Cable Analysts Breathe Easier on News That $35 DirecTV Now Price Is Temporary

Writing investors Tuesday, Fritzsche said the way the plan is priced “should limit cannibalization of its existing video base,” a concern for investors before the launch. As one of two players to have a national video offering and mobile rights to deliver a large amount of content, DirecTV Now broadens AT&T’s total available market opportunity, said Fritzsche, saying the offerings will evolve further as AT&T moves ahead in its bid to acquire Time Warner.

The typical average revenue per user (ARPU) for AT&T U-verse customers is $110 per month, which compares with DirecTV Now’s Gotta Have It plan at $70 per month. On the surface, the difference appears to be a $30 hit to ARPU, but whittling down the number of channels from 400-plus (U-verse) to 120 channels for the Gotta Have It plan “should translate into significantly lower content costs,” Fritzsche said.

MoffettNathanson's Craig Moffett said analysts’ view after AT&T’s disclosure of the limited-time $35 pricing had turned to “AT&T blinked” by Tuesday. But he cautioned details of the packages are more complicated, citing a channel lineup leaked by Multichannel News before the official package rollout Wednesday. Analysts had estimated AT&T’s programming costs for 100 channels would be around $34, a “negative net margin,” but Monday’s pricing disclosures “suggest that average prices, and margins, will be much more reasonable,” Moffett said.

Full channel lineups will be available when the product rolls out Wednesday, but a screen shot of lineups showing the first 47 of 60 channels available in the base package makes it “clear that there isn’t much missing,” said Moffett. Included are most of the broadcast networks, ESPN, ESPN2, Disney Channel, Nickelodeon, Nick Jr., Cartoon Network, Discovery, History Channel, USA, TNT, TBS, FX, AMC, CNN, Fox News, MSNBC, CNBC, Bloomberg and what Moffett dubbed millennial channels: Comedy Central, MTV and Spike. AT&T and CBS haven’t been able to work out a deal.

Regional sports networks aren’t part of the base package, having their own appeal that sports fans are willing to upgrade for, but the $35 package covers most of what anyone in the target demographic would likely want, Moffett said. “Is anyone going to pay more for CNBC’s ‘World’ network?” he said. “And is there even a single cord cutter -- a cohort that almost by definition lives online -- that would pay extra for a linear TV version of The Weather Channel?”

With little incentive to move to an upgrade package, AT&T still has the problem initially cited when it released plans for the $35 package, said Moffett: “They aren’t going to make any money.”

Caveats for DirecTV Now at the onset are the lack of CBS content and DVR capability (including the ability to pause live content), as well as a limit of two content streams. At the launch event Monday, AT&T Entertainment Group CEO John Stankey said AT&T is working with CBS but left open the possibility that if they can’t agree on a deal, DirecTV Now’s demographic “might be attracted to this product that maybe fits well" without content. CBS spokesman Dana McClintock declined comment Tuesday.

On the limit of two streams with the service -- which could be a deal breaker for a household with multiple viewers -- Brad Bentley, chief marketing officer-AT&T Entertainment & Internet Services, called two streams “the starting place.” Down the line, additional streams could be offered, he said.

Stankey underscored the robustness of AT&T’s premium, managed satellite and U-verse products. Though the internet “has come a long way,” AT&T’s confidence level that it can run multiple streams into a household on unmanaged networks with "a level of quality is still something that we have to watch over time,” Stankey said. “If somebody needs beyond two streams, we think the premium product is the right product for somebody to be in,” he said, and “we can make sure the quality is there.” As DirecTV Now scales, the company will look at whether additional streams can be managed effectively, he said.

More than half of the telco's customers consume content outside of the traditional linear TV model, said Stankey. “Let freedom stream,” AT&T’s theme for its VOD DirecTV Now service, “personifies the segment of the market we’re going after,” he said. Cord-nevers, including those who couldn’t pass a credit check in the past, are part of the 20 million potential subscribers the company is going after, but the most coveted customers are millennials.

Stankey described the target customers as those who want flexibility and “weren’t going to go into the ecosystem as it was before,” but the other two offerings in the DirecTV Now portfolio -- FreeView and Fullscreen -- have a millennial bent. Fullscreen, from Fullscreen Media, will be priced $5.99 a month and includes advertising-free content from scripted and unscripted original series, TV shows and films licensed from studios along with exclusive content from online creators. AT&T wireless customers can get Fullscreen content free for a year with eligible plans and will be able to stream without data charges on their mobile devices, said the company. Such zero ratings moves have drawn FCC scrutiny.