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Market Insight

AT&T loses 946,000 TV subscribers in Q2 2019

August 07, 2019  | Subscribers Only

Erik Brannon Erik Brannon Associate Director – Research and Analysis, Service Providers & Platforms

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In a blow to the already-fragile business of pay TV, AT&T announced that it lost 946,000 pay TV subscribers in Q2 2019. The losses were mainly premium (legacy DirecTV and U-verse TV subscribers), the company ending the quarter with 22.9 million TV subscribers. In the same quarter, the company increased broadband subscribers by 45,000 and mobile subscribers by 3.9 million. Subscriber revenues (from TV, broadband, and mobility) grew 1.6% in the quarter to $11.4 billion, following a contraction of 0.5% in Q1 2019.

IHS Markit estimates that DirecTV (satellite), U-verse TV, and DirecTV Now lost 738,000, 40,000, and 168,000 TV subscribers respectively. Premium TV ARPU in Q2 2019 was $117.49, and IHS Markit estimates that full year 2019 ARPU will be $125.05 for U-Verse TV, and $102.63 for DirecTV. IHS Markit expects that ARPU will generally increase in the next few years as the company attempts to make up for subscriber losses by raising prices.

The company also announced its new thin-client broadband TV product, AT&T TV, would debut later in the summer 2019. Details are sparse on the new service, but it will likely include a limited selection of linear channels as well as free TV and movie on-demand. The service will be available to the companies IP subscribers. Subsequently, DirecTV Now is being rebranded to AT&T TV Now and will exist as a separate service to AT&T TV.

Broadband additions were purely IP (U-Verse and fiber broadband) in Q2 2019. AT&T added 93,000 IP connections in the quarter, with the loss of 48,000 legacy DSL subscriptions. There were 3.06 million Fiber Broadband subscribers (22% of all IP subscribers) in the quarter. Fiber net adds were 297,000 in the quarter, with many U-Verse broadband subscribers converted to fiber broadband, which delivers significantly faster speeds.

The Mobility segment continued to post solid growth in Q2 2019, with the addition of 3.9 million subscribers. Postpaid is giving way to prepaid as Cricket – the company’s low cost mobile MVNO – and AT&T Prepaid enjoyed strong growth and reduced churn. At the end of the quarter, the company had 76.3 million contract mobile subscribers, and 83.3 million prepaid subscribers.

Our analysis

AT&T is a company in transition, with each of its operating arms not only changing with the marketplace but having to manage the integration of WarnerMedia. On the TV side it is gravitating in the same direction as Verizon, transitioning focus from its linear TV business to online. For broadband, it is business as usual: Promote the transition of DSL to IP and convert competing cable broadband subscribers to AT&T fibre. The company’s mobile business is also in transition, with growth in lower priced prepaid and MVNOs, and the rollout of 5G.

Subscribers are at the heart of the matter

The striking change in AT&T’s video strategy is illustrative of the dramatic shifts in the TV business in the US. When the company completed the acquisition of DirecTV in 2015, it expressed excitement at the premium nature of its subscribers. At that time, it looked as if the juggernaut couldn’t be stopped, following AT&T’s acquisition the DirecTV grew TV subscribers every quarter through 2017. However, online channels like Netflix and Amazon Prime were already surging.  Since the acquisition, DirecTV has only managed 5 quarters of growth, and from its recent high of 21 million TV subscribers in Q1 2017, the company has since lost more than 3 million of these.

Collectively, the industry began to switch gears, and like other operators, AT&T launched a lower-cost and more flexible pure-online version of its pay TV service, DirecTV Now, in Q4 2016. The sea change in the way that consumers purchase content has had a negative impact on the service – from a peak of nearly 1.9 million subscribers, it has lost 518,000 subscribers since Q3 2018. While the losses have been attributed to subscribers coming off promotional offers, and raising prices (to compensate for carriage fee increases), IHS Markit also believes that consumers who are cutting the cord are experiencing ad-load fatigue associated with linear TV networks – 32 to 40 thirty-second ad spots per hour. Not only do online channels charge significantly less than lite channel packages for their subscriptions, most feature no advertising.

AT&T will continue to refine its video strategy, recently announcing its new online TV play, AT&T TV, which will launch in Q3 2019. The company is yet to reveal the particulars of the service, but claims that customer acquisition costs will be half what they are for traditional products thanks to decreases in equipment costs and customer self installation. It also believes that the new product, which will be available to its 14.4 million IP broadband subscribers, will be able to achieve  better margins with lower price points.

There are no plans to discontinue any of the existing services, rather, the focus will be on maximizing cost efficiencies going forward. The company has a significant number of customers coming off promotional offers at DirecTV and DirecTV Now, and expects that both services will see TV subscriber losses through the remainder of 2019.  What is for sure is that AT&T will continue to integrate HBO with its other TV services like Turner Networks. 

Online growth and access is a focus for near future

AT&T TV is set to become a key part of the company’s broadband strategy. Broadband has proven to be a steady performer on a quarterly bases, with fiber broadband deployment growing by an average of 275,000 subscribers per quarter for the last six quarters. In the same period, IP broadband and DSL subscribers averaged 12,000 additions per quarter. Broadband, especially fiber, is going to be key as the company continues its broadband and streaming TV initiatives.

Also boosting its streaming initiatives is the rollout of the 5G service. While in its infancy, early demonstrations of 5G technology are delivering on the promise of Ethernet-like speeds over wireless networks. There are major issues which will need to be ironed out, like 5G’s propensity to overheat handheld devices. Regardless of the mode in which consumers watch video content (live TV or online on-demand), if 5G becomes mainstream the cellular phone will have a shot at becoming the primary Internet portal for customers. In the way that current-generation cellular plans have been moving toward the family plan, so too will 5G. 

The launch of AT&T’s new direct-to-consumer (D2C) streaming service HBO Max, which is scheduled to roll out in 2020, will give consumers yet another choice to traditional pay TV. The service will have content from the Warner Bros. film and TV studio, other WarnerMedia owned streaming content like HBO and Crunchyroll, and the Turner networks. The Turner networks will eventually offer live news and sports content on HBO Max which was announced in its Q2 2019 earnings call. This move could dramatically increase the appeal of the product, especially if streaming rights from existing deals with the NBA, MLB, and NCAA are acquired. In terms of online channel offerings, ESPN+ currently has some of the most comprehensive sports coverage of any channel in United States, however it is not fully comprehensive. ESPN+ has exclusive UFC fights and varying limited deals with the NCAA, MLF, NFL, NHL, and MLS. If HBO Max is able to offer fully comprehensive sports coverage for multiple leagues in the US, the service would quickly challenge other sports providers and grow as a market leader. The major downside is that for every premium subscriber who switches to HBO Max there will be a significant drop in ARPU which the company isn’t likely to make up.

AT&T, like every other major player in the space, is doing its best to adapt to a very fluid marketplace. Its diversity is key to its transformation in the digital age. Combining its entertainment assets with both wired and wireless assets will enable the company to transition existing subscribers into double or triple (HBO Max, broadband, mobile) subscribers in much the same way that cable is bundled with broadband. If HBO Max is able to acquire full streaming rights, the sports offering will allow them to market the service in a similar fashion to the way that DirecTV has marketed NFL Sunday Ticket for years.

As comments from AT&T executives suggest, HBO Max will be a $2-$3 upcharge on top of their current HBO products and will not exist as a standalone product. IHS Markit estimates HBO Now to have 8.6 million paid subscriptions by the end of Q3 2019. With an already strong subscriber base, adding the Warner library, TV assets, and live news and sports for a minimal upcharge could offer the new service significant early growth. 

 

Geography
USA
Research by Market
Media & Advertising
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