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DirecTV Now’s Most Attractive Package Will Be Money-Loser for AT&T, Analysts Say

AT&T vowed to shake up the pay-TV business with aggressive pricing on its new DirecTV Now internet-streaming TV service. And at least initially, the telco’s willingness to lose money on its foray into the over-the-top fray could let it steal customers away from cable TV and OTT rivals like Dish’s Sling TV and Sony’s PlayStation Vue, analysts say.

Set to launch Wednesday, Nov. 30, DirecTV Now is designed to make it far easier — and cheaper — to buy a mobile-oriented, TV-anywhere service than traditional cable or satellite services. There are no contracts, no installation window, and no credit checks required.

Analysts expect the most popular DirecTV Now bundle will be the lowest-margin one: The entry-level 60-plus-channel “Live a Little” bundle, priced at $35 monthly. Indeed, at that price point, AT&T will lose money when factoring in costs for subscriber acquisition — it’s offering free Apple TV and Amazon Fire TV Stick devices as incentives to prepay for the service — as well as customer service and support, according to analysts Craig Moffett and Michael Nathanson. Programming in the baseline bundle will cost $30 per month, based on per-channel fee estimates from SNL Kagan, meaning DirecTV Now’s starter package will have a negative operating margin overall.

“Put simply, they aren’t going to make any money” on the base package, Moffett and Nathanson wrote. “We don’t expect DirecTV Now to be such a runaway hit that it wrecks the market as we know it. But it would be a mistake to dismiss it as a non-event at its new pricing. It is still dangerous… both to the ecosystem and, most of all, to AT&T itself.”

The structure of DirecTV Now’s pricing and packaging reinforces the thesis that AT&T’s primary purpose with the OTT product is to use it as a loss-leader boost its wireless business, which has seen flagging growth in recent quarters. AT&T is making it attractive to buy both services: The telco’s wireless customers will have DirecTV Now video-streaming usage excluded from monthly data caps.

Meanwhile, AT&T will lose even more money with its special introductory offer of a 100-channel bundle for $35 per month, although it hasn’t specified how long that promo pricing will be available. At the $35 promo price, the 100-channel package will have a negative operating margin of more than 7%, Telsey Advisory Group analyst Tom Eagan estimated. Plus, AT&T is offering (again, for the time being) the option to add HBO or Cinemax for an additional $5 per month each — a deal AT&T is almost certainly subsidizing, according to analysts.

Even the regular DirecTV Now “Live a Little” package could be enough to turn the heads of cord-cutters (or “cord-nevers”). That includes ABC, NBC and Fox programming — although at launch live local channels will only be in U.S. markets where the broadcasters own the affiliate — plus ESPN, ESPN 2, Fox News Channel, CNN, Nickelodeon, MSNBC, CNBC, Disney Channel, TNT, TBS, USA, HGTV, AMC, FX, A&E, Comedy Central, MTV, Discovery, Fox Sports 1, Univision and Syfy.

“If the base $35 bundle is compelling enough, it could be quite attractive for consumers relative to the enhanced basic packs, which are at the heart of the churn-reduction strategy at companies like Charter, especially when combined with unlimited wireless data and no monthly set-top box costs,” Barclays analyst Kannan Venkateshwar wrote in a note to clients.

DirecTV Now includes three other high-priced, higher-margin bundles: $50 per month for 80-plus channels (“Just Right”), $60 a month for 100-plus channels (“Go Big”), and $70 per month for 120-plus channels (“Gotta Have It!”). The $50 bundle could carry margin in the low 20s if general and administrative, content delivery and marketing are low, according to Eagan. “Our sense is that with the ongoing rate of $50 for 80+ channels, the service will likely be profitable,” he wrote.

But analysts aren’t convinced that many consumers will take those profitably-priced packages.

The entry-level DirecTV Now tier certainly seems good enough for the majority of the target demo DirecTV Now is aimed at, Moffett and Nathanson say. The next tier up ($50 per month) adds channels including NBCSN, ESPNews, MLB Network, Cooking Channel, Fusion, IFC, The Weather Channel and GSN. The 100-plus tier (normally $60) includes all those plus channels including Golf, NBA TV, DIY Network, NatGeo Wild and Tennis Channel. The $70 top tier (with 120-plus channels) includes eight Starz Encore channels, as well as networks like Boomerang, Univision Deportes and El Rey Network. (AT&T has not released the full channel lineups for each DirecTV Now tier yet.)

“Virtually all of the channels that anyone would really want, save for regional sports networks, are included in the $35 ‘Live a Little’ package,” Moffett and Nathanson wrote. “And is there even a single cord cutter — a cohort that almost by definition lives online — that would pay extra for a linear TV version of The Weather Channel?”

To be sure, there are a number of drawbacks with DirecTV Now that will stunt its potential to win over the estimated 20 million U.S. households that don’t currently have pay TV.

CBS and Showtime are absent, as AT&T has yet to reach a deal with the programmer, while DirecTV’s NFL Sunday Ticket is also unavailable on the OTT platform. And because Verizon holds smartphone rights to live NFL games, pro football will be blacked-out on DirecTV Now smartphone apps.

There’s no DVR functionality in DirecTV Now, though that’s in the works for next year. And — in what could be a showstopper for some households — the service is limited to two simultaneous streams. Finally, DirecTV Now for now will not be available on three big OTT platforms: Roku, Sony PlayStation and Microsoft Xbox. (AT&T expects to roll out support for additional devices in 2017, in addition to the current lineup that includes Apple TV, iOS and Android devices, and Amazon Fire TV and Fire Stick.)

“At the end of the day, we view this product as competition for the Slings and PlayStation Vues of the world rather than for the core cable customer,” Wells Fargo analyst Marci Ryvicker wrote in a note.

While DirecTV Now’s impact specifically on Sling TV is unclear at this point, even if Dish lost all of its estimated 1 million Sling TV subs, “our valuation for Dish doesn’t really move,” Ryvicker added. That’s because the analyst’s forecasts do not have Sling ever generating more than 5% of consolidated operating cash flow.

In any case, AT&T will have to raise the rates of DirecTV Now in the future if it wants to sustain profitability, according to Drexel Hamilton analyst Tony Wible. The channels included in the base tier are expected to increase rates by about 10% per year. “While raising prices is also an option, it may be very difficult given the competitive environment,” he wrote in a note. Hulu is launching a live TV service in early 2017, while Google is expected with bow a skinny bundle called “YouTube Unplugged.” And Amazon will eventually offer a pay-TV over-the-top package priced at “at or below cost,” Wible speculated.

Virtual pay-TV providers “must find a way to balance higher costs and aggressive pricing, which they may do by integrating more OTT networks in lieu of traditional networks,” Wible added. Note that AT&T announced deals for exclusive content from Taylor Swift and Reese Witherspoon’s Hello Sunshine, and it’s offering a free year of Fullscreen’s SVOD service (normally $5.99 per month) to AT&T wireless subs who also take DirecTV Now.

Then there is AT&T’s $85 billion bid for Time Warner. “Ownership of a scale content-creation platform like TWX becomes incredibly valuable in this environment, in our view, especially with Warner Bros. and HBO among the largest content creators in the world,” according to Barclays’ Venkateshwar.

The question remains how disruptive to the pay-TV ecosystem AT&T’s low-priced OTT gambit will prove to be. As UBS analyst Doug Mitchelson put it: “Critical for media (companies) with DirecTV Now is whether it expands the market (pure positive for affiliate revenue), or is cannibalistic with traditional subscribers (hampering affiliate revenue by shifting subscribers down to DirecTV’s industry-leading rate card).”

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