'AT&T's strategy is fraught with peril at every level': Conflicting priorities may explain AT&T's mixed third quarter results
- AT&T reported mixed results for the third quarter 2018.
- AT&T's entertainment business took the biggest hit.
- Competing interests among different lines of business at AT&T might be part of the reason for these mixed results.
The financial results of AT&T's big strategic bets are beginning to materialize, as the company released third-quarter 2018 earnings for WarnerMedia and Xandr on Wednesday.
While AT&T made strides in certain parts of its business, others areas were less stable.
The wireless business reported solid results, while WarnerMedia's results were mixed, with satellite subscriber loses and decreased growth in DirecTV Now subscribers. Competing interests among different lines of business at AT&T might be part of the reason for these mixed results.
"AT&T's strategy is fraught with peril at every level," analyst Craig Moffett wrote in a note in October. "Each move to use one set of assets to benefit another - the essence of synergy - simply accelerates a decline somewhere else."
Moffett pointed to conflicting priorities between DirecTV and Turner. AT&T suggested a model of charging distributors based on content consumed rather than using rigid contracts, an idea that could benefit DTV while hurting Turner. And AT&T announced a forthcoming OTT service, combining DTV Now, AT&T Watch, and HBO Now. The service will include the Warner Bros. library, hurting revenue for licensing content.
In the third quarter, it was AT&T's entertainment business that took the biggest hit. It lost 346,000 traditional video subscribers in the third quarter, and added 49,000 DirecTV Now subscribers. This is a substantial decline in growth compared to prior quarters. In the second quarter 2018, DTV Now added 342,000 subscribers.
A central premise of AT&T's acquisition of Time Warner was the ability to compete against Silicon Valley companies that already dominate direct to consumer relationships. But the push to compete may actually harm other parts of its business.
"While AT&T's certainly responding to market changes, it's not like they'll catch up to the Netflixes of the world fast enough to lead the charge," said Mark Douglas, CEO at ad tech company SteelHouse. "Stitching all their acquisitions together to monetize effectively will take time, and keep in mind, even if they do catch up, they're also losing that monopoly they held over cable television - which is something they'll never be able to get back."
Cable operators currently have a monopoly in the market, Douglas said. With DTV, AT&T was able to encroach into this market and disrupt a bit of their foothold. But as the company shifts priorities to DTV Now, that disruption will cease to exist.
Perhaps more challenging is that as AT&T's satellite business erodes, the OTT service that replaces it doesn't yield the same revenues.
"Pricing for DTV is substantially lower," Douglas said. "They can't get that price point back. Although cable can at least hold on to internet access fees, AT&T doesn't even have that."