• Comcast vs. AT&T: Succeeding in the Real World vs. Flailing in the Dream World

    If you want a vivid contrast of one company succeeding in the real world vs. another flailing in its own dream world, there’s no better example than what’s currently happening at Comcast vs. what’s currently happening at AT&T.

    With Comcast, which just reported its impressive Q3 ’16 earnings this morning, the company has not only devised a clever strategy for competing in a highly disruptive environment, but is also executing on it masterfully. Conversely,  AT&T is a company that has already made a backward-looking $50 billion acquisition of DirecTV, is trying to make a new $85 billion acquisition of Time Warner whose rationale its CEO cannot clearly explain and is now planning to launch a new $35/month DirecTV Now video service that is guaranteed to lose money and could do serious harm to the industry.

    Focusing first on the real world, Comcast’s Q3 ’16 earnings continue to demonstrate the company’s momentum in both video and broadband. Years into the hype around cord-cutting - and with Netflix having amassed nearly 50 million U.S. subscribers - Comcast managed to add 32K video subscribers in Q3, its best third quarter in 10 years. That compares with a loss of 48K subscribers in Q3 ’15 and puts the company on track to GAIN video subscribers for the full year.

    Once again, Comcast’s X1 set-top box helped differentiate the company’s video service, with 45% of X1 subscribers now taking the box. Buttressing X1 are the broad content rights for VOD that Comcast has negotiated, plus cloud DVR. As previously announced, Comcast is integrating Netflix with X1, which will make the X1 experience even better. It’s worth noting that analysts MoffettNathanson estimate Comcast still derives a gross margin of $44.75 per month per video subscriber. While on a percentage basis that’s down to 50.9%, from over 65% 9 years ago, it is still very healthy.

    Broadband improved again, adding 330K subscribers, vs. 320K in Q3 ’15. On top of broadband, Comcast has rolled out wireless gateways, home security, etc. And Comcast has also announced it will move into the wireless business in 2017, leveraging its huge WiFi hotspot network created over the past several years and its deal with Verizon.

    In cable alone, Comcast is executing across all its products and delivering real results. The company also reported strong results at NBCU’s broadcast and cable networks, although significantly helped by the Olympics.

    In contrast to Comcast’s real world successful strategy and execution, AT&T’s plan to acquire Time Warner and last night’s announcement that its upcoming DirecTV Now service will cost $35/mo for 100+ networks look more like AT&T’s flailing pursuit of its dreams. Watching an excerpt of AT&T’s CEO Randall Stephenson speaking at the WSJD Live conference yesterday leaves a distinct impression that the company is throwing not one, but two Hail Mary passes at once.

    First, the Time Warner deal, which is all about diversifying AT&T’s revenue stream away from its now contracting mobile business. As I explained on Monday, the best case outcome is likely that two plus two equals four, meaning Time Warner performs equally well under AT&T’s ownership as it would have independently. But there’s real risk that two plus two could actually end up equally LESS than four if AT&T were to force Time Warner’s properties into doing things that were perceived as better for AT&T’s bigger interests than for Time Warner specifically.

    At WSJD, Stephenson said about the deal’s rationale, “This deal is about one thing - how can we change the game in this ecosystem?” He went on to describe the $35/mo DirecTV Now launch, targeted to the 20 million non-pay-TV U.S. homes. He mentioned that an agreement to include Time Warner’s networks in DirecTV Now was ALREADY in place (and was “one of the first ones done”) before the proposed acquisition, so there’s no new benefit. He did however note that AT&T’s ownership of DirecTV gave the company scale to help get the content deals in place for DirecTV Now.

    As MoffettNathanson wrote this morning, using SNL Kagan’s benchmark costs for carrying broadcast and cable TV networks, DirecTV Now’s estimated content cost is $34/mo, leaving just $1/mo of gross profit. Factoring in subscriber acquisition cost, customer service, transport and other costs, DirecTV Now would lose money at $35/mo. MoffettNathanson further calculates that based on expected churn rates, the lifetime value of a DirecTV Now subscriber could actually be NEGATIVE.

    Worse, it would also likely cannibalize existing pay-TV subscribers at both DirecTV (which has an estimated $60/mo gross margin) and other operators far more than the penetration it would achieve from the 20 million non-pay-TV homes Stephenson is targeting. If this were to occur, DirecTV Now would accomplish the ignominious distinction of weakening its own DirecTV business, weakening other pay-TV operators, hurting the networks themselves by extension and even Hollywood, which would see budgets shrunk. In other words, if DirecTV Now succeeds at any material level, it will destabilize the broader video industry and strip out some of its profitability.

    As if all that’s not enough, back on the question of what AT&T will actually do with Time Warner, Stephenson’s comments suggest a sand box of experiments, each of which sound detrimental to Time Warner’s core business. He said, we’re going to “touch the third rail the industry has not and will not touch” and “experiment and test how you can bring a la carte pricing into the ecosystem.” How do these possibly help Time Warner? In a final theoretical nod, Stephenson vaguely said Time Warner will “develop new ad-support models” which will help offset rising content costs (i.e. DirecTV’s negative profitability). New ad models are already underway, but no rational person believes they’re anywhere close to adding significant profitability to TV networks.

    Listening to Mr. Stephenson, it’s hard not to conclude that, just as AT&T intends to put DirecTV’s core business at risk with DirecTV Now, it also intends to put Time Warner’s core business at risk with various poorly thought-out disruptive pursuits that would surely engender a backlash at Time Warner, reminiscent of what sank the AOL deal 15 years ago. All of this distraction would increase the likelihood that the Time Warner deal would actually equal less than four.

    While a lot has been written about the regulatory roadblocks ahead for the AT&T - Time Warner deal, far more attention should be focused on how amorphous the deal's strategic benefits actually are, as well as the potential risks to Time Warner’s still quite healthy business.

    As Comcast continues executing in the face of all kinds of industry headwinds, adding ever more value to its multichannel bundle, AT&T seems to be embarking on a strategy born in its own dream world with a low likelihood of eventual success.

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