Could DirecTV Now Prove A Game Changer For AT&T?

AT&T (NYSE:T) is on track to launch its streaming TV services later this year, in what could be the most significant move for its entertainment division following its acquisition of DirecTV last year. While the carrier will initially target the product at cord cutters and other households without pay TV services, the carrier is reportedly  looking to make streaming its primary video platform in the next three to five years. Although AT&T will be entering a competitive market for online video streaming services, filled with younger and potentially more tech-savvy competitors, it does have significant strengths of its own.

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We have a $48 price estimate for AT&T, which is about 20% ahead of the current market price.

The Addressable Market For Streaming TV Services Is Growing

The U.S. pay TV market has been facing challenges, amid high penetration levels (roughly 83% of U.S. households) and cord cutting in favor of online streaming. EMarketer estimates that there were about 100.7 million pay TV subscribers in the U.S. at the end of 2015, and it expects the figure to decline to about 96.4 million by 2019, while the number of non-pay TV households is expected to grow from 20.8 million to 28.1 million in the same period. AT&T hasn’t been immune to the trends in the broader market, with its video subscriber base shrinking by about 0.5% since the acquisition of DirecTV. By offering a strong streaming TV option, the carrier could keep subscribers in its fold.

Competition Is Heating Up With Media And Tech Firms Targeting The Market

While cord cutters have seen options rise with the advent of streaming video services such as Netflix, Hulu and Amazon’s Prime Video, these services haven’t really been able to replace traditional TV given their lack of live channels and strong sports content. However, pay TV providers and media firms have been increasingly offering online TV packages, with Dish Networks offering Sling TV (priced at between $20 to $40) and Sony offering PlayStation Vue ($40 to $55). Silicon valley giants have also set their sights on this space, with Google reportedly prepping to launch an online TV channel streaming service called “Unplugged” sometime in 2017, while Apple is also rumored to have a web TV service that ties up with its iDevice ecosystem in the works.

AT&T’s Competitive Advantages: Content, Pricing And Cross-Selling Opportunities 

That said, AT&T does have some distinct advantages as it enters the fray. Content often determines the success of streaming services, and AT&T should be on solid footing in this regard, given its deep connections with content providers. The company has agreements with 90% of its content partners, recently signing deals with networks ranging from Turner, NBC Universal, Discovery Communications and HBO. Moreover, AT&T could eventually offer the DirecTV’s NFL Sunday Ticket – one of its most valuable content assets – along with its streaming packages, subject to necessary agreements.

AT&T’s CEO Randall Stephenson has indicated that pricing for the service will be very aggressive. This is possible given that AT&T holds the single largest pay-TV subscriber base in the U.S. (about 25 million subscribers), allowing it significant bargaining power with content distributors. AT&T could also lean on its sizable base of wireless and broadband customers to promote its streaming services by providing bundles. Additionally, data usage related to DirecTV Now streaming will not count against the monthly data caps of AT&T wireless customers. While AT&T will initially limit the service to a maximum of two simultaneous streams, it could extend it to offer as many as 10, per Bloomberg, targeting  higher spending pay TV customers who want to view content on multiple TVs and connected devices.

Streaming Could Eventually Supplant Satellite And Fiber Based Services

Bloomberg has reported that AT&T intends to make DirecTV Now its primary service, and this is probably with good reason. The cost of service delivery with Now will be low, as AT&T won’t have to send technicians to install satellite dishes or set-top boxes, given that customers will simply need to download apps onto their smartphones or internet-enabled devices. Secondly, customer service costs will also been kept in check as customer acquisition, tech support and billing could all be done online, reducing the need for traditional and costly phone-based support. This could effectively help the firm cut costs and potentially boost margins for its entertainment services.

That said, there are some risks as well. Firstly, its possible that the carrier’s high-value pay TV users, who have monthly ARPUs of $100+, could defect to its lower-priced streaming bundles. It remains to be seen how the carrier calibrates it new offerings in order to prevent such cannibalization. Secondly, moving to an internet-based delivery model implies that AT&T is effectively relinquishing control over the last-mile connectivity (satellite dishes/optical fiber) that delivers TV content to internet service providers (ISPs), many of whom are its direct competitors. This could hamper its customer relationships and potentially reduce the control it has over its quality of service.

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