The traditional cable and satellite TV universe has continued to shrink as cord-cutting expands, but streaming bundles and services are facing their own issues and challenges. That’s apparent in a couple of recent reports on what’s going on with AT&T and WarnerMedia. First, Mike Farrell of Multichannel News has a report on AT&T’s latest earnings call:
AT&T said it lost a cumulative 1.16 million pay TV subscribers in Q4 — 945,000 at its DirecTV and U-Verse subsidiaries alone — but financial results were ahead of expectations as it readies for the launch of its HBO Max streaming service.
Most analysts expected AT&T to lose about 900,000 video customers in the period, a target the company missed handily, but still fewer than the 1.4 million it lost in Q3. AT&T said it ended the year with 20.4 million total video connections, 4.1 million fewer than the 24.5 million customers it had at the end of 2018.
With 945,000 of the Q4 losses being at DirecTV (satellite) and U-Verse (cable), it appears that the rest (215,000) come from streaming service AT&T TV Now. It’s notable that AT&T TV Now is more expensive than many other providers, especially if you want a lot of sports content; its base package starts at $65/month, but the main sports channels there are just ESPN, ESPN2, and FS1, so many sports fans will have to go to the $80/month or even the $124/month package to get the channels they want. They do have a lot of regional sports networks that competitors don’t (at the $80/month level and above), and their packages have some other perks (including a lot of non-sports channels, free HBO in certain packages, and discounts for AT&T wireless customers), but with sports-heavy packages elsewhere at $50 (YouTube TV), $55 (Hulu + Live TV), and $60 (Sling with both packages), it’s understandable that there may be some people leaving AT&T Now for other streaming bundle options. And there may also be people exiting the bundles entirely for just streaming services like Netflix, Hulu, and Disney+.
Beyond that, the losses at DirecTV and U-Verse are also notable, and they show further contraction in traditional cable and satellite TV. That’s not a story exclusive to AT&T, of course, as other providers are also losing plenty of customers, but AT&T appears to have been hit particularly hard over the last while. The close to 4.1 million customers that left in total since the end of 2018 is almost six percent of what they had. And the actual numbers that left are higher, as the 4.1 million represents a net loss, so it’s boosted back up by the customers they gained.
It’s interesting that the AT&T financial results wound up beating expectations despite the subscriber losses being worse than expected, and that perhaps indicates they’re doing well elsewhere. It’s notable that while revenue at WarnerMedia (the division created after AT&T’s 2018 acquisition of Time Warner) declined 3.3 percent to $8.9 billion. Turner networks revenue was up 1.6 percent to $3.3 billion. So that’s a nice boost. But the subscriber story certainly doesn’t look too good for them, either with their traditional packages or their streaming bundles.
And that perhaps adds further urgency still for the upcoming HBO Max over-the-top service (set for a May launch) to be a success. AT&T (and Time Warner before it) have been selling over-the-top HBO access through HBO Now since 2015, but HBO Max is going to be much bigger still, incorporating a lot more library and new original content from across WarnerMedia. But as Farrell notes, that comes with costs, and WarnerMedia saw a big revenue decrease from their decisions to stop licensing certain content (including Friends), which will be headed to HBO Max. Stephanie Sengwe of The Streamable has more on that part of the story:
With the launch of HBO Max right around the corner, WarnerMedia has been withholding on licensing some of its content. Instead, they have turned inward, choosing to invest in original content and using library content such as “Friends” — whose steaming license to Netflix used to bring in millions of dollars — to lure in new subscribers.
However, the decision to focus on HBO Max has come at a steep price. The company reported that they lost $1.2 billion in revenue because they are no longer licensing their content. “Without the impact of foreign exchange pressures and HBO Max investments in the form of foregone WarnerMedia content licensing revenues, consolidated revenues would have increased in both the fourth quarter and the full year,” AT&T, the parent company of WarnerMedia, stated in their fourth quarter 2019 earnings report today.
$1.2 billion is certainly a massive revenue drop. And for the past couple of quarters, and the first part of this year before HBO Max launches, that’s going to be quite negative for the corporate balance sheets. However, that kind of investment can certainly pay off; Disney hit some of those short-term revenue drops itself when it withdrew some of its licensed films from services like Netflix in preparation for the launch of Disney+ and that service is doing very well so far, expected to hit 25 million subscribers by the end of Q1 2020.
And AT&T has high ambitions for HBO Max, targeting 50 million subscribers there within the next five years. We’ll see if they get there, but they’re certainly making a big bet on it. With their traditional cable and satellite businesses shrinking, it certainly seems logical for them to work on expanding their direct-to-consumer business. But just how well HBO Max will do after its launch is up in the air, and that’s a critical question for the future of AT&T and WarnerMedia. These reports show just how critical it is.