Author: Mark Lowenstein
AT&T completed its acquisition of DirecTV last week, about a year after it was first announced. To be honest, I was never a big fan of this move. Pay TV is not a growing business, and I believe AT&T's dollars would have been better spent expanding its broadband business in the U.S.
But now that AT&T owns DirecTV and its 20 million U.S. subscribers (plus 19 million in Latin America), what should we expect? I'd like to focus particularly on the broadband angle.
Here's what we know: As of the end of Q2, including the DirecTV acquisition, AT&T has:
- 86 million retail wireless subscribers (postpaid and prepaid), plus 13 million reseller subs and 23 million connected devices (tablets, connected cars, etc.)
- 23.5 million landline voice subs (of which 13 million are consumers) and a serving area of 21 states
- 16 million broadband subscribers, about 12 million of whom are served by high speed Internet (HSI), somewhat loosely defined
- 6 million U-verse Pay TV subscribers, the vast majority have a "triple play" package of voice, HSI and TV
- about 30 million homes 'passed' with U-verse, compared with 17 million for Verizon FiOS
- 2.5 million homes passed with GigaPower fiber service (promised to expand to 12 million locations)
- 20 million Pay-TV subscribers in North America and 19 million in 11 Latin American countries (this includes DirecTV subs).
- And the following content assets: DTV, including exclusive NFL Sunday ticket; ROOT Sports; Otter Media Chernin Group joint venture, which also has a stake in Fullscreen; deal with Hulu for mobile/broadband subs
John Stankey, a long-time AT&T executive, will be the head of the newly named AT&T Entertainment and Internet Services business.
AT&T has said very little of about its actual strategy for DirecTV, other than trying to sell Wall Street on the revenue benefits and potential for integration and cost reduction. AT&T has also said that in the coming weeks it will "launch new integrated TV, mobile and high-speed Internet offers that give customers greater value and convenience."
Here's what I think AT&T will, or should, do.
There is some fairly obvious low-hanging fruit here. First off, one major asset that AT&T brings to the DirecTV table is its strong retail presence. Expect AT&T to start marketing DirecTV in its stores. The timing is excellent, with back-to-school (August is the second most active month for cellphone sales) and the NFL season approaching (NFL being a big differentiator for DirecTV). AT&T will need a fairly compelling offer to get people to switch, since a majority of pay-TV subscribers are ensconced in a Triple Play service from their cable company, and unbundling from that might result in those subscribers having to pay higher broadband and landline voice charges to their existing provider (unless they're one of the 30 million homes passed by AT&T U-verse). Perhaps Stankey should borrow from the mobile playbook and offer to reimburse customers who have to pay a penalty to switch or incur higher costs for other services, especially broadband.
Another opportunity is to create a compelling mobile bundle for existing or potential DirecTV subscribers. AT&T was not able to tell me how many of the 20 million DirecTV subs in the U.S. are existing AT&T subscribers, and the question is further complicated by the fact that pay TV is measured in households while cellular is measured in connections. One might be able to back into the number based on AT&T's market share, but a fair number of DTV households are in rural areas and might be unserved or underserved by cellular.
Another near-term opportunity is offering DirecTV customers who are not current AT&T subscribers aggressive incentives to switch. The other is touting the benefits of the mobile-pay TV combination as a way of incenting subscribers of competing pay TV and mobile services to switch to AT&T. Pay TV and cellular are the two "national" services that AT&T offers.
I think AT&T will aggressively market to these subscribers and will focus on incentives for switching. I am not expecting overly aggressive price discounting for a service bundle. AT&T has been cautious on wireless pricing and I don't think that will change. And it wouldn't want to do anything overly dilutive to pay-TV revenues given the overall tepid reception that the DTV deal has received from the financial community.
The most interesting angle of this whole deal, and the area where I think we'll see a lot of action, is the coming Battle for Content between AT&T-DirecTV, other pay-TV providers, the OTT universe and Verizon. There are some exciting opportunities here, but it's also messy. AT&T has many ingredients to offer a broad array of content to its mobile and broadband subscribers: DirecTV, Root Sports, Hulu and the Otter Media/Chernin Group joint venture with its current stake in Fullscreen. AT&T has an interesting opportunity – and challenge – in finding the most effective way to leverage these assets.
There are questions, such as whether AT&T can offer programming from traditional networks carried by DirecTV, such as ESPN, Discovery, and so on, to mobile subscribers who are not DTV customers, or are subscribers of rival pay-TV services such as Comcast. There are also complications, such as the fact that AT&T owns the rights to DirecTV's NFL Sunday ticket, but arch-rival Verizon has a separate mobile rights deal with the NFL. The content rights landscape is a complex grid, and it not easy to know, or keep track of, what content AT&T can offer, and under what conditions, especially on an OTT basis.
And I follow this for a living. Try explaining the various permutations to the average consumer…
As AT&T plots its broader content strategy, Verizon is nearing the launch of its own OTT content offering for mobile, combining rights it has from FiOS TV, the AOL purchase, Intel OnCue, and deals it has made with HBO, Vice and others. Add Apple and its permanently rumored streaming TV offering, the daily goings on in the OTT universe, and the explosion – and growing valuation – of non-traditional content properties (YouTube, Vice, Buzzfeed, etc), and the content landscape is looking pretty interesting.
Plotted against this content are the traditional "operator" challenges. First and foremost, are AT&T and Verizon capable of developing an appealing package of OTT content for their subscribers, combining traditional TV and new media programming, determining the proper mix of free, paid, and ad-supported content, and effectively competing against the multitude of other distribution outlets, from Comcast to Amazon, Netflix, Hulu, and sleeping giant DISH? Will they have enough unique and exclusive content, effectively packaged, to draw subscribers and generate revenues? We've been at the "mobile TV" table before, and operators' track record here is not great. So the jury is out.
Second, how do operators solve for a world where data still costs $8-10 per GB, and video provides the single greatest strain on operators' already capacity constrained networks? We are now even seeing usage caps on operatorbroadband services…
I think the opportunity is in pulling together the various programming assets into channels, or packages, of snackable, 'optimized for mobile' content, targeting the younger demographic. Some of this programming will have to be free, zeroed out, or ad-supported if any meaningful amount of it is going to be consumed over cellular. And we will need continual innovation and multiple techniques to significantly ease the strain video puts on operator networks.
A final question is whether AT&T can somehow fill the biggest hole in the satellite TV offering: broadband. I would be more excited about this deal if AT&T could provide a broadband solution to the DTV customers who do not live in AT&T's U-verse footprint (i.e. the vast majority of them). Right now, the answer is a giant "no." But the roadmap is potentially intriguing. Between continual improvements to satellite Internet, 4G/5G wireless, fixed wireless, and unlicensed LTE, it is conceivable that AT&T could offer a competitive broadband service, outside its landline footprint, in the future.
It could even be a "budget" broadband service, say 15-20 Mbps with a 50-75 GB cap, for ~$30 per month, to DTV subscribers (who are less likely to need a full-fledged OTT service). The "Cricket or Metro" of broadband, combined with an attractive mobile option. A mobile/broadband/TV Triple Play for $99 per month. Per household, with shared data over mobile.
These are the sorts of outside the box concepts I'm hoping Stankey and team will announce in the coming months. If it's the predictable, unimaginative, telco/cable-esque "10% discount on mobile offers for DTV subscribers" type of thing, then those who have been pessimists on this deal since it was announced a year ago will be proven right.