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3 Ways AT&T's Management Thinks Its New TV Service Will Improve the Entertainment Segment

By Adam Levy - Mar 11, 2020 at 12:05PM

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AT&T TV offers several benefits over the legacy DIRECTV satellite service.

Early in March, after months of hype, AT&T (T 1.67%) launched AT&T TV. Management has been promoting the new service, which delivers linear television over the internet instead of using satellite signals or a hardline to the home. The product should produce better profit margins for the company's entertainment segment, but it's still unclear whether it'll help stop the exodus of AT&T's TV subscribers.

AT&T President and COO John Stankey said the company was very happy with the first day of the AT&T TV launch at an investor conference in early March. While he clarified that one day does not make a full quarter, he outlined several areas where he sees the company benefiting from the new software-focused video delivery the company is shifting toward. Here are the three most important points.

The AT&T TV set-top box and remote on a table, and the homescreen displayed on a television.

Image source: AT&T

1. Better attach rates on the bundle

The main goal for AT&T's switch from primarily delivering video to customers via satellite to its software-based service is to improve the take rates for bundling television service with home internet. To that end, Stankey says the service is a success.

In the 10 markets where AT&T tested AT&T TV, the company saw a higher attach rate for video service for home internet customers compared to markets where it only offered DIRECTV satellite service. Stankey said the first day of the nationwide launch showed a similar improvement in attach rates.

Stankey believes the value proposition with its fiber-based internet service is even stronger. AT&T can offer speeds up to 1 GB per second in areas where it's laid down fiber to the home. The company slowed down its fiber build-out in the middle of last year, and it's now focused on penetrating the market with high-speed internet service. Stankey says it's reaching 50% market share after 36 months of bringing fiber to a neighborhood.

That said, AT&T's internet customer base is considerably smaller than its video subscriber base. It ended 2019 with just 14.1 million internet subscribers versus 20.4 million video subscribers. So, appealing to its internet customers to improve gross additions will likely have an undersized impact on total video subscriptions.

2. Lowering customer acquisition costs

One of the biggest benefits AT&T investors will see right off the bat with AT&T TV is the lower customer acquisition costs. 

Installing a satellite dish on a customer's roof and running cable through a customer's house can be quite expensive. By comparison, customers can usually self-install the equipment needed to receive AT&T TV. That means customers become profitable for AT&T much more quickly since it doesn't have to recoup large up-front costs over the first few months of providing the service.

As a result, AT&T should see improvements in gross margin for its entertainment segment as it shifts its gross additions primarily to software-based customers instead of satellite customers. 

The lower subscriber acquisition costs may also enable the company to offer more aggressive promotions or keep its prices lower than the competition if it feels it could benefit the long-term profitability of the business. Currently, however, management is focused on maximizing cash flow in order to pay down its large debt balance. The lower up-front costs for AT&T TV customers will certainly improve cash flow for the business.

3. The connected-TV advertising opportunity

Since AT&T TV is delivered over the internet, that means AT&T can develop better ad targeting and insertion tools to maximize the value of its ad inventory. The growing spending on connected-TV advertisements may be a big opportunity for AT&T as it pushes into the market with a growing audience of software-based video subscribers.

"Large quality brand advertisers right now really like that dynamic of data-informed advertising placed, in particular, alongside premium content and video streaming. Every one of those AT&T TV customers opens up an opportunity for more inventory into that market," Stankey said.

Connected-TV ad spending is set to double over the next four years. 

AT&T TV not only offers an opportunity for AT&T to sell ads in its own streams, but the use of a custom set-top box could open the door for it to split ad inventory with other streamers. If AT&T TV's box becomes a significant source of viewership for ad-supported video-on-demand services, AT&T could have a considerable amount of connected-TV ad inventory to sell. And if it can demand a premium for its advertisements over traditional TV, it could see a nice boost to its revenue.

Management is very optimistic about the potential to help its video business, which has been bleeding subscribers for six straight quarters. AT&T TV may provide greater gross additions than DIRECTV, but it's unlikely going to be enough to offset subscriber losses from its other pay-TV services (DIRECTV, U-Verse, and AT&T TV Now). Still, a shift to the software-based video service should produce a more profitable subscriber base -- something management has made a key focus over the last two years.

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