AT&T: More is More and Less is Less and Never the Twain Shall Meet

AT&T told analysts late Tuesday just what is up its sleeve regarding its just-completed $108.7 billion Time Warner merger, and it’s fairly simple: grow revenue and the profits will follow.

The trick though, is how to go about doing that.

According to chairman and CEO Randall Stephenson, the path toward profits winds through the millions of customers, viewers and users of AT&T properties, ranging from DirecTV, DirecTV Now, wireless and broadband services, which he numbers at about 170 million relationships, and the literally hundreds of millions of unique viewers of its digital properties. On a conference call to discuss second quarter results, Stephenson noted that alone has 200 million unique viewers per month. Tack on other similarly-viewed digital properties from Otter Media and Bleacher Report and the opportunities abound.

Related: AT&T Nearing Deal to Buy All of Otter Media: Report

On the call, Stephenson talked of the new advertising opportunities through the Turner and Time Warner relationship. He noted that when AT&T delivers ads on DirecTV, its yields improve three-to-five times.

Randall Stephenson

Randall Stephenson

“Turner has an ad inventory that's three times the size of our DirecTV inventory, and as we apply the same data to that inventory, we expect a significant lift,” Stephenson said. “You take these three elements -- premium content, 170 million direct-to-consumer relationships and great ad technology -- and then you combine those with our high-speed networks, and we think all of this is a game changer.”

On the content side, WarnerMedia CEO John Stankey said he isn’t concerned with scale and content, but he does want content that scales. I guess that means the goal is to get its shows in front of more people.

Stankey took some heat from a New York Times article earlier this month that cast a Town Hall meeting he had with Turner and HBO employees in a somewhat unfavorable light. Some of his comments – particularly those that likened the media business to childbirth and his assertion that while HBO makes money, it doesn’t make enough – turned out not to be as bad as originally thought (he was apparently laughing when he made the HBO profit comment). On the conference call, Stankey said the reports didn’t “effectively characterize what we are about.”

What WarnerMedia is about, he said, is driving engagement.

John Stankey

John Stankey

“We have a tremendous amount of great projects already in the funnel that as the HBO team and Richard [Plepler, HBO chairman] would describe it, they have not been in a position to say yes to because of constraints on certain resources,” Stankey said.

He added that the goal is to remove constraints from top-quality projects to balance out the schedule to drive engagement on HBO throughout the year.

“That will improve the fact that we can see, especially on the digital platforms, you have customers jumping in and out based on scheduling,” he said. “And if we can smooth that schedule, we can drive churn down or improve retention and power additional subscriber growth.”

Part of that includes ramping up HBO’s programming spend, currently at around $2 billion, or about one-fourth the $8 billion Netflix spends. Stankey wouldn’t be specific as to just how much HBO’s programming budget will rise, but said AT&T could reinvest some of the efficiencies it gets from the merger and by running the business differently.

Related: Netflix Investing 85% of New Spending on Originals 

Stankey said while HBO and Turner properties have created a number of initiatives that are good in their own right, they have relatively small audiences compared to a company the size of AT&T, which he said needs to generate tens of millions of viewers, not millions.

The way to do that, he added, is through togetherness.

Stankey said WarnerMedia’s brands are plenty strong on their own, but not as powerful as they could be if they banded together.

“You can assemble the genre of content and bring them together on one platform and one experience that aggregates and gets scale,” Stankey said, adding that over time the company will unify brands into a more consistent and more focused experience, which will in turn increase scale.

But some analysts see a real problem with the belief that you can ramp up spending, and drive engagement but still offer your product below cost.

In a research note, MoffettNathanson principal and senior analyst Craig Moffett wrote that while it’s nice to say you want to drive engagement, offer content across platforms and create more stuff, it’s not so easy to do that when you’re losing money on the distribution platform.

AT&T’s DirecTV satellite service has been bleeding customers for months – it lost about 286,000 customers in Q2. While its OTT service DirecTV Now gained about 342,000 subscribers (it has a total of 1.8 million customers, compared to DirecTV’s 19 million), that service is priced substantially lower than what it charges for the satellite service. DirecTV Now has also been bundling HBO for free in some of its packages and it offers a free Apple TV device to new subscribers. Moffett called the DirecTV Now subscriber gains a “pyrrhic victory.”

Although Turner had a good Q2 – ad revenue rose 3% and total revenue increased 6.3% -- Moffett isn’t sure it will last long. There is a risk that Turner’s growth rate cold fall sharply in the next round of affiliate renewals --- it’s last deals were heavily front loaded because of sports. And while AT&T said it was encouraged by increased advertising opportunities, Moffett’s colleague Michael Nathanson has written that TV ads are shrinking for the first time in a non-recession.

And when it comes to togetherness, the analyst hopes that is not code for heavy discounting under the guise of bundling.

“With DirecTV, AT&T’s bundling strategy has amounted to little more than giving customers more for less,” Moffett wrote, adding that may have helped with churn in the wireless division, it decimated the satellite company’s profitability. Moffett estimated that DirecTV’s cash flow declined 16.8% in Q2.

“They started giving away HBO even before they owned it,” Moffett continued. “That inflated HBO’s growth rate when [Time Warner] was a standalone company, but it won’t help now that it’s inside AT&T.”