Deeper Dive—AT&T goes all-in with DirecTV Now, but Wall Street remains unimpressed

randallstephenson
AT&T CEO Randall Stephenson says the company is "bullish" on the future of video.

This week, AT&T reported losses of 207,000 users across its linear DirecTV satellite and U-verse TV platforms in the fourth quarter, a loss more than offset by the addition of 368,000 new DirecTV Now virtual customers. 

For the year, AT&T reported customer losses of 1.159 million for its two linear video platforms. DirecTV ended 2017 with around 1.2 million subcribers, with about 200,000 coming in the last month of 2016. Long story short, AT&T is migrating its video base to the IP-based platform, which will benefit starting this spring from a consumer-facing technology overhaul.

What this all means for AT&T’s Entertainment Group, which houses the company’s pay TV operations, as well as its fading DSL business, is a matter of some polarization. Despite paying $49 billion to buy a satellite TV company less than three years ago, AT&T clearly sees IP distribution as its future. 

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“We continue to work through the ongoing transition of the pay-TV industry,” company CFO John Stephens declared during AT&T’s fourth-quarter earnings call on Thursday. “This transition pressures revenues and margins. We will manage this transition as we have managed other transitions over the year, but expect the pressure to continue throughout 2018.”

For his part, AT&T CEO Randall Stephenson said migrating the user base from satellite to streaming was always the plan. 

“Since the day we bought DirecTV, we assumed that traditional linear video would be in a declining mode,” he said. “OTT and the ability to consume video on mobile devices, we believed, would be the trend and the wave of where things went. We wanted to be in the leadership position and facilitating that kind of consumption of premium video on mobile devices, and we have been in the leadership position in that.”

“As it relates to video, we are standing up a video product that we are convinced will give us growth in the video platform for the next few years, and that's our DirecTV Now,” Stephenson added. “So, as traditional linear declines, DirecTV Now, we think, can offset that and not only that, but our traditional linear video will be repurposed.”

Stephenson and AT&T believe that factors such as the negated CPE costs of virtual platforms, as well as the emergence of advanced advertising technologies and associated revenue streams, will eventually render DirecTV Now a viable revenue replacement.

“So, we're very bullish on video,” Stephenson said. 

RELATED: AT&T lost nearly 1.2M linear pay TV customers in 2017

For their part, investment analysts have been impatient with the strategy, with MoffettNathanson’s Craig Moffett noting, “That the company continues to grow its base of DirecTV Now subscribers isn’t helpful—AT&T loses money on them. What matters is that their satellite subscribers are leaving. Whether they can stop the declines of high-value legacy satellite subscribers, where they ultimately make all (or more than all) of their profits, will be critical to the company’s fortunes going forward.”

I emailed Moffett to see if he thinks the advanced advertising component could be a game-changer for DirecTV Now. "Not really," he responded. "Yes, it could emerge reasonably soon.  But no, the opportunity is not remotely large enough to replace the lost margins from satellite TV."

Other analysts don't seem to be as vociferous in their feelings against vMVPD margins. But that doesn't mean they're warm to them, either. 

“Adds of 161,000 [video subscribers] far exceeded expectations driven by DirecTV Now momentum and fewer U-Verse losses,” said Jefferies’ Scott Goldman. “However, ARPU came in light due to promotions and the mix shift to OTT drove a pronounced slowdown in growth. The OTT push, and an additional NFL game, also pressured profitability. … We remain cautious on segment margins into 2018 given the mix shift, ongoing investments, and content costs."

Deeper Dive is a new weekly column, appearing on Friday, offering more in-depth reporting on a story appearing earlier in the week on FierceCable.