AT&T might follow this Thanksgiving weekend by cooking the pay TV industry’s golden goose.
On Monday the telco formally unveils DirecTV Now, a streaming service that CEO Randall Stephenson has said will offer more than 100 networks for an astonishingly low price of $35 a month.
And although the topic is much debated, several analysts say that could hasten the demise of pay TV’s expanded basic bundle — the most potent driver of Big Media profits.
“Ma Bell is about to set the tone for the industry; all eyes are on the success of DirecTV Now” — as well as AT&T’s $85 billion deal to buy Time Warner — Macquarie Research’s Amy Yong says.
DirecTV Now’s plan, plus a live streaming offering that Hulu will introduce early next year, will be “the most incrementally covered and discussed topic in the pay-TV and media industries over the coming months,” Guggenheim Securities’ Michael Morris predicts.
AT&T’s gambling with high stakes.
Pay TV companies regularly generate some of the fattest profit margins in American business. Distributors collect an average of about $90 a month from about 100 million households, more than 80% of the country. When you throw in advertising sales, pay TV ends up accounting for roughly $200 billion a year in sales.
But the system has been strained as consumers — whose inflation-adjusted incomes have been flat for well over a decade — struggle to keep up with annual pay TV price hikes. That’s created a vicious cycle as subscriptions decline, leading providers to keep raising prices, leading more subscribers or potential subscribers to look for a way out.
Something has to give. And AT&T might have one solution if low prices for DirecTV Now win wireless subscribers from Verizon, T-Mobile and Sprint.
That seems to be the only way the initiative makes sense. DirecTV Now’s programming costs alone could come to $34 per subscriber per month, MoffettNathanson Research’s Craig Moffett and Michael Nathanson estimate.
“That would leave DirecTV’s gross margin per subscriber at around $1. Yes, $1,” they say. “DirecTV’s margin after [subscriber acquisition costs], customer service, transport, computing, and storage costs would be negative.”
Programmers are glad to have another source of distribution revenue. Fox, Disney, NBCUniversal, Time Warner, Discovery, Viacom, Univision, A&E Networks, AMC Networks and Scripps Networks already have said that they will be represented in the DirecTV Now lineup.
There’s been no announcement about the most popular network, CBS, which has its own subscription streaming service: CBS All Access.
The TV industry might be in for a bumpy ride. “Not only will DirecTV Now cannibalize a portion of existing DirecTV satellite-based subscribers, it will take video subscribers away from DirecTV’s competitors,” BTIG’s Rich Greenfield says.
He wonders whether the industry is entering “a race to the bottom, with competitors who do not need to make money on video offering ever-lower price points across a variety of smaller and smaller programming packages.”
Cowen and Co’s Doug Creutz also warns that “any rapid movement of consumers out of traditional cable bundles is likely to wreak significant disruption on the ecosystem.” That could result in more showdowns over pricing as networks and distributors “scramble to protect margins.”
But Nomura Securities’ Anthony DiClemente is more sanguine, at least for now.
DirecTV Now and the expected Hulu Live “will initially attract subscribers from the large cohort of cord nevers/recent cord cutters with minimal cannibalization of the traditional Pay TV base,” he says.
He estimates that traditional pay TV could lose 794,000 subscribers in 2017 — offset by about 1.2 million households that will start to pay for DirecTV Now and Hulu Live.
The vast majority of cable, satellite and telco video customers probably will stick with their expanded basic packages if expectations are right that DirecTV Now will not have CBS’ network and local station content and offers less-than-high-def video resolution to just one device at a time.
To support his estimates, DiClemente notes that Dish Network has attracted about 825,000 paying subscribers to Sling TV, which starts at $20 a month for about 30 channels. Sony’s PlayStation Vue, with more services and a $30 price, has about 160,000 subs.
Disney’s Bob Iger, for one, says he’s not worried about DirecTV Now and other TV-like streaming services. They’ll “move more Millennials into the pay-TV universe,” he said this month.
Even so, he says, that “doesn’t mean there isn’t going to be a shift either away from the giant expanded basic bundle or away from some of the traditional distributors.”
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