Deeper Dive—AT&T’s video business shows small signs of life

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AT&T is still suffering massive pay TV subscriber losses and HBO Max is still working through distribution woes. However, the company’s video business showed some subtle signs of life during the third quarter.

AT&T lost another 627,000 video subscribers, primarily from its premium TV base that includes DirecTV, U-verse and AT&T TV. Those losses are likely to outpace AT&T’s competition this quarter but compared to the 1.358 million total video subscribers the company lost in the same quarter last year – and the roughly one million video subscribers it lost in each ensuing quarter – it’s a big improvement.

MoffettNathanson analyst Craig Moffett said AT&T’s premium video subscriber base is still shrinking at an annual rate of 16.3%, but it’s the first deceleration of that rate in the past nine quarters.

AT&T gave credit to AT&T TV for helping offset the DirecTV losses and CEO John Stankey said that his company has largely worked through the promotional cycles for its linear video products. He said AT&T’s gross video subscriber additions are now “not just churning back and forth.”

Stankey called AT&T TV a “much more natural fit” with the broadband business than the satellite product and said that improved broadband volume is helping ease video subscriber declines. He said AT&T’s investment over the next year in growing its fiber footprint will continue to help the video business.

“I’m not going to suggest to you that [video is] anything but a mature business. It’s going to continue some degree of decline but we’d like to exit this year with our decline rate looking more ratable to our share. We’re on that march to do that and we’re doing it with some tried and true approaches about how we should manage the base,” Stankey said.

UBS analyst John Hodulik said AT&T benefitted last quarter from improved churn, high broadband attach rates for AT&T TV and the return of sports.

“…But we remain cautious given a softer economy, higher pricing and strategic pivot by distributors/networks away from linear TV,” wrote Hodulik in a research note. UBS expects AT&T to lose 560,000 video subscribers in the fourth quarter.

Stankey said he couldn’t predict what cord cutting trends would look like in the near future but guessed that the U.S. pay TV industry might see the trend plateau once pay TV household penetration gets down into the 55 million to 60 million range.

Over at WarnerMedia, total domestic HBO and HBO Max subscribers exceeded 38 million while 8.6 million customers have activated HBO Max. It’s an increase over the 36.3 million HBO and HBO Max subscribers and 4.1 million HBO Max activations the company counted at the end of the second quarter.

Stankey said the pandemic-related production shutdowns have placed stress on HBO Max’s customer acquisition abilities but said that HBO Max’s library has helped with customer retention.

“The pandemic put us in a tough spot on originals. That will now start to ease as production picks up,” said Stankey. “Everything is about where I expected it would be.”

AT&T is working on fixing some usability issues with HBO Max. “Once we think we have all those things in line and have the right content, should the customer acquisition pace increase? I think we’d all like to see that happen when the formula is right.”

The HBO Max advertising-supported service is still on track to launch in 2021 and Stankey said it will allow his company to offer HBO Max to market segments that want a lower price point. He said having advertising will allow AT&T to “think differently” about how it uses other products and services on the HBO Max platform.

“It’s a really important strategic issue for us to have an ability to use advertising as a means to offer other products and services,” Stankey said.

HBO Max is not growing anywhere near as fast as competitors like Disney+ and Netflix, despite a global pandemic keeping many people at home, and it’s still missing key distribution deals with Amazon and Roku. AT&T will almost certainly account for the lion’s share of cord cutting once again this quarter. But maybe there’s a glimmer of hope for AT&T’s entertainment and media businesses.