Despite 946,000 subscriber losses in Q2, AT&T expanded its video business margin

subscriber losses
AT&T is struggling to keep pay-TV – and streaming – subscribers as it resets its video strategy.

AT&T (NYSE: T) says it will continue to focus on high-value customers for its pay-TV and virtual pay-TV services… despite its biggest subscriber loss ever in Q2. The company today said almost one million subscribers dropped from its pay-TV and streaming platforms in the quarter. It expects similar losses through the end of the year as it continued to shed customers who subscribed to fixed-price offerings and other promotional deals.

CEO Randall Stephenson, during a call with analysts, said AT&T is targeting a long-term value customer base, adding that it expected “this level of loss to continue” until it had remade its subscriber stack. And, he said, AT&T planned to rollout yet another TV streaming service in Q3 this year, in addition to HBO Max and its mobile-centric Watch TV. The new service, AT&T TV, a thin-client designed to stream content to a proprietary set-top box, will be at the core of the company’s strategy moving forward.

It had better be big, because the company’s 946,000 subscribers losses in the quarter, an eye-popping decline by any standard. Most – 778,000 – were DirecTV and U-verse subscribers. But, its virtual pay-TV service, DirecTV Now, also got slammed in the quarter; it lost 168,000 subscribers.

Subscriber losses in 9 months top 500K for DTV Now

Over the past nine months, the telco has lost more than a half-million subs from DirecTV Now (267,000 in Q4 2018 and 83,000 in Q1 2019). The OTT service was supposed to catch some of the 2 million DirecTV and U-verse customers who have abandoned ship over the past year. At the end of Q2, is DirecTV Now’s subscriber count was just 1.34 million.

Nevertheless, Stephenson said, those losses are expected to be just a footnote next year after it launches HBO Max, a new D2C offering built on content from HBO and a raft of other original programming from WarnerMedia as well as licensed programming.

HBO Max also eventually will fully leverage the rights it acquired when it added Turner and TNT in the Time Warner acquisition. Turner has NBA, MLB and other premium sports right – including the NCAA Final Four next year – that it hopes will have a big payoff.

“Ultimately, HBO Max will have a live element,” Stephenson said. “Premium sports are going to be a really important element for HBO Max.” That live element will include news, he said.

And, AT&T is looking to maintain exclusivity over much of the HBO Max content, with Stephenson noting “exclusive content has been important for as long at TV has been around. We’ll take advantage of that… there are lots of opportunities to take advantage of unique content deals through WarnerMedia.”

AT&T TV and the market

Stephenson was very optimistic about AT&T TV.

“The real results of AT&T TV will be next year,” he said. The service will be based around a self-installable Android STB. And, unlike DTV Now, it will deliver a full bundle of more than 200 channels, including Netflix. A major advantage to the AT&T TV over DirecTV: The cost of customer acquisition which, he said, would be cut in half. And, with its fiber product now passing 14 million households, it has a big addressable market across the US.

Stephenson said he sees the key to the video market as being able to deliver the best margin on TV services. The best way to do that? Keep subscriptions costs at a reasonable level by keeping costs down.

And he pointed to Q2 as a good example. Despite significant subscriber losses, AT&T’s margin on the video business was up.

“With content costs continuing to grow, you gotta find a way to get the cost curve down,” he said. One way, he said, is to make sure AT&T TV customer acquisition costs are controlled.

“AT&T TV will be the workhorse over the next couple of years. We’ll put our shoulders behind it,” he said. “We’ll get a lower price point and shore up the customer base.”

He noted that even though Dish stopped carrying HBO as part of a carriage dispute between Dish and DirecTV, “our (margin) numbers are still up year-over-year.”

“This thing is just feeling pretty good,” Stephenson said. “We’re getting more indications HBO Max is going to be strong.

“Bottom line: we like how our video portfolio is shaping up here.”

The bottom line

AT&T is still behind the 8-ball when it comes to subscriber losses, and it’s facing a bit of a rocky road in terms of carriage disputes, battles resulting in part from its need to hold down video costs. In addition to the Dish-HBO negotiations, CBS (NYSE: CBS) and Nexstar (NASDAQ: NXST) stations also have gone dark on DirecTV.

Stephenson said the bid/ask at the core of the CBS issue “is not that wide,” adding that AT&T had sent in a new offer five days ago. Since that, “it’s been crickets,” he said.

The gulf with Nexstar is wider, he said, as the company initially was seeking a 100% increase in carriage fees. Recently, it’s made a new offer that bumps the fees 50%. Stephenson said AT&T was “not going to impose those increases on our customers.”

And he said, AT&T customer, “in a world of streaming, are finding other ways to access this content.”

The big question? Can AT&T put together a value proposition that can help it find a seat at the streaming table and stem its subscriber losses?

Stay tuned.

Jim O’Neill is Principal Analyst at Brightcove. You can follow him on Twitter @JimONeillMedia and on LinkedIn