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AT&T Can't Afford the Skinny Bundle

By Adam Levy - Oct 22, 2019 at 8:25AM

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The pay-TV leader is raising prices for its skinny-bundle subscribers.

AT&T (T 0.66%) revamped its channel lineup and pricing for AT&T TV Now at the beginning of the year, back when it was still called DIRECTV Now. The company will raise prices for subscribers once again next month, according to a report from Variety, making it even less compelling compared to competitors like Disney's Hulu + Live TV or Alphabet's YouTube TV.

The new pricing starts at $65 per month for its 45-channel bundle and $80 per month for the 65-channel bundle that also includes Cinemax. Both bundles include HBO. Hulu + Live TV starts at $45 per month for its 60-channel bundle and offers HBO for an additional $15 per month and Cinemax for an extra $10 per month. You also get access to Hulu's on-demand service. YouTube TV costs just $50 per month for its 70-channel bundle.

AT&T's pricing is far from competitive, and the move will likely send even more consumers looking for alternatives.

The AT&T TV Now logo

Image source: AT&T.

Bleeding subscribers

AT&T has seen its over-the-top video subscribers fall from a high of 1.86 million during Q3 of last year to just 1.34 million as of the end of the second quarter. It saw subscriber losses double in Q2 compared to the first quarter after its most recent price increase. The price hike next month is even more drastic, up $15 per month for some customers, and could cause subscriber losses to accelerate further.

The timing of the price increase is directly correlated to AT&T's other TV businesses. Management said during its second-quarter earnings call that it still had about 1 million customers on promotional pricing. Those customers will see their prices increase considerably starting next month at the latest, and AT&T fully expects many of them to cancel their service and seek value elsewhere.

AT&T is also preparing to launch its AT&T TV product based on a thin-client set-top box. It recently took the product out of beta testing, indicating it's ready to make a broad launch of the new service. Management previously said it'll launch AT&T TV before the end of the year. Packages will start with a year of promotional pricing as low as $60 per month, but require a two-year commitment with significant price increases in the second year.

AT&T will continue to bleed customers through the end of the year, but the customers it enters 2020 with will be much more profitable. That's extremely important for AT&T, which sits on a monumental amount of debt following its acquisitions of DIRECTV and WarnerMedia.

Can AT&T hold onto premium subscribers?

AT&T clearly isn't interested in value-seeking customers. It wants the consumers seeking a premium experience who are willing to pay a premium price for it. But consumers' spending habits are quickly shifting away from premium bundles.

A recent survey commissioned by Roku found that "cord traditionalists" -- those with the big expensive cable bundles -- declined by 4 million last year. Most of them opted to "shave" the cord, opting for a small bundle of cable networks instead of cutting the cord entirely.

These customers might be profitable for AT&T, but they don't offer very much long-term value. That's especially true as more premium streaming options -- including AT&T's own HBO Max -- enter the market, increasing the appeal of cutting the cord and opting for a few select services instead. Several companies are stepping up to make assembling a bundle of over-the-top streaming services easier for consumers, which will further accelerate the trend.

AT&T's focus on higher average prices and profitability is necessary in the short term, considering the company's massive debt, but it puts the telecom and media giant in a bad position to compete for subscribers in the long run.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Alphabet (C shares) and Walt Disney. The Motley Fool recommends Alphabet (A shares), Alphabet (C shares), Roku, and Walt Disney and recommends the following options: long January 2021 $60 calls on Walt Disney. The Motley Fool has a disclosure policy.

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