AT&T (T) Chief Executive Randall Stephenson’s promise that his company’s blockbuster $85.4 billion acquisition of Time Warner (TWX) would create a “head-to-head nationwide competitor with the cable ecosystem” .
The company’s recently announced DirecTV Now video streaming service that offers 100 “premium” channels for $35 per month is a case in point. Though the service would cost less than half of the $103 average price that consumers shell out for pay TV, it isn’t clear what consumers are getting for their money because AT&T hasn’t disclosed its channel lineup, and it declined to comment for this story.
“That’s the problem with any ‘skinny bundle,’” said Bruce Leichtman, who runs Leichtman Research Group, a media, technology and broadband consultant. “It’s missing something. …When you talk to consumers, 75 percent say there’s some channel or genre that is a must-have as part of a pay-TV service.”
CBS (CBS), the corporate parent of CBS MoneyWatch, and 21st Century Fox (FOX), whose properties include the Fox broadcast network, are holding discussions with AT&T but haven’t reached an agreement over DirecTV Now, according to people familiar with the situation. Spokespeople for CBS and Fox declined to comment for this story.
Comcast (CMCSA) signed an agreement with AT&T in September that allowed for the company’s NBC Universal networks to be distributed across all DirecTV products including DirecTV Now. An NBC Universal spokesperson declined to comment on the DirecTV Now lineup ahead of a formal announcement from AT&T. Besides the NBC broadcast network, NBC Universal’s properties include Bravo and CNBC.
Walt Disney (DIS), parent of ESPN and the ABC broadcast network, is a partner of DirecTV Now as is Viacom (VIA), a sister company of CBS whose channels include Comedy Central and Spike. DirecTV Now will feature A&E Networks, corporate parent of A&E and The History Channel, along with several channels owned by Scripps Networks (SNI), according to officials from both companies.
But even if the existing channel lineup attracts users, the economics of the business are tough.
According to a client note from MofettNathanson, AT&T will earn a negative gross margin per subscriber when costs such as computing are considered. Economists have also argued for years that selling pay-TV service on an a-la-carte or per-channel basis would drive up prices and limit consumer choice.
“It’s a very challenging business model,” Leichtman said, referring to skinny bundles. “It’s lower price, but it’s also lower margin. It’s higher churn.”
Incumbent providers are proving to be formidable competitors. Comcast, the world’s largest cable company, on Wednesday reported better-than-expected quarterly results, thanks in part to the strength of its video business, which added 32,000 customers in the quarter. That was this category’s best third-quarter result in 10 years.
Steve Burke, the head of NBC Universal, told analysts during the earnings conference call that new web-based video services won’t have a material impact on Comcast for the next year or two.
According to Leichtman, consumers known as cord-cutters who quit pay-TV services and have generated considerable media attention account for about 2.6 percent of all households, an increase from 2 percent a decade ago.
In Wednesday trading, shares of AT&T, which has the second-largest wireless network behind Verizon (VZ), fell 27 cents to $36.43.