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AT&T Drops Lowest-Priced DirecTV Option, but There's a Method to the Madness

By James Brumley – Sep 10, 2020 at 8:53AM

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Potential buyers of the cable satellite brand need to see the business is at least capable of viability in the future.

On the surface, it seems like (another) bad decision from telco giant AT&T (T -1.22%). The company is no longer offering its cheapest "Select" package to new DirecTV subscribers, making it even less compelling for newcomers to sign on to the struggling service. That move follows DirecTV's similarly uninviting decision made in June to raise the price of several plans by $10 per month -- at least for newcomers. Existing subscribers will continue to pay their same recent rates, which remain above new customers' discounted costs during their first of service.

For a cable television brand that's lost nearly 4 million satellite cable customers over the course of the past four quarters, though, this isn't a time to close any doors. There's a certain logic to the move, however, not despite resurfaced rumors that AT&T is looking to shed at least most of DirecTV, but because of them.

Multi-colored puzzle pieces being assembled by business people at a conference table

Image source: Getty Images.

DirecTV's rising introductory prices

Phillip Swann, perhaps better known as the web's TV Answer Man, appears to be the first to report it: DirecTV's "Select" plan that sold for $59.99 per month for the first year of a new customer's subscription is no longer an option. The next-cheapest offer for newcomers is "Entertainment," which costs $64.99 per month during the first year of a two-year commitment but jumps to what is presently a price of $97 per month after the first year. The second year of the "Select" plan cost around $80 per month while it was still sold.

It seems like a step in the wrong direction, particularly given the plethora of cheaper and free streaming services now permeating the television arena.

To fully understand what led AT&T to this particular decision, though, one has to go back to something AT&T's now-retired CEO Randall Stephenson said last May during an investor conference hosted by J.P. Morgan. Stephenson explained at the event:

[T]he other element to give you sustainable profitability is cleaning up the customer base. Because we have a number of customers on our rolls that are very low-ARPU [average revenue per user] customers and we don't see any line of sight to getting them to a profitable level. And so as these customers' contracts or whatnot are coming up, there are many who are opting to just leave, and it's caused churn to spike considerably. These are really low-ARPU customers.

Erasing any doubt that profitability is the priority, Stephenson added:

[T]he lion's share of this customer base are high-quality customers. ... The churn is over 100% driven by just this cleanup of the customer base. ... We get to 2020, we think these customer numbers can begin to improve significantly. And in fact, we will achieve the EBITDA stability of Entertainment Group this year."

Fast forward to today. The COVID-19 pandemic clearly disrupted every company's 2020 plans, and it's not clear if this cleanup work of DirecTV's customer has led to the EBITDA stability Stephenson was talking about then. What is clear, however, is that new CEO John Stankey doesn't believe bringing bargain-minded customers into the DirecTV fold does any good either.

The bottom line for AT&T

AT&T isn't the only cable company grappling with higher costs that have been matched with waning pricing power. Mike Cavanagh, CFO of rival cable television provider Comcast (CMCSA -3.62%), commented around the same time last year, "we will not chase unprofitable video subs." Presumably, other cable television names are of the same mind, aiming to manage the cable contraction profitably rather than fight it. Neither the companies with cable TV operations nor their shareholders seemed surprised or terribly upset that the industry lost another 4 million customers during the first half of this year.

AT&T, however, may have a much stronger motivation to prove a smaller DirecTV unit is actually a more profitable one. A few days ago The Wall Street Journal reprised the notion that the telecom powerhouse is looking to offload at least most of its cable satellite brand, suggesting talks with private equity firms have already taken place. Those prospective suitors may be leery of buying a business that's bogged down by a swath of ever-changing customers that are taking an ever-changing toll on the bottom line. On the flip side, suitors may be ok with a stable and loyal customer base that's also persistently profitable.

Whatever the case, it's difficult to categorize what AT&T is doing with DirecTV as anything but defensive.

James Brumley owns shares of AT&T. The Motley Fool recommends Comcast. The Motley Fool has a disclosure policy.

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