective,” he added.
Stephens also talked up new DirecTV Now features, such as a cloud digital video recorder, as a means to “add new revenue streams and help counter some of the revenue and margin pressure we are dealing with.”
‘Transitions Are Never Easy’
Overall, he described the AT&T pay TV business as in transition, a word he used about a dozen times.
“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. “We don’t expect video to be any different.
Now, the challenge for AT&T is making sure its core satellite TV business doesn’t erode too fast to effectively transition to an IP-based service, which still has hours to cook in terms of being an effective, advanced-advertising driven, profitable business.
In a statement released to FierceVideo, AT&T seemed to walk back the transition talk at least a little, renewing its allegiance to satellite.
“We have no plans to discontinue satellite service,” the telco said. “Our video strategy involves offering our customers choices in how they want to receive their video service, including via satellite, our wireline service or streaming over home broadband, regardless of their provider.”