AT&T (NYSE: T) I just reported another quarter of the staggering pay TV subscriber losses. Nearly 900,000 fewer people subscribed to one of AT & T’s premium TV services in late June compared to the previous quarter. Most of those subscriber losses can be attributed to DirecTV, which AT&T has been under pressure to divest since activist investor Elliott Management bought a sizeable 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 seeks to offer more programming over the Internet. With those products launched, the question arises whether AT&T still needs DirecTV. In fact, an analyst asked AT&T CEO John Stankey exactly that during the company’s second-quarter earnings call. This is what he had to say.
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“We like the customer base.”
“You can go back and see the comments I made, I think, very soon after the DirecTV transaction 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 to the right technology platforms in the future.”
Satellite service gives AT&T a significant scale. After the acquisition, AT&T became the largest pay TV distributor in the country. That stopover was useful in negotiating transportation rates for the launch of its outrageous DirecTV Now service (now called AT&T TV Now).
Other AT&T connectivity services, such as wireless or home broadband, can also be sold to that customer base. In fact, a large part of AT & T’s strategy is to bundle its services.
But Stankey says satellite technology is probably not 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. Also, software-based delivery requires less installation overhead than DirecTV since clients install automatically and there are no expensive equipment (such as a satellite dish).
Divestment is approaching?
Now that AT&T appears to be integrated into the software-based approach, with services launched and contracts in place, DirecTV’s customer base is no longer as valuable as it used to be, and not just because it lost millions of subscribers in the five years since its acquisition.
Moving DirecTV’s customer base to new technologies does not require AT&T to own that customer relationship. AT&T saw this first-hand as virtual multi-channel video programming (vMVPD) distributors won customers away from their legacy TV services.
AT&T could use the cash raised from the sale of DirecTV’s assets to pay off its debt faster. The company refinanced $ 17 billion worth of debt in the second quarter, issuing new long-term bonds with lower interest rates and withdrawing short-term debt. AT&T ended the quarter with more than $ 152 billion in net debt, an improvement of $ 162 billion in mid-2019, but still a huge overindebtedness in the business.
AT&T is unlikely to be able to recoup the $ 49 billion it paid for DirecTV in 2015. A spin-off of DirecTV in conjunction with Dish Network proposed last year, AT&T would generate approximately half of its original purchase price. Still, that would hurt AT & T’s debt balance quite a bit 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 you will have to accept a big loss if you are going to get rid of the company.
