AT&T’s Big Gamble

AT&T DirecTV

FEBRUARY 8, 2019

When AT&T acquired DirecTV in 2015, the satellite cable provider controlled 25% of the U.S. Pay-TV market. However, DirecTV has been shedding subscribers since the beginning of 2017, which is only accelerating.

The DirecTV deal was AT&T’s first big gamble in the filmed entertainment distribution market. 

Juggling Massive Mergers

AT&T is struggling to juggle all the entertainment and distribution assets acquired in the DirecTV and Time Warner takeovers, including DirecTV, DirecTV Now, HBO, HBO Now, AT&T’s new bundle of channels WatchTV, and now WarnerMedia is launching a stand-alone streaming service. 

All this fragmentation within a single company is a recipe for disaster.

Beyond maintaining AT&T’s core telecom business, the company is beset with a host of new problems after these media acquisitions.

First, the company is trying to manage a declining pay satellite market in its DirecTV unit, which is only accelerating, by growing the low-cost alternative DirecTV Now. The initial fear that the cheaper service would cannibalize the traditional business was not pessimistic enough. Because now after only two years DirecTV Now is starting to shed subscribers too.

This year, about two million two-year DirecTV contracts are expiring, which will likely see many of these subscribers fleeing for cheaper options elsewhere.

Second, the company is struggling to maintain HBO’s status in a fracturing media landscape while expanding HBO Now, the cord-cutting alternative to the traditional service.

With these issues and many more, WarnerMedia is now attempting to build from scratch a stand-alone streaming service this year to compete with Netflix and to a lesser extent Hulu, Amazon, and the forthcoming Disney+.

Lastly, the cherry on top of AT&T’s pie is $184 billion in long-term debt, which will only increase as it launches a capital-intensive streaming service.

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Deepening Declines

Since the beginning of DirecTV’s decline in 2017, the service has lost over 1.8 million satellite subscribers, nearly 9% off its high of 21 million two years ago.

In the last quarter of 2018, DirecTV lost 408,000 satellite subscribers, leaving the service with 19.2 million. Analysts were expecting a loss of 300,000 subscribers.

However, the most troubling revelation is the loss of 269,000 DirecTV Now subscribers in the same quarter. This new service was supposed to be the lower cost alternative to the traditional service to catch fleeing cord cutters.

This loss was a 14% decline from 1.86 million to 1.59 million subscribers. Such a substantial loss after only two years of operation is a bad omen.

In the last quarter, HBO’s revenue declined to $1.67 billion from $1.68 billion, while Turner’s fell to $3.21 billion from $3.23 billion. In the ever-expanding world of Netflix, one of the most alarming trends for the company to reverse is the 3% drop in HBO’s subscription revenue in the quarter to $1.4 billion. 

Worst still was the performance of the Entertainment Group where DirecTV and the media assists are managed. Revenue within this unit dropped 5.6% compared to last year.

The only bright spot within the Entertainment Group was Warner Bros., which grew revenue to $4.47 billion from $4.05 billion.

FilmTake Away

AT&T’s buyout of a declining DirecTV and a sputtering Time Warner at the top of the market is materializing into a massive miscalculation.

However, what is more distressing is the possibility that AT&T’s buyout of Time Warner for $85 billion last year is turning into an albatross around the company’s neck. With nearly $185 billion in debt, AT&T may have broke open the piggy bank at the wrong time to fund these expensive acquisitions.

The telecom company’s media ambitions, which started with the $49 billion purchase of DirecTV in 2015 and culminated in the takeover of Time Warner may prove ill-timed in lieu of the impending streaming showdown between Hollywood giants, Silicon Valley, and Netflix.