Motley Fool
0
All posts from Motley Fool
Motley Fool in Motley Fool,

DirecTV NOW Has Almost 500,000 Subscribers, But It Can't Save AT&T's Video Business

AT&T (NYSE: T) unveiled DirecTV NOW late last year, and it hit the ground running. The company said it added over 200,000 subscribers in the fourth quarter when it was live for just over one month. The company didn't provide any exact numbers, however, basically saying it didn't want to create a benchmark for itself, instead focusing on improving the quality of the service.

But now that AT&T is seeing significant pressure on its traditional TV business, consisting of U-Verse and DirecTV satellite, the company decided to offer up some numbers for investors. As of the end of the second quarter, AT&T had 491,000 DirecTV NOW subscribers. Still, the streaming services subscriber additions couldn't make up for losses. AT&T lost a total of 199,000 TV subscribers last quarter.

Image source: DirecTV

Pushing the bundle

In AT&T's second quarter presentation, it highlighted the success of bundling DirecTV and U-Verse with its wireless service. Over the last two years, since closing its acquisition of DirecTV, AT&T increased the number of customers bundling TV and wireless by 4.8 million or 31%.

In recent months, AT&T has further pushed its wireless subscribers to also subscribe to one of its TV options. Customers subscribing to one of its unlimited data plans can save $25 per month on any of its television services. That means they can get DirecTV NOW's lowest tier for just $10 per month extra on top of their cellphone bill.

Bundling provides an advantage for AT&T compared to competing streaming services like Dish Network's (NASDAQ: DISH) Sling TV or Sony's (NYSE: SNE) PlayStation Vue. Bundling improves customer lifetime value not only by increasing the monthly bill, but by helping retain customers longer.

That said, the bundle hasn't been attractive enough to draw more television subscribers. Even with the growth of DirecTV NOW, AT&T is losing subscribers, and there's no indication that it can turn around that trend.

DirecTV NOW is not a replacement for DirecTV

Another important factor to consider for investors is that replacing traditional TV subscribers with low-value bundled DirecTV NOW subscribers puts tremendous pressure on revenue and gross margin for its video entertainment business. Management even admits DirecTV NOW isn't a replacement for DirecTV. On the other hand, juxtaposing DirecTV NOW subscriber additions with losses at DirecTV and U-Verse implies a different message.

With lower average revenue per subscriber and lower gross margin, AT&T will eventually see its video revenue and margin start to decline. It managed to increase revenue from video about 2% year over year last quarter. Profit margin across the entire entertainment segment (which includes high-speed internet and legacy voice service) is flat.

That said, Dish Network has managed to improve its operating margin over the last year as Sling TV subscribers account for a larger share of its total. (Dish doesn't break out its satellite and streaming subscribers.) The improvement in profit margin is due to lower subscriber acquisition costs, equipment costs, and general and administrative costs.

But it's not clear that AT&T can copy that success. While DirecTV NOW doesn't require the equipment of satellite or U-Verse, AT&T is spending heavily to promote the service. Not to mention the subsidy it's giving its unlimited wireless plan subscribers. It has shown improvements in general and administrative costs compared to last year, but it's still spending more than two years ago on a pro forma basis.

AT&T's video business is bleeding subscribers despite three different and distinct products. As the largest pay-TV provider in the country, AT&T has a lot to lose as more competition enters the market from streaming. While DirecTV NOW is off to a respectable start, it's not doing well enough to keep AT&T from losing subscribers, revenue, and profits.

10 stocks we like better than AT&T
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and AT&T wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of July 6, 2017

Adam Levy has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.