With AT&T reporting its Q2 ’17 results yesterday, the pivotal role that the company’s DirecTV Now skinny bundle is playing in sustaining its wireless business is becoming increasingly clear. It has never been any great secret that DirecTV Now, which now has approximately 500K subscribers, was meant to be bundled with AT&T’s wireless service, but the speed with which it is already contributing to the wireless business is quite noteworthy.
In supporting slides and on the earnings call, AT&T CFO John Stephens repeatedly called out the role DTV generally and DTV Now specifically are playing, particularly in reducing post-paid wireless churn (the type of wireless service most readers of this post have). At .79%, Q2 marked the lowest-ever quarter of post-paid churn. More broadly, post-paid churn is down 25 basis points since the close of DirecTV deal.
While AT&T did not break out the relative contributions of DTV vs. DTV Now to wireless (and Stephens demurred from saying when asked directly on the earnings call), it’s clear that DTV Now is bearing most of the load. It was another rough quarter for DTV, which lost 156K subscribers in Q2 ’17 vs. a gain of 342K in Q2 ’16 (note Uverse separately lost 195K subs in Q2 ’17 vs. a loss of 391K in Q2 ’16). With 152K DTV Now subs added in Q2 ’17, DTV Now has become the sole bright spot among AT&T’s video offerings (and it should also be noted that even DTV Now’s Q2 ’17 sub gain of 152K was down from the 267K added in Q4 ’16, but up from 72K added in Q1 ’17). In short, it’s still too early to know DTV Now’s sub acquisition trend line (but, hey, years after Netflix's launched streaming we still don't even know clearly what drives their business, so let's not expect too much from DTV Now).
Stephens said that the “vast majority” of DTV Now subscribers are bundled with wireless. AT&T’s offers speak to this: the company continues to promote a $25/month credit on either DTV or DTV Now when subscribing to AT&T Unlimited Plus service. But DTV will still run $25/month after the discount, whereas DTV Now is just $10/month and no cost/hassle to get the dish itself.
Underscoring the company’s emphasis on DTV Now, Stephens said, “We know that traditional TV service is not for everyone.” No kidding. Further, Stephens said over 50% or more of new DTV Now subscribers never had pay-TV, indicating just how important DTV Now is to opening up AT&T to new video customers (likely millennials) and having a lower price video entry point in DTV Now to dangle in front of them.
Last but not least, Stephens explicitly said of the quarter, “Our focus was on giving customers a great video entertainment experience bundled with mobility.” That mantra fits perfectly with how DTV Now has been positioned - as a mobile-first, on-the-go TV service. Going forward, as more people drop expensive, bloated multichannel bundles (including from DTV and Uverse), DTV Now will become even more critical to AT&T’s bundling strategy.
Taking things one step further, in my view, there’s a very real implication of DTV Now becoming critical promotional fodder for AT&T to sustain its wireless business. Back in March, in “Video is Quickly Becoming Bait For Wireless Carriers to Lure and Retain Subscribers,” I tried to explain how it’s not just AT&T that’s using video this way - it’s ALL the big wireless carriers. And with both Comcast and Charter, the 2 biggest cable operators aggressively entering wireless, they too could upend their traditional video-first strategies.
As this potentially plays out, it could have profound consequences for the pay-TV business is it devolves to little more than a hook to entice wireless subscribers. Being positioned as a hook means there will be even more pressure on broadcast and cable networks to reduce their affiliate fees to relieve margin pressure the carriers and operators face due to their discounted bundling strategies. With that cost pressure will likely come a pruning of less popular networks, an even greater reliance on advertising (at the very time users are demanding fewer interruptions), reductions in original programming budgets (at the very time Netflix and Amazon are increasing theirs) and certainly more M&A (see current Viacom, Discovery, Scripps drama).
In sum, whereas skinny bundles on their own are an inherently unattractive business, the way AT&T is using its DTV Now skinny bundle is already having an influence on the video business that will likely only increase going forward. As competitors scramble to keep up, the dynamics within the video business itself are likely to change dramatically.