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AT&T's Television Business Continues to Crumble

By James Brumley – Apr 24, 2020 at 7:25AM

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The company's TV unit isn't seeing a corresponding decline in profitability, but that's on the radar.

As a whole, AT&T (T 0.64%) did pretty well last quarter. Sales were down, but profits were up, and though the top and bottom lines both missed expectations, the coronavirus pandemic has thrown most organizations an unhittable curve ball. All things considered, the company's first fiscal-quarter numbers were healthy enough.

There was one glaring misstep, however, that was shocking but not necessarily surprising. AT&T's television unit lost another 897,000 cable subscribers and another 138,000 streaming customers. That makes the three-month stretch ending in March the seventh consecutive quarter AT&T has lost TV customers. In fact, the loss seems to be accelerating.

Man's hand drawing a downward-pointing graph on a chalkboard.

Image source: Getty Images.

Some dismissed the setback as the result of the COVID-19 outbreak. People are locked down, and AT&T itself is largely on hold. Consumers as well as companies are just waiting for life to get back to normal.

Except that argument doesn't hold water when it comes to AT&T's television business. TV viewing, whether by streaming or conventional cable, is way up since early March simply because there's little else to do. Losing over 1 million customers who are locked at home and bored out of their minds underscores just how much trouble this sliver of AT&T's business is in.

More of the same

It's not a story that needs much in the way of retelling. AT&T's 2015 acquisition of satellite cable name DirecTV never quite lived up to expectations, and everything the company has done to adjust to the new normal for the TV market not only didn't help, but perhaps made matters worse. Consumers love streaming services. They just don't love any of AT&T's streaming options. They're clearly not fans of its linear cable offerings either. The graphic tells the tale.

Historical decline of AT&T television subscriber count.

Data source: AT&T Investor Relations. Chart by author.

As for what went wrong, and why, last quarter's television woes are just an extension of its previous television woes. Consumers have a myriad of cord-cutting options in addition to cheaper cable options. And, not that it matters nearly as much as it used to, television watchers seem to be responding to different bundles that might include offers from a third-party name like Netflix or Alphabet's YouTube. As was explained last week, AT&T remains mostly tone-deaf in terms of pricing and packaging. Last quarter's continued deterioration of its TV business simply underscores that assertion.

That being said, AT&T deserves credit in at least one regard. It's not continuing to add (or lose fewer) television customers at the expense of profitability. Although video entertainment revenue was down 8% in step with customer losses, the profitability of the company's entertainment group -- which also includes its residential broadband business -- is holding up. The company's full quarterly investor report mentioned the addition of higher-value customers and less promotional activity that might have previously frustrated consumers into canceling their service.

Historical revenue and operating income for AT&T's entertainment group.

Data source: AT&T Investor Relations. Chart by author.

Still, the trend's undertow is a concern. AT&T can't shrink its TV customer headcount indefinitely and expect the group's profitability to not be eventually impacted.

One last hope

There's an X-factor lurking in the background that will come to the forefront in a big way late next month. HBO Max, from AT&T subsidiary Warner Media, is still set to launch on May 27. It matters simply because customers of AT&T's television products such as AT&T TV and U-Verse TV will be given complimentary access to HBO Max. If they love it, they may decide to remain an AT&T television customer.

That's a very big "if" though. AT&T TV starts at $50 per month with a two-year commitment, and that introductory price is only good through the first year. Given the sheer pace of the cord-cutting undermining its TV subscriber base, that one free add-on may not be enough for most consumers.

Whatever's in store, one thing is clear -- AT&T hasn't found a winning television formula yet.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. James Brumley owns shares of Alphabet (A shares) and AT&T. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Netflix. The Motley Fool has a disclosure policy.

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