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AT&T’s DirecTV Now Targets Cord-Cutters Without Crushing Margins

  • Over-the-top service aimed at 20 million-plus without cable TV
  • Phone giant also debuts Fullscreen, FreeView online services

AT&T Inc.’s DirecTV Now live online video service launches Wednesday with prices that attempt to thread the needle -- attractive enough to target consumers who don’t want conventional pay TV without obliterating margins or cannibalizing the company’s traditional subscriber base.

Phone and tablet customers, along with owners of web-enabled TV sets, can get more than 100 channels including ESPN, Fox, Bravo and Nick Jr. for a limited time at $35 a month, according to a statement from the Dallas-based company Tuesday. When that promotion expires, consumers will pay anywhere between $35 for 60-plus channels to $70 for more than 120 channels, with HBO or Cinemax thrown in for $5 extra a month. The programming lineup includes all major cable outlets and national broadcasters, except CBS, and omits the NFL Sunday Ticket and local broadcasts in many cities.

Top Pay TV Providers
Source: Bloomberg Intelligence

Already the largest pay-TV provider in the U.S., AT&T is using the service to target more than 20 million consumers who don’t subscribe to satellite or cable TV. The $35 promotional offer may appeal to viewers weighing similarly priced services, such as Sling TV and PlayStation Vue. But DirecTV Now’s weaknesses -- an absence of CBS shows, a lack of 4K video quality and a limit of two simultaneous web streams -- still make the service inferior to AT&T’s fuller-featured TV business, which fetches an average bill of about $118.

AT&T will charge $60 a month for 100-plus channels when the promotion expires, giving its profit margins a boost.

“There is a collective exhale that the $35 plan for 100 channels, which AT&T teased ahead of time, is for a limited time only,” Jennifer Fritzsche, an analyst at Wells Fargo Securities LLC, wrote in a note.

DirecTV Now will be accessible through an app and available nationally, according to AT&T. Subscribers can get the service on mobile devices and also will be able to watch on web-enabled TVs or through media players from Apple Inc., Google and others. To sweeten the deal for AT&T wireless customers, DirecTV Now streaming won’t count against their data plans.

“The real differentiator will be that AT&T subscribers won’t use any of their data to access this,” said Avi Greengart, research director for consumer platforms and devices at Current Analysis.

Major Programmers

Walt Disney Co., Time Warner Inc., 21st Century Fox Inc. and Comcast Corp.’s NBCUniversal all will have at least some channels on DirecTV Now. In addition to CBS, popular premium network Showtime isn’t available through the package. Both are owned by CBS Corp., which was the only major entertainment company not to reach a deal with AT&T for the service.

DirecTV Now

Source: DirecTV

“The one big disappointment is not having CBS in there,” said Roger Entner, an analyst at Recon Analytics.

AT&T’s head of entertainment, John Stankey, said at a press briefing Monday the company is optimistic it will sign CBS, America’s most-watched network. It’s also working to offer the NFL Sunday Ticket and to sign up TV stations affiliated with the major networks, deals that will make local newscasts and other programming available.

Low-Cost Option

At the prices unveiled by AT&T, there’s room for profit but not much, according to Phil Cusick, an analyst with JPMorgan Chase & Co. Based on SNL Kagan programming cost estimates, Cusick projects gross margins of about 2 percent at the $35 tier and up to 15 percent for the $60 package. By comparison, Dish Network Corp.’s Sling TV margins are about 8 percent on its $20 package and break-even for the $40 option, Cusick wrote in a note Wednesday.

AT&T needed a lower-priced online TV service to defend itself against cheaper, subscriber-robbing services like Netflix Inc., Inc. and Hulu, as well as the new generation of multichannel streaming services.

AT&T has 25.3 million TV subscribers, and has lost 122,000 customers in the past year. If DirecTV Now is successful, the company plans to use the online format as its primary platform for new TV customers in the next three to five years. The phone giant recently struck a deal to buy Time Warner for $85.4 billion, potentially gaining ownership of the Warner Bros. studio, HBO and Turner Broadcasting.

Online Rivals

The debut of DirecTV Now pits AT&T against over-the-top internet TV competitors in addition to Sling, such as Sony Corp.’s PlayStation Vue, which starts at $39.99 for more than 45 channels. And Hulu and Google’s YouTube are expected to launch live, multichannel web TV services early next year.

As part of the DirecTV Now debut, AT&T is promoting deals on hardware. New customers can get an Apple TV device with a three-month prepaid subscription. They can also opt for an Amazon Fire TV Stick with Alexa Voice Remote included with one-month prepaid DirecTV NOW package, the company said.

AT&T is also offering $5.99-a-month access to Fullscreen, a service with 1,500 hours of advertising-free TV shows, series and films licensed from various producers. The company will provide Fullscreen at no added cost to eligible new and existing wireless plans with messaging service.

The company also introduced a third service that’s ad-supported. FreeView is a free sampling of on-demand content from Audience Network, Otter Media properties and other channels on DirecTV Now.

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