Is there a storm brewing at AT&T’s video business?

An SEC filing from AT&T has revealed progress at the business over the last couple of quarters might be nothing more than a false dawn.

The US telco has used a backdrop of earthquakes and hurricanes as justification for a slightly ropey third quarter, but are these disasters just a bit of a smoke screen to hide a business struggling to adapt to the new status quo? In terms of the actual performance, AT&T has warned despite growth of its OTT content platform, DirecTV Now, total video subscribers will show a net loss of 90,000.

The actual quarterly announcement won’t be out for a while (October 24), so this is nothing more than a bit of damage limitation. Share price has declined by about 6% (at the time of writing) over the course of the week, though this will likely stabilise, and the impact of less-than-ideal financials will be lessened. Pretty standard stuff.

Natural disasters will have an impact on the business, as damage to infrastructure will certainly effect sales, but worryingly for AT&T the cord-cutters are leaving in the thousands, and traffic is not being matched the opposite direction. Executives can boast about a 300,000 subscriber gain on its OTT service, but a net loss of 90,000 means 390,000 customers left its legacy service. It might be simple to point out, but the AT&T spin machine has done a pretty decent job in glossing over the fact.

But natural disasters are not the only thing executives need to worry about. Another explanation is ‘heightened competition in traditional pay TV markets’. Increased options for the consumer is always going to mean you aren’t going to get as many new subscribers as you want, but the fact AT&T is overseeing a subscriber net loss this quarter says one thing to us; there are better services out there.

Another slightly worrying area is the cash side of the video business. Taking a very simplistic approach, we appreciate it is a more complicated equation, but DirecTV Now is substantially cheaper than the traditional alternative. Using the current offer on the website, DirecTV will cost you $25 a month, while the OTT version is down to $10.

These are short term offers, the price will increase, but AT&T is essentially creating an alternative service which is cheaper for the consumer, but it isn’t replacing the lost subscription numbers from the original. Less subscribers at a smaller monthly bill, means less money. There will be technological and financial benefits to running an OTT service as opposed to the traditional cable, but how much more efficient can it actually be?

Competition is certainly intensifying in the content space, and AT&T needs a bit of a boost from somewhere. Completing the Time Warner deal cannot come soon enough.

That said, Paolo Pescatore from CCS insight is certainly a bit more positive about the AT&T outlook:

“This news underlines the cut throat market nature of TV in the US,” said Pescatore. “The concept of cord cutting or shaving is not knew and people will continue to flock to online video services. Specifically in the US companies who offer TV services via satellite or cable will continue to struggle.

“But those like AT&T are still very placed. The numbers do show strong support for its online video service DirecTV Now. And overall it is a very good offering. This is where the battle lies and everyone is piling into offering live TV, along with on demand and original content. In this context, this will put pressure on those that do not have a good online video service. The acquisition of Time Warner will only strengthen AT&T’s position.”

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