Tech

Rani Molla is a Bloomberg Gadfly columnist using data visualizations to cover corporations and markets. She previously worked for the Wall Street Journal.

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

AT&T Inc. is willing to take a financial hit to get its new online TV service, DirecTV Now, off the ground next week -- part of a gambit to win over Washington regulators while also positioning itself as a trend-setter that can shape the future of digital video.

AT&T is selling its online bundle of more than 100 TV channels that will cost subscribers $35 a month. After subtracting the costs to buy programming from 21st Century Fox, Disney and others, that leaves AT&T with only about $1.32 of revenue from each subscriber, according to estimates by research firm MoffettNathanson LLC.

That's likely to mean that AT&T will lose money on each customer it signs for the service. For comparison, DirecTV’s traditional satellite TV has an average revenue of $110 for each user, UBS estimates, and generates gross margins of about $60 per user, according to MoffettNathanson.

Razor Thin
At its current pricing, DirecTV Now's gross margins per user each month are just over $1
Sources: MoffettNathanson, UBS (DirecTV satellite ARPU)
Note: Includes CBS programming costs.

But the low price for an online TV service plays into AT&T’s claim that it can provide much-need competition to traditional cable TV companies. AT&T hopes the move will also help it win approval for its proposed merger with Time Warner Inc. Investors have been deeply skeptical that regulators will clear the takeover -- and even a new direction in the White House hasn’t shaken that skepticism.

In Play
Online pay-TV services like AT&T's DirecTV Now are estimated to reach nearly 15 million subscribers by 2020, according to UBS estimates
Source: UBS

Launching DirectTV Now will also put AT&T ahead of its many future competitors in the expanding market for TV delivered over the web. That market is expected to have nearly 15 million paid subscribers by the end of the decade. AT&T is gambling that low-cost offerings will allow it to attract customers now, while still giving it the option of raising prices later.

virtual-pay-TV-Shira

DirecTV Now may also help AT&T compete where it matters most: in its wireless business. AT&T has been losing smartphone subscribers to upstart rivals such as T-Mobile.

Can You Hear Me Now?
T-Mobile led branded phone net additions by a wide margin in the third quarter of 2016
Source: MoffettNathanson

To sweeten its pitch to mobile video-obsessed consumers, AT&T is letting them watch DirecTV Now programming without the bandwidth usage counting against their monthly data caps. That’s a big incentive, and one that isn’t likely to run afoul of whatever new telecom regulatory regime a Trump administration puts in place, according to Bloomberg Intelligence analyst Matthew Schettenhelm. 

AT&T's willingness to treat DirectTV Now as a loss-leader is similar to what Amazon.com Inc. is doing with its online video service. Amazon currently doesn't care if it makes money with Amazon Prime Video, because its goal is to use web video as a hook for its Prime shopping club. AT&T also has ample resources to bring to the pricing battle: $160 billion in annual revenue.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. The analysis assumes AT&T is paying the same rates for programming that traditional cable TV and satellite companies are paying. It may turn out that as a new entrant on the scene, DirecTV Now is being charged higher rates than others, which would pare the service's gross margins or turn them negative. 

To contact the authors of this story:
Rani Molla in New York at rmolla2@bloomberg.net
Shira Ovide in New York at sovide@bloomberg.net

To contact the editor responsible for this story:
Timothy L. O'Brien at tobrien46@bloomberg.net