Will DirecTV Now Make Financial Sense For AT&T?

AT&T (NYSE:T) is expected to introduce its DirecTV Now streaming television services later this month, in what is likely to be the most significant launch for its entertainment division following the acquisition satellite TV behemoth DirecTV last year. The company is expected to promote the service heavily, with prices starting at just $35 per month, while offering upwards of 100 channels from leading content providers. In comparison, Sony’s PlayStation Vue offers 100 channels for $55 per month, while Dish’s Sling TV offers 40 channels at $25 per month. AT&T will also reportedly offer a streaming device such as Apple TV or Amazon Fire TV Stick for free for customers who sign up for multiple months. While the product will allow AT&T to tap into a market of over 18 million U.S. TV households that do not currently have pay TV connections, it could come at a significant near-term financial cost.

We have a $48 price estimate for AT&T, which is about 30% ahead of the current market price.

See our complete analysis for AT&T here

DirecTV Now is expected to have significantly lower margins compared to AT&T’s current pay TV products, as content costs – which are the largest component of a pay TV provider’s cost base – are expected to remain high. A report from Deutsche Bank pegs content costs for DirecTV Now at upwards at $30 per subscriber, with gross margins for the service estimated to be in the single digits. In comparison, AT&T’s regular video products garner monthly ARPUs of close roughly $110, with gross margins of close to 45%. There is also a risk that many of AT&T’s high-value pay TV users, particularly on its U-Verse IPTV platform, could defect to its lower-priced streaming bundles, hurting the overall profitability of the entertainment unit.

That said, there could be some advantages. AT&T could improve ad targeting on DirecTV Now, leveraging its customer data sets, allowing it to bolster per subscriber advertising revenues compared to its regular TV offering. Secondly, the company will be able to significantly cut down on costs related to installations and maintenance of equipment such as satellite dishes and set top boxes, as customers will simply need to download apps onto their smartphones or internet-enabled devices. This should have a positive effect on capital expenditures as well, as costs relating to truck roll get cut down. Customer acquisition costs are also expected to decline meaningfully, as AT&T markets the service online and also by cross-selling to its telecom customers. For example, DirecTV Now is expected to be zero-rated for AT&T’s wireless customers, meaning that it will not count towards their monthly data cap, making it more attractive to users (although this is raising some net neutrality issues at the FCC).

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