While touting their robust subscriber growth, operators of virtual pay TV platforms have been met with a collective “meh” from investors, who see the low-priced, low-margin skinny vMVPD bundles as poor replacements for fast declining linear video businesses.
During its first-quarter earnings call Wednesday, AT&T presented investors the most robust case to date on what it sees as a currently painful “transition” to OTT video and why it believes it will come out ahead in the long run.
For the quarter, AT&T added 312,000 DirecTV Now customers while losing 187,000 customers across its linear DirecTV satellite and U-verse IPTV platforms. The virtual platform now accounts for around 17% of AT&T’s 25.4 million pay TV customers, up from just 1% a year ago.
Speaking to investors, AT&T CFO John Stephens used the term “transition” a dozen times. And, at least in the beginning, transitions are painful.
With the virtual platform base-priced at $35 a month, AT&T conceded to already feeling the aches of margin pressure.
“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. We do expect revenue and margin pressure as we manage through this, especially this year.”
Stephens believes the debut of the new DirecTV Now operating platform, launching in beta in the ongoing second quarter, will provide some relief.
He hopes that additional revenue can be spun off from DirecTV’s new cloud DVR, as well as VOD and pay-per-view capabilities.
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“These new services will add new revenue streams and help counter some of the revenue and margin pressure we are dealing with,” Stephens explained.
He said further revenue could be realized through advanced advertising and collected data insights on the IP-based DirecTV Now platform. Notably, AT&T's advanced advertising unit, AdWorks, reported a 9% revenue gain for the quarter, driven in part by the addressable IP capabilities of DirecTV Now.
“On the advertising, I'd point out that this quarter we were up 9% in 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], if you will, of the inventory of ads that we get as the distributor from the content folks,” Stephens said.
“So we're making it work. We're getting higher CPMs and getting higher revenue streams and making it more effective. We feel really good about that. As we go through this year, we hope to add a lot more inventory from underneath our umbrella of ownership companies to that, and we'd like to develop that.”
He noted that digital advertising could soon be an $80 billion business.
“We're not what I would call in that piece a significant player,” Stephens noted. “We believe that we can be. We have the capabilities to be.”
Data insights is another emerging revenue opportunity for AT&T, he said.
“If you think about digital and the opportunity to grow that, and anything about the opportunity to take all of our digital insights and data insights and help advertisers make sure their advertising is working effectively and efficiently, we believe that there's a real opportunity there,” Stephens added.
While mentioning a range of opportunities, Stephens stopped short of specifying just what the dollar figures might look like. This is undoubtedly key for analysts, who are pretty aware on a granular level that virtual services are trading at pennies on the dollar in regard to much higher margin linear services. For his part, however, the CFO also spoke to the other side of the equation: customer set-up costs, noting DirecTV Now’s lack of truck rolls as a major cash flow saver.
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“Moving to the DirecTV Now platform or moving to a thin client platform eventually for the home is really going to change the free cash flow aspects because of the upfront cost of truck rolls,” Stephens explained. “If you will, climb the roof costs—all of that can change as well as some of the things with regard to billing and administrative costs, the fact that it's an automatic bill or it's a credit card bill, all of those things will change.”
While it does seem to have the makings of a plan, it's tough to say if AT&T knows exactly how virtual pay TV margins will match up to the salad days of linear once all of this revenue potential is finally realized ... or is deemed not to have panned out.
Perhaps most compelling—and ephemeral—of all, Stephens said, will be AT&T’s ability to dovetail the virtual pay TV platform with its core wireless business.
“Bundling all that with wireless, that's the real strength in it,” he said. “That's what makes it worth all the efforts that we're going through to transition it. So it's not just one individual piece, but it's the collection of those pieces that make this very attractive.”