Analysts skeptical on AT&T/DirecTV bundling, think OTT mobile video offer could be coming

Now that AT&T's (NYSE: T) deal with DirecTV is done and the company is moving to bundle wireless service with a national video offering, financial and industry analysts are divided over whether or not AT&Ts wireless business will see any material benefit from doing so.

AT&T held an analyst day yesterday in its hometown of Dallas, and analysts came away with different impressions of its wireless prospects. Additionally, some were hoping for more clarity on how AT&T might launch an over-the-top video mobile service to counter Verizon Wireless (NYSE: VZ), which plans to launch such an offering later this summer. Yet analysts speculate that even though AT&T executives said relatively little on that front, an OTT service could be coming. 

New Street Research analyst Jonathan Chaplin said in a research note that AT&T's wireless strategy in regard to DirecTV "seemed more geared towards extending the life" of the satellite TV business "rather the other way around."  He also noted that after the deal the wireless business' share of EBITDA at AT&T will fall from 66 percent to 54 percent, but still comprises most of the company's value.  

Chaplin said he is skeptical of AT&T's plans in wireless. "We think the company should be focused on offering a product bundle that will differentiate the wireless offering," he wrote. "It seems that AT&T sees simplicity as the biggest differentiating factor of their mobile video service: they believe they can capture share by making the experience easier. Maybe they will offer a modestly more convenient experience by consolidating services onto one bill; however, we aren't convinced that this will be enough to lure customers from other platforms that offer largely the same product." 

Jackdaw Research analyst Jan Dawson said in a blog post that he is "somewhat skeptical of the benefits of a double play that simply combines TV and wireless, because it's missing the broadband piece." He said combining TV and broadband is likely a more attractive bundle for consumers, "and AT&T has good opportunities to cross sell these two products, and that's the most interesting part of this to me."

Chaplin said "we believe the wireless business will still face the fundamental problem of having 33% of wireless industry revenue with just 21% of industry spectrum."

Speaking of spectrum, Chaplin said AT&T's management backed away from the company's prior commitment to spend $9 billion in next year's incentive auction of 600 MHz broadcast TV spectrum auction. Chaplin said AT&T's management said "it was no longer a binding condition of the deal and they don't need low-band spectrum the same way that they needed AWS-3 (or high band)." 

AT&T's absence from or weak participation in the auction could undermine auction revenues. AT&T said last year it planned to purchase between 20 MHz and 40 MHz of spectrum in the auction. According to Chaplin, AT&T's management indicated that if the opportunity arises in the 600 MHz auction with low valuations, it would be more likely to vigorously participate.

Wells Fargo analysts Jennifer Fritzsche, Caleb Stein and Eric Luebchow said in a research note that they had hoped to hear more from AT&T on a specific OTT video strategy but acknowledged that the DirecTV deal only closed last month.

"We would expect announcements to come sooner vs. later on this front (we don't expect VZ to have too much of a head start here)," they said. "And view of the recent Sunday Ticket announcement that it can be watched on any device as evidence of type of announcements which will be coming with more frequency."

AT&T could use DirecTV and U-Verse video content in an OTT play to non-AT&T or DirecTV customers. Indeed, Dawson noted that during the analyst day "there were several references to providing video over both managed and unmanaged networks, and the context was such that this didn't seem to just be talking about TV Everywhere-type extensions to classic services. I'm very curious to see if this means we're going to see either DirecTV or U-Verse branded video services being sold to subscribers that can't or don't want to buy the traditional services from either company."

"The implication here -- especially given a comment about being in compliance with merger conditions -- was that AT&T might offer its mobile subscribers some special access to U-Verse or DirecTV content, or possibly use the Sponsored Data model AT&T already has in place to provide zero-rated access to this content," Dawson added.

Verizon executives have indicated that the company's OTT service will have advertising-supported content and will include some free sponsored content. 

Overall, Dawson said he thinks AT&T is going to look to stay ahead of the curve in wireless. "I've said previously that when it comes to the mobile business, AT&T is the company most focused on what's next," he said. "It began investing in connected cars, home automation, and a variety of other businesses years ago and is now reaping the benefits of its early start, capturing a significant share in connected cars in particular and driving significant net adds through that business. Even as the traditional phone business is saturating, AT&T is tapping into new growth areas better than its competitors, and that's been important as its own traditional growth has slowed."

For more:
- see this Beyond Devices post

Related articles:
AT&T not chasing 'switchers segment,' raises outlook for 2015
AT&T combines wireless, DirecTV service starting at $200/month
AT&T closes DirecTV purchase: Stankey in charge of new 'Home Solutions' operation, White retires
AT&T appears poised to support iPhone's Wi-Fi calling, but Verizon remains MIA
AT&T network hardware issue disrupts wireless service in Southeast
AT&T's Cricket offers unlimited voice and SMS to and from Mexico and Canada - but no data

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