AT&T (NYSE:T) is currently offering its new DirecTV Now 100-channel bundle for just $35 per month. That price will go up to $60 per month at some point in the near future, but early subscribers will be locked in at that price indefinitely. But there's one caveat: AT&T reserves the right to make price adjustments as necessary as its content expenses rise.
AT&T seems intent on offering a complete bundle and this strategy could leave more price-conscious consumers looking at other options a few years from now.
Other streaming services have a different approach to pricing that could make them more enticing to those looking to spend less. Sony's (NYSE:SNE) PlayStation Vue and Dish's (NASDAQ:DISH) Sling TV, for instance, have made efforts to keep prices low by working with media companies to alter what's offered and what they charge.
Prices will surely go up
Analyst estimates for DirecTV Now's costs indicate that it'll be practically impossible for AT&T to make any money on its standard $35-per-month package of 60 channels. Analyst Craig Moffett estimates the cost of programming for its base package is $30 per month, according to a Barron's post. Add in subscriber acquisition costs (like a free streaming stick or set-top box), credit card processing fees, and the cost of streaming the content itself, and AT&T is posting negative margins, he points out.
It's unlikely AT&T will be able to drop some channels from its lower-priced package. Not only would that risk irking its customer base, it would very likely break contracts it made with media companies to create the service. Networks like Disney's ESPN have pushed to get their channels into the lowest tier of pay-TV bundles to curb subscriber losses. If AT&T wants to keep prices low and make more money, it will have to drop a whole family of channels from every tier.
How Sony and Dish deal with content costs
Sony hasn't been afraid to shake things up to keep its PlayStation Vue pricing low. Last month it dropped all of Viacom's (NASDAQ: VIA) networks. In a blog post, PS Vue chief Dwayne Benefield wrote, "As part of our ongoing evaluation of the PlayStation Vue offering, we have determined that removing the bundle of channels from Viacom is the best way for us to continue to offer the most compelling value to our fans."
Some customers were no doubt turned off and forced to search for an alternative way to get Comedy Central or Nickelodeon, but Sony is catering to the set of consumers looking for a $30- to $40-per-month television solution.
Likewise, when Sling wanted to add several channels to its service, it worked around its existing contracts by providing two options to subscribers. It now has two separate packages and subscribers can opt to combine them. The workaround allowed Sling to keep its $20 base price point, and offer an alternative for just $25.
Both PlayStation Vue and Sling are focused on keeping pricing low because, as Moffet points out, cord-cutters -- millennials in particular -- are extremely price-sensitive.
Who is DirecTV Now for?
During AT&T's press conference introducing DirecTV Now, management said DirecTV Now is targeted toward the 20 million Americans who aren't part of the pay-TV ecosystem. These are people who don't have high enough credit scores to qualify for a traditional pay-TV plan, live in a building that DirecTV or U-Verse can't serve, or change their living situation too often for long-term contracts to work. These are not customers looking for the cheapest option available; these are people that want cable TV and can't get it.
To be sure, that's a valuable market AT&T is targeting. However, its initial promotional pricing will attract customers outside of that targeted base. Moreover, that target market is more likely to cannibalize AT&T's existing pay-TV subscriber base at lower net revenue and gross margins. That will put pressure on AT&T's entertainment segment if it's unable to keep DirecTV Now subscribers attached when it raises prices.
Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.