Lessons from AT&T’s bruising entertainment experience

How AT&T entered and exited the media business

AT&T enters the satellite market at its peak

In 2014, AT&T announced it was buying DirecTV. By that time, AT&T was already bundling DirecTV with its phone and internet service and had approximately 5.9 million linear pay-TV (U-Verse) video subscribers. However, this pay-TV business was already experiencing decline, to the extent that when the DirecTV merger completed in mid-2015, U-Verse subscribers had fallen to 5.6 million by the end of that year.

With the acquisition of DirecTV, AT&T went from a small player in the media and entertainment industry to one of the largest media players in the world adding 39.1 million (US and Latin American) subscribers and paying $48.5bn ($67bn including debt) to acquire the business. The rationale for this acquisition (the satellite business) was to compete with cable operators by being able to offer broadband, increasing AT&T’s addressable market beyond its fibre-based U-Verse proposition which was only available in certain locations/states.

AT&T and DirecTV enjoyed an initial honeymoon, period recording growth up until the end of 2016 when DirecTV subscribers peaked at just over 21 million in the US.

From this point onwards however, AT&T’s satellite subscribers went into decline as customers switched to cheaper competitor offers as well as online streaming services. The popularity of streaming services was reflected by moves among traditional media players to develop their own streaming services such as Time Warner’s HBO GO and HBO NOW. In 2015, DirectTV’s satellite competitor Dish TV likewise launched its own streaming service Sling TV.

Even though it was one of the largest TV distributors on a satellite platform, AT&T also believed online streaming was its ultimate destination. Prior to the launch of its streaming service in late 2016, Bloomberg reported that AT&T envisioned DirecTV NOW as its primary video platform by 2020.

A softwarised platform delivered lowered costs as the service could be self-installed by customers and didn’t rely on expensive truck roll installation or launching satellites. The improved margins would enable AT&T to promote TV packages at attractive price points which would balance inflation demands from broadcasters for the cost of TV programming. AT&T could also more easily bundle the softwarised TV service with its broadband, fibre and wireless propositions and earn more lucrative advertising revenue based on its own network and viewer insights.

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The beginnings of a bumpy journey in TV

AT&T’s foray into satellite and streaming TV can be characterised by a series of confusing service propositions for both consumers and AT&T staff, expensive promotional activity and overall pricing/product design misjudgements as well as troubled relations with TV broadcasters resulting in channel blackouts and ultimately churn.

Promotion, pull back and decline of DirecTV NOW

DirectTV NOW launched in November 2016, as AT&T’s first over the top (OTT) low cost online streaming service. Starting at $35 per month for 60+ channels with no contract period, analysts called the skinny TV package as a loss leader given the cost of programming rights and high subscriber acquisition costs (SACs). The loss leader strategy was aimed at acquiring wireless and broadband customers and included initiatives such as:

  • Promotional discounts to its monthly $60 mid-tier 100+ channel package reduced to $35 per month for life (subject to programming costs).
  • Device promotions and monthly waivers. The service eventually became available on popular streaming devices (Roku, Xbox and PlayStation) and included promotions such as an Apple TV 4K with a four month subscription waiver, a Roku Streaming Stick with a one month waiver or a $25 discount on the first month.
  • Customers could also add HBO or Cinemax for an additional $5 per month, which again was seen as a costly subsidy for AT&T to offer.

The service didn’t include DirecTV satellite’s popular NFL Sunday Ticket programming as Verizon held the smartphone rights to live NFL games, nor did it come with other popular shows from programme channels such as CBS. Features such as cloud DVR (digital video recording) functionality were also initially missing, but would follow as AT&T’s TV propositions and functionalities iterated and improved over time.

The DirecTV NOW streaming service enjoyed continuous quarterly growth through 2017 but peaked in Q3 2018 with net additions turning immediately negative in the final quarter of 2018 as management pulled back on costly promotions and discounted pricing.

The proposition became unsustainable financially in terms of its ability to cover rising programming costs and was positioned comparatively as a much less expensive service to its larger DirecTV satellite pay-TV propositions.

The DirecTV satellite service sold some of the most expensive TV propositions on the market and reported higher pay-TV ARPU ($131) than peers such as Dish ($89) and Comcast ($86) in Q4 2019.

  • The launch of a $35 DirecTV NOW streaming service with no contract and with a similar sounding name to the full linear service confused both new and existing DirecTV satellite customers and some would have viewed their satellite package as expensive compared to the cheaper steaming option.

Rising programming costs

AT&T’s low-cost skinny TV packages brought them into direct confrontation with TV programmers in terms of negotiating fees for content. When the streaming service launched, analysts highlighted the channels within AT&T’s base package were expected to rise in price annually by around 10% each year and this would eventually require AT&T to eventually balance programming costs with rising monthly package pricing.

Confrontations with programmers included a three-week dispute with CBS and an eight week dispute with Nexstar in 2019, which resulted in a blackout of both CBS and Nexstar channels across AT&T’s TV platforms such as Direct TV, U-Verse, DirectTV NOW. Commenting on the blackouts in Q3 2019, Randall Stephenson noted there were “a couple of significant blackouts in terms of content, and those blackouts drove some sizable subscriber losses”.

AT&T’s confrontation with content owners may have been a contributory reason to consider acquiring a content creation platform of its own in the form of Time Warner.

In mid-2018, as AT&T withdrew promotions and discounts for DirecTV NOW (later rebranded it to AT&T TV NOW), customers began to drop the OTT TV service.

  • AT&T TV NOW went from a peak of 1.86 million subscribers in Q3 2018 to 656,000 at the end of 2020.

DirecTV NOW subscriptions

DirecTV-subs-AT-T-stlpartners

Source: STL Partners, AT&T Q2 Earnings 2021

Name changes and new propositions create more confusion

In 2019, DirecTV NOW was re-branded to AT&T TV NOW , and continued to be promoted as a skinny bundle operating alongside AT&T TV, a new full fat live TV streaming version of the DirecTV satellite TV proposition. AT&T TV  was first piloted in August 2019 and soft launched in November 2019. The AT&T TV service included an Android set-top box with cloud DVR functionality and supported other apps such as Netflix.
AT&T TV required a contract period and offered pricing (once promotional discount periods ended) resembling a linear pay-TV service, i.e. $90+. This was, in effect, the very type of pay-TV proposition customers were abandoning.
AT&T TV was seen as an ultimate replacement for the satellite business based on the advantages a softwarised platform provided and the ability to bundle it with AT&T broadband, fibre and wireless services.

Confusion amongst staff and customers

The new AT&T TV proposition confused not only customers but also AT&T staff, as they were found mixing up the AT&T TV proposition with the skinny AT&T TV NOW proposition. By 2019 the company diverted its attention away from AT&T TV NOW  pulling back on promotional activity in order to focus on its core AT&T TV live TV service.

According to Cord Cutters News, both services used the same app but remained separate services. AT&T’s app store marketing incorrectly communicated the DirectTV NOW service was now AT&T TV when in fact it was AT&T TV NOW. Similarly, technical support was also incorrectly labelled with online navigation sending customers to the wrong support channels.

AT&T’s own customer facing teams misunderstood the new propositions

DirecTV-Cordcutter-news

Source: Cord Cutters News

Withdrawal of AT&T TV NOW

By January 2021, AT&T TV NOW was no longer available to new customers but continued to be available to existing customers. The AT&T TV proposition, which was supposed to offer “more value and simplicity” was updated to include some features of the skinny bundle such as the option to go without an annual contract requirement. Customers were also not required to own the set-top box but could instead stream over Amazon Fire TV or Apple TV.  In terms of pricing, AT&T TV was twice the price of the originally launched DirecTV NOW proposition costing $70 to $95 per month.

The short life of AT&T Watch TV

In April 2018, while giving testimony for AT&T’s merger with Time Warner, AT&T’s then CEO Randall Stephenson positioned AT&T Watch TV as a potential new low-cost service that would benefit consumers if the merger was successful. Days following AT&T’s merger approval in the courts, the low cost $15 per month, ultra-skinny bundle launched as a suitable low-cost cord-cutter/cord-never option for cable, broadband and mobile customers from any network. The service was also free to select AT&T Unlimited mobile customers.

By the end of 2018, the operator claimed it had 500,000 AT&T Watch TV“established accounts”. By the end of 2019 the operator had updated its mobile tariffs removing Watch TV for new customers subscribing to its updated Unlimited mobile tariffs. Some believed the company didn’t fully commit to the service, referring to the lack of roll out support for streaming devices such as Roku. The operator was now committed to rolling out its new service HBO Max in 2020. AT&T has informed Watch TV subscribers the service will close 30 November 2021.

Timeline of AT&T entertainment propositions

AT-T-Timeline-Entertainment

Source: STL Partners

The decline of DirecTV

As the graphic belowshows, in June 2021 there were 74.3 million pay-TV households in the US, reflecting continued contraction of the traditional pay-TV market supplied by multichannel video programming distributor (MVPD) players such as cable, satellite, and telco operators. According to nScreenMedia, traditional pay-TV or MVPD market lost 6.3 and 6.2 million customers over 2019 and 2020, but not all were cord-cutters. Cord-shifters dropped their pay-TV but shifted across to virtual MVPD (vMVPD) propositions such as Hulu Live, Sling TV, YouTube TV, AT&T TV NOW, Fubo TV and Philo. Based on current 2021 cord-cutting levels, nScreenMedia predicts 2021 will be the highest year of cord-cutting yet.

Decline in traditional pay-TV households

pay-tv-decline-nscreenmedia

Source: nScreenMedia, STL Partners

Satellite subscribers to Dish and DirecTV 2015-2020

Satellite-pay-tvdish-nscreenmedia

Source: nScreenMedia, STL Partners

When considering AT&T’s management of DirecTV, nScreenMedia research shows the market number of MVPD subscribers declined by over 20 million between 2016 and 2020. In that time, DirecTV lost eight million subscribers. While it represented 20% of the MVPD market in 2016, DirecTV accounted for 40% of the pay-TV losses in the market (40% of 20 million equals ~8 million). AT&T’s satellite rival Dish weathered the decline in pay-TV slightly better over the period.

  • In Q4 2020 the operator wrote down $15.5bn on its premium TV business, which included DirecTV decline, to reflect the cord cutting trend as customers found cheaper streaming alternatives online. The graphic (below) shows a loss of 8.76 million Premium TV subscribers between 2017 and 2020 with large losses of 3.4 million and 2.9 million subscribers in 2019 and 2020.

AT&T’s communications business has also been enduring losses in legacy voice and data (DSL) subscriptions in recent years. AT&T has used a bundling strategy for both products. As customers switched to AT&T fibre or competitor broadband offerings this also impacted the video subscription.

Table of contents

  • Executive Summary
    • What can others learn from AT&T’s experience?
  • How AT&T entered and exited the media business
    • AT&T enters the satellite market at its peak
    • The beginnings of a bumpy journey in TV
    • Vertical integration strategy: The culture clash
    • AT&T’s telco mindset drives its video strategy
    • HBO MAX performance
  • The financial impact of AT&T’s investments
    • Reversing six years of strategic change in three months
  • Lessons from AT&T’s foray into media

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Full Article: African Communications – a brewing storm

The outlook for the African Communications Industry is uncertain, at best. For sure, there is currently massive infrastructure investment across the continent. And this investment not only covers mobile technology, there are also major fibre and satellite projects working towards bringing the internet to the population. But a storm is brewing: major African players, such as MTN and Zain, are reassessing their corporate strategies; in-country consolidation in mobile looks inevitable in several countries as too many players have been licensed; and the business case for mass market internet services is unproven.

However, the lesson learnt from the mobile expansion through the continent is that innovation will flourish. This innovation is not only seen in products such as M-PESA, but also in business models. Africans are innovating their own business models for their own environment as well as adapting the tried and trusted business models which work in Western Europe. This article discusses some of the structural problems in some markets, examines some of major players and explores the new projects.

One Continent, Many Countries

Africa is a huge continent with a population close to 1bn and over 50 countries. Populations vary from Nigeria at 148m to Equatorial Guinea at 0.5m. GDP/head varies from the oil-fuelled Libya at US$8,300 to the war-ravaged Liberia at US$130. Importantly for Telco’s each country has a different regulatory framework, taxation regime and competitive intensity.

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It is hardly surprising, given all this diversity, that a wide range of strategies have been deployed by Telcos. There are a lot of nationally based local operators, however, a few key operators have been building a pan-African strategy.

Zain

Zain emerged from the Kuwaiti operator, MTC, and bought the original pan-African operator, Celtel, in 2005 for US$3.6bn. Since then, Zain has invested in Nigeria, Madagascar and Ghana. JPMorgan estimates in a recent note that including both acquisitions and capital expenditure,Zain has invested a total of US$8.9bn in Africa. Despite this historical commitment, Zain has been in the news recently after announcing that its African operations (excluding Sudan) are up-for-sale with a price tag of US$12bn.

In 2008, Zain Africa had a turnover of US$5bn (US$4.2bn ex. Sudan), EBITDA of US$1.8bn (US$1.4bn ex. Sudan) and net Income of US$401m (US$122m ex. Sudan). On these figures, it is hard to justify Zain Africa being worth US$12bn without complete faith in the potential of Africa. Obviously, the recent discussions between Vivendi and Zain have failed to reach a consensus on valuation.

In our opinion, Zain suffers from two major problems:

Zain-africa.JPG

  1. Their small subscriber base in many countries means that economies of scale are hard to achieve. Zain has tried with initiatives such as their One Network roaming product and the forthcoming pan-African payments system, Zap, yet have not solved the problem of operating in small, low income countries.
  2. Many of the larger countries in which Zain operates, especially Nigeria, Kenya and Tanzania, suffer from over-competition and Zain has a low market share. Furthermore, Zain is struggling to maintain margins as penetration grows.

MTN

MTN is a South African company which has expanded throughout Africa and the Middle East. MTN is currently present in 16 African countries and is particularly strong in the key markets of Nigeria, South Africa and Ghana. MTN has also been in the news recently with a complex merger transaction with Bharti Airtel of India in progress, under which the two companies will take blocks of stock in each other. In 2008, MTN had an approximate African turnover of US$10bn (ZAR86bn) and EBITDA of US$4.7bn (ZAR38bn). South Africa and Nigeria alone made up 74% of turnover.

MTN-Africa.JPG

Vodafone

Vodafone has been present on the African continent since 1993, being one of founders of Vodacom in South Africa. In 1998, Vodafone entered Egypt investing in the second operator, ClickGSM. In 2000, Vodafone entered Kenya with an investment in Safaricom. In 2008, Vodafone entered Ghana with an US$900m investment in Ghana Telecom.

This is a key differentiator for Vodafone from the Zain and MTN strategies – they expanded early, investing with strong local partners and in the largest African economies. The partnerships have not been trouble free, but today Vodafone is probably the strongest African operator in a relatively small number of countries.

vodafone-africa.JPG

In the 12 months to Mar-09, Vodacom alone had turnover of ZAR55bn (US$6.7bn) and EBITDA of ZAR18bn (US$2.2bn); Safaricom had a turnover of US$915m and EBITDA of US$363m; Vodafone Egypt and Ghana results aren’t published.

Unsurprisingly, Vodafone in Africa seems to be adopting a similar strategy to parent and transitioning itself to being a “Total Communications Provider” offering both fixed, mobile and internet services – with the exception of Egypt, where the local partner is the fixed incumbent. For instance, Vodacom has bought a pan-continent Satellite provider, Gateway, who offers services to carriers and businesses.

New Subsea Cables are arriving

The main Sub-Saharan cable connectivity is currently provided by the SAT3/SAFE cable which became operational in 2001. The SAT3/SAFE cable is not only limited to 120GB capacity, but access is controlled by predominately state-owned PTTs. East Africa is not currently served by a cable. Gigabit Ethernet circuits are currently available from London to New York at US$10/MB compared to approximately US$1,000/MB on African routes.

kmm-africa-cable.png

However, the Seacom and Teams cables will be operational this year and bring much needed connectivity to the East Coast of Africa. Prices are expected to drop to as low as US$33/MB over time. Main One and EASSY are expected to follow in 2010. WACS and ACE in 2011. Alternate routes and price competition are bound to follow over time.

Inland Long Distance Networks

Getting fibre to the shore is only one part of the equation; connecting the major cities is another. It appears that a vibrant set of altnets are starting to emerge: companies such as Neotel in South Africa and Jamii in Kenya. Companies such as Altech Stream East Africa are starting to build regional networks.

New Satellites are being launched

For most communications providers whether fixed, mobile or internet, the only option currently is slow and expensive satellite links. Slow as the current generation of geo-satellites have a latency of approximately 600ms and expensive as data is priced at approximately US$25k/MB. A next generation of 16 satellites are planned to be launched by O3b Networks (with Google as an investor) and due to be operational by late 2010.

kmm-africa-sat.png

Each of these satellites will orbit the earth providing coverage not only to Africa, but South America and Asia, and as they orbit much lower than the geo-stationary satellites are expected to have a latency of 120ms and approx. 10GB of capacity each. Cost will be around US$500/MB, which, whilst still expensive, makes the economics of rural Africa connecting within sight.

Chicken & Egg

The big question is whether all this investment will deliver a decent return to investors. The huge bubble investment in Western Markets in fibre, satellite and alternative networks in general at the turn of century ended with a lot of the original investors losing all their money. Demand is uncertain for advanced, or even basic, internet services in Africa. However, the infrastructure needs to be place before innovation and new services can flourish. The eggs are being laid and only time will tell whether the chicken will come home to roost.

With this second wave of investment, it becomes apparent why major operators such as MTN and Zain are reassessing their position and at a minimum are looking at spreading the risk through bringing in new partners. Vodafone is pushing ahead on a limited geographical footprint leveraging from a position of strength in mobile.