As it prepares to launch an IP-based video service that is more of a direct replacement to traditional satellite TV service in the first quarter of next year, AT&T will reconfigure and reposition its seminal streaming pay TV product, DirecTV Now.

Speaking at the UBS Global Media and Communications conference earlier this week, AT&T CEO Randall Stephenson said work is underway to “thin the content out” on the DirecTV Now bundle and “get the content out that’s really relevant to the consumer.”

Simultaneously, Stephenson seemed to indicate that further price hikes are in store for DirecTV Now, which already increased its base monthly fee from $35 to $40 over the summer.

Related: fuboTV’s Gandler: One or two vMVPDs Could Go Away in 2019

“We’re talking $50 to $60,” he said. “We’ve learned this product, we think we know this market really, really well. We built a 2 million subscriber base. But we were asking this DirecTV Now product to do too much work. So we’re thinning out the content and getting the price point right; getting it to where it’s profitable.”

It’s widely understood that DirecTV Now—as well most virtual MVPD service—operates at a loss, with monthly price points that average around $40 market-wide simply not providing enough revenue to offset fast-rising programming costs.

For example, asked by an investment analyst last month if Dish Network’s vMVPD service, Sling TV, was profitable, company chairman Charlie Ergen remarked, “It depends on how you look at it. But under Charlie Ergen's definition of profitability, I think I'd like to make a little bit more money than we're making today.”

Both Dish and AT&T have expressed hope that innovation in advanced targeted advertising enabled by these IP-delivered services will eventually offset their generally lower subscriber revenue.

“Sling is really seeing explosive growth with its advertising revenue,” said Dish programming chief Warren Schlichting, keynoting last month’s Streaming Media West conference in Huntington Beach, Calif. last month. “We’re seeing incredible results with targeted advertising.”

But when pressed, Schlichting conceded that these results weren’t yet incredible enough to move the needle in any significant way on the balance sheet.

For its part, AT&T—which already is seeing DirecTV Now customer growth decelerate from its previously torrid pace—seems to be biting the bullet, and trading profitability for growth. AT&T is in effect re-positioning DirecTV Now to sit in the middle of its video value proposition, between its upcoming premium OTT service and its bottom-end AT&T Watch streaming service. 

AT&T is prepping the launch of what Stephenson called “an over-the-top thin-client service” in the first quarter. The IP-based service will run on the open internet, with users plugging in a proprietary set-top that connects via USB port. AT&T hasn’t announced a price point for the new service, but it’s expected that it will be more expensive, and offer more channels, than DirecTV Now. 

AT&T stock fell nearly 7% in early trading Wednesday, after the communications giant missed analysts targets for its video services by a mile, and added it was re-evaluating its programming line-ups across its services.

AT&T’s linear satellite TV service DirecTV shed about 359,000 customers in the third quarter, better than the company expected but missing analysts estimates of a loss of 245,000. The company added about 13,000 U-Verse customers but the 49,000 additions to its DirecTV Now subscriber rolls were well below consensus estimates of a 287,000-subscriber gain.

AT&T currently has three video offerings – DirecTV/U-verse, its traditional linear product, DirecTVNow, its virtual MVPD offering and AT&T Watch TV, a mobile-delivered skinny-bundle product that is free to AT&T Wireless customers with unlimited data plans and $15 per month for everyone else. Earlier this year AT&T hinted at a fourth streaming product that would launch next year. 

AT&T Communications CEO John Donovan offered some more insight into the streaming product on a conference call with analysts to discuss Q3 results. It will be a proprietary thin-client offering and AT&T, which has already begun beta testing it, will expand into the trial phase in the first half of next year.

“This will be a more measured roll out and like our roll out of Watch TV, we expect this service to be EBITDA positive,” Donovan said. “Over time it should lower acquisition costs of our premium video service.

He added that AT&T is taking a hard look at its video offerings, reducing heavy promotions and taking a more tailored approach with customers, targeting more engaged subscribers who are not as heavily price-sensitive.

“We’re refining our four video products, tailoring them to customer needs,” Donovan said in the call. “Our mobility-focused Watch TV is gaining traction, DirecTV Now is being updated to increase its simplicity and further differentiate the service, and our premium DirecTV and U-verse service focus on the traditional linear TV viewers.”

AT&T has already started to scale back promotions for its DirecTV Now service, and earlier this year implemented a $5 per month price increase across the board for the service. 

Donovan said that the video business is evolving like the wireless business, with some customers seasonally shopping for shows.

“We know our customer base now, and with our data will continue to tweak our approach to optimize profitability and see our value proposition stabilize,” Donovan said. “This puts us in a more stable position as we set up our product realignment in 2019.”

That will include putting its content under the magnifying glass, with Donovan adding that AT&T is evaluating its programming lineups and “taking a fresh look at how we can align content cost with the price.”

Those comments echo AT&T chairman and CEO Randall Stephenson who has said in the past that AT&T would like to move to a programming cost model where fees are based on actual customer engagement. It is a practice that has long been hoped for by distributors, but which analysts believe will be hard to convince content providers to embrace. 

AT&T Communications said it has named former DirecTV executive Tim Gibson to the new role of vice president of video & application marketing.

Gibson, formerly VP of strategy and business development at DirecTV, will be responsible for the multi-billion dollar revenue and subscriber marketing business across AT&T video products and third party applications, including traditional content packaging, premiums, movies, sports, music and original programming.

In his previous role, Gibson helped lead the strategy behind AT&T’s entrance into digital video with DirecTV NOW and was responsible for negotiating key agreements for distribution of AT&T’s digital video services including NFL Sunday Ticket, DirecTV NOW, and Watch TV.

Gibson will be located in El Segundo, Calif. He replaces Hanny Patel who has accepted a new role as vice president of advertising services at AT&T Communications.

For AT&T and Time Warner, now comes the hard part.

In the months leading toward U.S. District Court Judge Richard Leon’s rejection of the federal government’s attempt to block the AT&T-Time Warner merger, both companies made a lot of promises. Now, with the $108.7 billion deal having closed last Thursday (June 14), they will have to make good on them.

On June 12, Judge Leon rejected the U.S. Department of Justice’s claims that the deal was anticompetitive, calling into question the DOJ’s math and its assertions that the combined company would restrict access to programming or raise prices.

He also attempted to nip any thoughts by the government of appealing his decision, adding any moves toward a stay would “cause irreparable harm to the defendants in general and AT&T in specific” and would be a “manifestly unjust outcome of this case.” The DOJ agreed, but still has the right to appeal.

Related: AT&T, Time Warner Cleared to Merge

Agreeing to Arbitration

Though Judge Leon imposed no conditions on the deal, AT&T and Time Warner pledged a few things they hoped would smooth the approval path. Perhaps the pledge with the biggest impact across the industry was the promise to offer “baseball-style” arbitration in carriage disputes between its networks, such as TNT, TBS, CNN and Cartoon Network, and other distributors.

In baseball-style arbitration, a third party arbitrator receives sealed proposals from both parties in the dispute, and after a hearing selects one of those proposals without modification. During the arbitration period, no networks could be blacked out.

AT&T-Time Warner had promised to extend the arbitration offer for seven years after the deal closed. According to AT&T, the arbitration offer still stands.

The American Cable Association, which was against the merger, said although the arbitration offer is flawed — it doesn’t include HBO — it is an essential part of the deal.

“If there is any saving grace in the Court’s opinion, it is that the Court recognized that the offer made by AT&T-Time Warner (via Turner Broadcasting) to agree to commercial arbitration to settle program access disputes ‘will have real-world effects,’ helping to prevent ‘new’ AT&T from raising prices to its rivals,” the ACA said in a statement.

AT&T made some other promises for after the deal closing, including launching a sports-free video bundle that will cost $15 per month for non-wireless customers, but will be free to AT&T Wireless subscribers with unlimited data plans. AT&T chairman and CEO Randall Stephenson said the service, called AT&T Watch, would include Turner channels and others, but would only come to life if the Time Warner merger were approved.

AT&T also promised to offer a broadband-delivered DirecTV product, priced at between $80 and $90 per month, but details on that product were sketchy. Still, analysts saw AT&T Watch — and the telco’s aggressive discounting strategies (wireless customers get the $35 DirecTV Now package for $10 per month) — as a critical look into how AT&T views the content business going forward.

Related: AT&T to Introduce Broadband-Delivered OTT DirecTV Product

Bundles and Other Promises

In a blog titled “AT&T Wants to Give Video Away for Free,” BTIG Media analyst Rich Greenfield wrote that creating another sports-free bundle is nothing new.

“What makes AT&T Watch so significant is that AT&T is planning to give this package of video channels to AT&T wireless unlimited plan subscribers at no cost,” Greenfield wrote, adding that with an estimated 15 million AT&T Wireless customers on unlimited data plans, uptake should be high.

All of these moves appear to be in line with what Stephenson has been saying all along — the days of high-priced, fat packages of linear TV are over.

“If you’d asked me seven years ago what this world would look like today, I would have missed it so far,” Stephenson said during the April DOJ trial, according to a court transcript. “The need for people, for content creators, to go through cable companies and satellite companies to get their content to the consumer, that is a thing of the past.”