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AT&T Introduces Homage to Cable TV

By Robert Izquierdo - Mar 9, 2020 at 9:18AM

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Do you love cable TV? Then AT&T has a product for you. For skeptical investors, this new service may be a warning sign.

Venerable AT&T (T -0.24%) rolled out a new streaming service nationwide on March 2. Called AT&T TV, the new service combines live television, such as sports, with video streaming through the internet.

As one of the oldest and most recognizable brands in the telecommunications industry, many view AT&T as a dinosaur trying to hold off extinction. Is AT&T TV a new coat of paint on an old home? Or is it an opportunity for the slow-moving telco giant to gain an advantage in the streaming wars? Let's dive into the implications of AT&T TV for investors.

The AT&T logo, which is a globe segmented by blue horizontal lines next to the letters A, T, ampersand, T.

Image Source: AT&T.

What is AT&T TV?

The popularity of cord cutting has led to a bevy of streaming services from the likes of Apple, CBS, and Disney. AT&T alone owns several but plans to focus on the upcoming HBO Max, debuting in May, and the newly launched AT&T TV, which includes features that help it stand out.

One of the key differences between AT&T TV and other popular streaming services like Netflix is that you can watch live television, such as sports. It comes with DVR capabilities to save recordings to the cloud. Lastly, AT&T partnered with Alphabet's Google to power the hardware: a voice-activated TV remote using Google Assistant, allowing users to speak into it for easier navigation of channels than traditional remotes, and a set-top box featuring the Google Play Store, where you can download apps (including Netflix) to complement the live television experience with app-based streaming content.

The ability to watch content from apps like Netflix and YouTube sounds like a bid to centralize the fragmented streaming market, but consumers still have to sign up and pay for these services separately. That's no different than the connected TV experiences I helped to build at the pre-Verizon Yahoo! over eight years ago. Still, that's a minor annoyance compared to the byzantine pricing strategy AT&T implemented for its new service.

Cable TV in streaming form?

The pricing is another key difference between AT&T TV and other streaming services, but not in a good way. Consumers receive a discount on the initial year of service, but even the discounted price smacks of cable TV rates at $49.99 per month.

After the first year, prices increase to the prevailing rates at that time. Since customers have to sign up for a two-year commitment, they will have to pay the higher rate. If they cancel early, they are assessed early termination fees. There's also an activation fee, taxes, and other potential hidden costs such as an internet device fee.

The company also tries to get consumers to buy additional services by bundling AT&T TV with internet access. This strategy is about increasing broadband revenue, according to John Stankey, AT&T's President and Chief Operating Officer. 

But the packages don't stop there. Four tiers of AT&T TV service come with varying degrees of content. Even with a package, some channels require additional fees to watch. It's complex, and feels like the cable TV experience consumers fled in favor of the simple pricing of streaming services.

AT&T TV's implications for investors

The outcome of AT&T TV could prove a warning sign for investors. AT&T has struggled to retain subscribers for its DIRECTV business. In its fourth quarter earnings report, John Stankey predicted the company will "start to see those subscriber trends incrementally improve" as AT&T TV hits its stride in the second quarter of 2020. 

If AT&T TV can turn that subscriber decline around, it's an encouraging sign for investors. If customers see AT&T TV as more of the same tired cable television model, then the hemorrhaging of subscribers could continue.

The partnership with Google gives AT&T TV its most interesting technology, but technology stocks are not fueled by licensing as AT&T has done here. Instead of trying to innovate with its own assets, AT&T decided to deliver a product that has little competitive advantage over other streaming services. Its next streaming attempt, HBO Max, is a key milestone for investors to track.

Given the growing competitive nature of streaming services, AT&T TV's pricing strategy is perplexing from a consumer standpoint. For investors, given the discounts in the first year, AT&T TV can experience some traction, and if AT&T pulls this off, the company may well see the desired growth in its broadband revenue.

Even if that happens, the real story unfolds after the promotional pricing evaporates and contracts expire. For now, a wait and see attitude best serves investors while the impact of AT&T TV materializes in the second and third quarters. 

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