Editor’s Corner—AT&T’s video/wireless bundling strategy bears fruit, but the endgame remains unclear

In its second-quarter results, AT&T said it has shown progress in its efforts to bundle its services. (AT&T)

AT&T has long touted the opportunities it sees to cross-sell its products and bundle its services—and that strategy appeared to show some tangible results in the carrier’s second-quarter financial report.

“The number of wireless subscribers who also have a TV service from us has increased by more than 4 million, or up 31%, since the close of the DTV deal. Conversely, TV subscribers with wireless plans have increased by nearly 1 million, or 18%. And the number of TV subscribers in our footprint with high-speed Internet service has increased by 10%,” boasted AT&T CFO John Stephens on the carrier’s quarterly conference call with analysts yesterday, according to a Seeking Alpha transcript of the event. Stephens noted that AT&T closed its acquisition of DirecTV two years ago, and he said the operator is now starting to see the bundling payback.

“While this is impressive when you look at all traditional TV subscribers, it's even more so when you break out our DirecTV and DirecTV Now customers. This includes those who have migrated from our IPTV service, which is something we intended. The number of wireless subscribers with DTV has increased by 72%, while the number of DTV subscribers with AT&T Wireless has increased by 1.7 million, or 52%, and the number of our DTV subscribers in our wireline footprint with our IP broadband has grown by more than 2.7 million, to 67% of DirecTV customers,” Stephens added.

But Stephens said it was AT&T’s wireless churn that mostly clearly shows the benefits of bundling: He said the operator’s postpaid churn has fallen 25 basis points since AT&T closed its DirecTV acquisition. In the second quarter, AT&T reported record-low postpaid phone churn of 0.79%.

Bundling strategy becomes clearer

AT&T’s moves during the second quarter helped highlight the carrier’s strategic trajectory. During the period AT&T refined its unlimited data offer to include both its DirecTV Now streaming service and HBO. That represents a substantial discount from the $35-per-month price tag on AT&T’s lowest DirecTV Now tier and HBO Now’s standard $15-per-month cost.

Some Wall Street analysts gushed that AT&T’s bundling strategy made a substantial contribution to the operator’s mostly better-than-expected second-quarter performance. “Wireless results were better than feared, as once again T’s bundling efforts helped drive record postpay churn and service mgn,” wrote the analysts at Wells Fargo in a note this morning.

“In what’s become a highly competitive US Wireless market, AT&T’s 2Q postpaid phone churn (and continued strength in prepaid) were positive surprises,” the analysts at Deutsche Bank agreed. “We believe AT&T’s network investments and bundling efforts with Video are starting to yield dividends in the form of significantly improved retention (postpaid phone churn of 0.79% was a record low, -5bp yoy).”

Indeed, the combination of AT&T’s wireless services with its streaming video offerings also helped offset dramatic declines in its legacy U-verse-branded IPTV and DirecTV satellite offerings. Specifically, AT&T added 152,000 DirecTV Now customers but lost 195,000 U-verse customers and 156,000 DirecTV satellite customers during the second quarter.

Of course, DirecTV Now stands as AT&T’s response to the disruption overtaking the pay TV sector, and the operator said the service has accumulated 500,000 subscribers in just under seven months since launch. “That’s pretty dramatic growth,” Stephens argued, “especially when you consider there were a couple of months of rest there when we put the platform through performance testing.”

It’s worth noting that AT&T is planning a major fall marketing campaign around DirecTV Now.

The real cost of bundling

Although it’s clear AT&T has enjoyed some success in getting customers who subscribe to one of its services to also sign up for others, some Wall Street analysts worried that AT&T is doing so at the expense of profits.

“It is difficult for AT&T to create value by bundling Pay TV and wireless, given that they have a very significant share of both markets,” wrote the analysts at New Street Research today in response to AT&T’s results. “The discount they offer, once it flows through the base, will likely offset gross add and churn benefits.”

New Street added that the cable industry could enjoy far more success with bundling, in light of Comcast’s Xfinity Mobile play (which starts unlimited wireless services at just $45 per month). “It is a very different matter for the Cable industry, starting with no share of the wireless industry and a cost structure in wireless that is competitive with the incumbents,” the New Street analysts wrote. “Cable can discount wireless heavily without giving up any value, and at the same time gain share and a pricing umbrella in broadband. And wireless will still add value for Cable as a standalone product.”

The analysts at MoffettNathanson dove further into AT&T’s pricing scheme for wireless and DirecTV Now, and the “costly strategy” therein.

“By our estimate, DirecTV Now’s $35 Live-a-Little package carries roughly $30 in programming cost. Selling $10-per-month subscriptions may help results in the wireless segment(s) but it won't help in Entertainment. Nor will selling HBO for $5 per month help sustain Time Warner. Time Warner spent decades building HBO into a powerhouse that could command $20 per month. Offering it for $5 risks angering competing distributors and, just as importantly, risks undermining HBO's premium positioning.”

The MoffettNathanson analysts added: “Video has emerged as the centerpiece of AT&T's bundling strategy. They will ultimately have to do more than just transfer value from DirecTV to wireless; they will actually have to grow the pie overall. Whether they can stop the declines of high-value legacy satellite subscribers, where they ultimately make all (or more than all) of their profits, will be critical to the company’s fortunes going forward. Thus far, bundling has amounted to a little more than a discounting strategy.”

It’s true that AT&T has created some compelling offerings, particularly the combination of unlimited wireless data with 60+ live TV channels and HBO for $100 a month. But as New Street noted, it’s the discount, not the bundle, that’s really noteworthy.

“Our view has been that consumers see little value in getting multiple services on one bill; they will move or stay for discounts; however, a carrier doesn’t need to bundle to discount,” the analysts wrote. “This view flies in the face of comments made over years by all carriers in all geographies; however, there is very little public data that supports the carrier’s claims.”

AT&T’s CFO argued that market observers need to take the long view on the company’s efforts—one that includes everything from the IoT to network virtualization to advanced advertising to FirstNet to international expansion—to really appreciate its strategy. “Quite frankly then, as you put all that together, from a total company perspective, our data insights opportunity, our advertising opportunities are significant … So we're doing well,” he said.

That, of course, remains to be seen. If it is successful in its bid to acquire Time Warner, AT&T will own virtually every part of the video pipe, from content creation to distribution. Is $100 per month per customer enough to fund both the final season of HBO’s Game of Thrones and an AT&T 5G network to watch it on? And to profit besides? That’s an open question. – Mike | @mikeddano