AT&T: DirecTV Now OTT play will cannibalize traditional pay-TV business

By Jim O'Neill on Sep 21 2016 at 1:15 PM
AT&T: DirecTV Now OTT product will cannibalize traditional pay-TV business

DirecTV Now, AT&T’s soon-to-launch streaming service, is one of the centerpieces of the telco’s mobile-centric strategy that it hopes will turn the company from one that is based on wireline services to one that is far more wireless oriented.

The soon-to-launch service will offer about 100 channels and have a price point that is “very, very aggressive,” CEO Randall Stephenson said during Goldman Sachs' Communacopia conference.

“(DirecTV Now) is exclusively an over-the-top product. This is no set-top box, this is no truck roll, this is a customer pulling down an app getting a very robust platform. We’ll be rolling it out in a couple of months,” he said, adding that data required to stream the content to a mobile device is “incorporated into “This is a very unique cost structure and a very unique platform,” that’s been built from the ground up, he said and minimizes costs to AT&T.

“They download an app on their smartphone, their smart TV or their tablet, they subscribe purely digitally, they select their content digitally, they interact with us digitally, the billing is purely an online billing arrangement,” he said. “This is a very, very low cost customer acquisition product” that has generated nominal incremental costs to provision.

AT&T currently is the largest MVPD in the United States, something that has given it leverage to negotiate content rights from an “aggressive” stance. So far, it’s signed up almost all of the content owners it’s targeted.

Thinner margins aren’t always bad

Still, margins on the product are “thinner.”

 “But I’m always willing to take thinner margins, when there is low capital intensity in the product,” he said.

The end result, he said, is a stickier wireless business with increased penetration.

“The lifetime value of a customer with this kind of product is actually quite attractive and very positive,” he said, adding, “I think in 2017 this is going to be a big driver of video for us.”

The amount of video being consumed on mobile devices has grown more than 200% since 2014 and now makes up 51% of all video starts, according to Ooyala’s Q2 2016 Video Index, released today.

Millennials, especially, have turned to mobile devices as their screens of choice for watching OTT video.

Mobile video is so important to AT&T that Stephenson called concerns that DirecTV Now might cannibalize AT&T’s existing pay TV business “funny.”

“I do think, yes, that there is risk of cannibalizing the existing product. And I think that’s always a good sign,” he said, because “that means you have found something that the market really, really wants.”

“We had the same conversation for how many years about wireless,” he said.

A focus on HH with no pay-TV service… for now

DirecTV Now is going to be targeted at the estimated 20 million homes that have no pay-TV subscription, he said. That’s similar to sentiments expressed by Time Warner when it launched HBO Now, and by CBS when it launched CBS All Access. Both services are estimated to have attracted more than 1 million households.

“We’ll be selling this product with limited streams, one or two streams,” he said. “We think you can kind of manage the cannibalization in the short run. We think this is going to be really important for quite a period of time.”

DirecTV Now plays to a growing consumer demand: “The consumer is about one thing, it's about video.”

Stephenson pointed to a 60% week-over-week increase in the number of users streaming NFL Sunday Ticket to a mobile device this weekend, “a stunning number.”

“We're not trying to do something where you just get buffer fatigue while you're waiting on content,” he said. “We want this to be an MVPD-like experience on a mobile device. And we feel pretty good we're going to be able to pull that off.”

Stephenson said he expects AT&T to be able to take an integrated product solution beyond its traditional footprint, becoming a truly nationwide provider.

“I will be sorely disappointed if that is not the reality two years from now,” he said.

AT&T isn’t alone in taking its legacy pay-TV business over the top, especially with a mobile focus.

Verizon also has been attempting to establish a toehold as a virtual MVPD, although its content play has been far less aggressive.

Its Go90 mobile video initiative has grown very slowly, likely due to lackluster content that doesn’t reflect its pay-TV lineup.

Stay tuned.                                                                                                      

Follow me on Twitter @JimONeillMedia and on LinkedIn

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