DirecTV Now Plans Leave Wall Street Wondering About Pay TV’s Prospects

AT&T CEO Randall Stephenson sent a chill through many media investors in September when he said that the company’s DirecTV Now streaming service would offer more than 100 channels for just $35 a month — a far lower price than pay TV’s expanded basic bundle.

But yesterday’s additional disclosure that he was just talking about an introductory offer, appears to have done little to allay the concern that the service that launches tomorrow will hurt, rather than complement, traditional pay TV.

There’s no discernible movement today in the stock prices for content creators and distributors who might be affected. AT&T is basically flat in afternoon trading.

Some believe that “AT&T blinked” with the clarification that the $35 price normally is just for about 60 channels, MoffettNathanson Research’s Craig Moffett and Michael Nathanson say. But the details of the plan “tell a more complicated story.”

The smallest package includes “virtually all of the channels that anyone would really want, save for regional sports networks,” they say.

The so-called “Live a Little” bundle includes ABC, Fox, and NBC owned stations, CNN, Fox News, MSNBC, CNBC, ESPN, TNT, TBS, Disney Channel, Discovery, USA, Nickelodeon, AMC, FX, A&E, BET, Comedy Central, MTV, and Univision.

“And the cherry on top is that HBO can be added for only $5 per month,” they add.

The lowest priced service won’t appeal to everybody: It will only work with two devices at a time. It doesn’t include CBS, although execs say they hope to change that. And it’s unclear whether AT&T will be able to offer ABC, Fox, and NBC live outside of markets where the networks own stations.

With all of the programming and delivery costs, the analysts don’t see how AT&T can make a profit on DirecTV Now. That makes it “dangerous… both to the ecosystem and, most of all, to AT&T itself.”

That’s not how AT&T Entertainment’s Brad Bentley sees it.

DirecTV Now is “a lower margin product” than DirecTV’s satellite service — but it will be profitable — he tells me. AT&T hasn’t determined how long the introductory offer will last, and plans to “play it by ear.”

Meanwhile he expects few DirecTV subscribers to trade down to DirecTV Now.

“Most households need more than two streams,” he says. “They need three, four, or five streams. It’s not going to have all of our sports content. We have local channels, but there’s no CBS. So people are trading off a little bit on the experience.”

He adds, though, that the product “will evolve over time. There come a time where we will figure out if we can add more streams and more sports content. So think of it as a starting point.”

ESPN and other programmers have not set a cap on how many subscribers will be able to watch their channels on DirecTV Now, Bentley says.

Guggenheim Securities’ Michael Morris is unpersuaded by the case against pay TV cannibalization. He warns it would be a “miscalculation” to conclude that DirecTV Now will just appeal to the 20 million households that don’t subscribe to the pay TV bundle,

The introductory offer is already “quite robust” and is “likely to become stronger” if CBS agrees to add its owned stations and prime time programming.

He also expects AT&T to use its scale as the No. 1 TV provider and the massive amount of data it collects about video and wireless customers’ preferences to offer “compelling video packages at [profit] margins below industry norms.”

That could force other distributors to accept lower profits, and accelerate cable operators’ efforts to offer their own wi-fi based wireless phone services.

Content owners also could feel a pinch, Drexel Hamilton’s Tony Wible says. He figures network owners will lose about 68 cents per subscriber per month from each subscriber who switches to DirecTV Now from pay TV (based on prices for Comcast’s 134-channel Philadelphia Digital Preferred tier).

The only network owner who’d be paid more, according to his calculation, is Time Warner — which AT&T has agreed to buy for $85 billion.

But DirecTV Now could backfire on Time Warner, at least in the short run.

Barclays’ Kannan Venkateshwar wonders whether AT&T’s taking a loss on HBO to offer it for $5 — which “could be cannibalistic to HBO’s own offering of HBO Now for $15/month.”

On top of that, Brean Capital’s Alan Gould believes that some pay TV customers who trade down to DirecTV Now will use some of the savings to subscribe to Netflix.

One hang up is that AT&T’s wireless customers would incur data fees when they watch Netflix. They won’t have them with DirecTV Now, and — for customers who pay the additional $5 — HBO.

Here’s where AT&T’s deal with Time Warner could backfire. In other cases, notably when Comcast bought NBCUniversal, antitrust officials insisted that the distributor treat its own content the same as other people’s content.

If regulators require AT&T to do the same — in this instance, offering Netflix without data charges — then DirecTV Now offers “only upside for Netflix,” Gould says.

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