Why AT&T’s Pay TV Business Has Been Underperforming

AT&T (NYSE:T) published its Q3 2017 results on Tuesday, meeting earnings expectations and missing market estimates on revenues due to large subscriber losses at its pay-TV division and continued attrition of postpaid feature phone subscribers. While AT&T’s losses in the postpaid phone space actually moderated year-over-year (97k phone losses versus 268k in the year-ago period), attrition at its pay-TV operations has accelerated, with the company losing a total of 385k traditional video subscribers versus just 3k losses in the year-ago period. Moreover, a bulk of the losses are attributable to the DirecTV satellite operations, which AT&T acquired just two years ago. Margins for the entertainment division also trended lower by about 220 bps year-over-year to 21.3%. Below we take a look at some of the factors that contributed to the underperformance and what lies ahead for AT&T’s pay TV operations.

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The U.S. pay-TV market has been on the decline, with subscribers cutting the cord in favor of cheaper online streaming services. The industry lost a total of over 1.5 million linear TV subscribers over the first half of this year. AT&T’s subscriber losses have actually outpaced the industry due to mounting competition and attrition from the company’s legacy U-Verse platform, which it is phasing out in favor of the DirecTV satellite offering. However, the satellite operations underperformed significantly over Q3, posting net subscriber losses of 251k versus 323k net additions a year ago. This was partly due to transitory factors. For instance, the company noted that about half of its declines in the traditional TV space were due to recent hurricanes in the U.S. Separately, the company has been tightening its credit policy for pay TV subscribers, with a focus on acting on overdue accounts. This also impacted the subscriber numbers for the quarter.

That said, there could be some improvement in the near term. AT&T said that it expects net adds for the linear TV business to turn positive over the holiday quarter. Moreover, the company is conducting trials of the next-generation software platform, which it expects to launch next year. AT&T expects this offering to help it to improve the ARPU and margins of its pay-TV business,  as it will include additional functionality including a cloud-based DVR and additional streams. AT&T’s streaming TV bet, DirecTV Now has also been faring reasonably well, adding 300k customers over the last quarter, with a total of about 800k subscribers in total. Although margins on the service are unlikely to be attractive compared to linear TV offerings, with churn also being potentially higher, it could allow AT&T to hedge its broader TV business. Moreover, with the company’s acquisition of Time Warner expected to close by the end of this year, AT&T could better manage content costs for the offering, boosting margins.

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