AT&T (NYSE:T) just reported another quarter of staggering pay-TV subscriber losses. Almost 900,000 fewer people subscribed to one of AT&T's premium TV services at the end of June compared to a quarter earlier. The bulk of those subscriber losses can be attributed to DirecTV, from which AT&T has been under pressure to divest since activist investor Elliott Management bought a sizable stake in the company.
Meanwhile, AT&T is shifting its focus to software-based entertainment. Its new AT&T TV and HBO Max services will take center stage, as the company looks to deliver more programming over the internet. With those products launched, it begs the question of whether AT&T still needs DirecTV. In fact, one analyst asked AT&T CEO John Stankey exactly that during the company's second-quarter earnings call. Here's what he had to say.
"We like the customer base."
"You can go back and look at comments I made, I think, very early on and post-transaction of DirecTV that we didn't necessarily make that move because we love satellite as a technology," Stankey told analysts. "We like the customer base. It was an opportunity to move that customer base into the right technology platforms moving forward."
The satellite service gives AT&T significant scale. After the acquisition, AT&T became the largest pay-TV distributor in the country. That scale was useful for negotiating carriage rates for the launch of its over-the-top service DirecTV Now (now called AT&T TV Now).
AT&T's other connectivity services, like home broadband or wireless, can also be sold to that customer base. Indeed, a big piece of AT&T's strategy is bundling its services together.
But Stankey says satellite technology probably isn't the best solution for where AT&T is headed. AT&T wants to provide a single platform for live linear television and on-demand programming. Furthermore, software-based delivery requires less overhead for installation than DirecTV since customers self-install and there's no expensive equipment (like a satellite dish).
Is the divestment coming?
Now that it appears AT&T is all-in on the software-based approach, with services launched and contracts in place, DirecTV's customer base isn't as valuable as it once was -- and not just because it lost millions of subscribers over the five years since its acquisition.
Moving DirecTV's customer base to new technology doesn't require AT&T to own that customer relationship. AT&T saw this firsthand as virtual multichannel video programming distributors (vMVPDs) won customers away from its legacy TV services.
AT&T could use cash raised from selling DirecTV's assets to pay down its debt faster. The company refinanced $17 billion worth of debt in the second quarter, issuing new lower-interest long-term bonds and retiring near-term debt. AT&T ended the quarter with over $152 billion in net debt -- an improvement from $162 billion at midyear 2019, but still a massive overhang on the business.
It's unlikely AT&T would be able to recoup the $49 billion it paid for DirecTV in 2015. A spinoff of DirecTV in conjunction with Dish Network proposed last year would net AT&T about half of its original purchase price. Still, that would put quite a dent in AT&T's debt balance and streamline its operations to focus on AT&T TV and HBO Max.
AT&T no longer needs DirecTV to deliver the product it wants for consumers. But it'll have to accept a big loss if it's going to divest the company.