Nexstar Media Group, the biggest local broadcaster in the U.S., and DirecTV are preparing to face off in a retransmission-consent battle that could result in about 200 stations across 100 markets being blacked out at the end of the month.

Nexstar stations have begun running warnings that subscribers to DirecTV, DirecTV Stream and U-verse TV could lose signals from Nexstar’s ABC, NBC, CBS, Fox and The CW affiliates.

“Our station has a contract with DirecTV/Uverse that allows them to deliver our programming to you. That contract could soon expire and DirecTV/Uverse might remove our station from your schedule,” a message on the website of Nexstar-managed WPIX New York said. 

In a statement, the broadcaster said: "Nexstar has been negotiating tirelessly and in good faith to reach a mutually agreeable multi-year contract with DirecTV since May, offering them the same fair market rates we offered to other large distribution partners with whom we successfully completed negotiations over the last three years.  DIRECTV has continuously proposed rates that are well below market for the valuable network and local community programming provided by our station(s), leaving us skeptical of whether they are motivated to reach a fair agreement." 

DirecTV said that at a time when more and more consumers are cutting the cord, it can’t continue to accept higher and higher retransmission fees and hope to pass them along to consumers.

In the current talks, DirecTV claims Nexstar seeks to double what it charges subscribers.

“Nexstar, the nation’s largest broadcaster, is demanding to more than double the amount it charges our customers to access approximately 200 local stations it owns or controls in more than 100 metro areas that serve 68% of U.S. TV households,” a DirecTV spokesman said. “Unfortunately, Nexstar has a long track record of demanding significantly higher fees from all pay TV operators and often forces providers to stop carrying their channels during negotiations. DirecTV will take the necessary actions to provide our customers access to their favorite programming while protecting them from unwarranted price increases.” 

Both sides pointed their finger at their erstwhile partner, claiming each has engaged in brinksmanship when earlier retrans deals were up for renewal.

“You may have seen them do this before. They will tell you they’re doing this on your behalf, but don’t believe it. DirecTV/Uverse has a history of taking stations off their line-up, holding their customers hostage,” the WPIX website says. “In fact, as a result of such actions, DirecTV/Uverse has lost an estimated 1.5 million subscribers just last year. Our offer is fair. And now they hold you the subscriber hostage. It’s not right.”

Nexstar goes on to suggest that if there is a blackout, subscribers to DirecTV should demand a rebate for the programming they’re no longer receiving.

“Nexstar routinely reaches amicable retransmission and carriage agreements with its cable, satellite and telco partners,” the broadcaster’s statement said. “Since the beginning of 2020, Nexstar has successfully completed agreements with 500 distribution partners, covering more than 90% of the company’s nationwide footprint. In 2022 alone, we successfully completed agreements with more than 50 of our distribution partners, including several large distributors.”

DirecTV also filed a challenge with the FCC stating that Nexstar violated media-ownership rules and other regulations by having de facto control over stations owned by Mission Broadcasting and White Knight Broadcasting, including in 25 markets where Nexstar also owns a top four local broadcaster. 

According to the complaint, this control is exercised through a combination of services agreements, financing arrangements and option agreements, and is further evidenced by the behavior of Nexstar, Mission and White Knight in retransmission-consent negotiations with DirecTV.  The complaint also alleges that Nexstar, Mission and White Knight have misled the FCC about these arrangements for years. 

Conservative news network Newsmax might be dropped from DirecTV this week, in a move that House Republicans are saying they will investigate although the pay TV provider said the motivation is saving costs.

 Also Read: DirecTV Stops Carrying Newsmax As Contract Extension Expires

DirecTV said it has been carrying Newsmax on its satellite TV service, DirecTV Stream and U-verse TV platforms at no cost to customers because Newsmax has not been charging a fee to carry the channel. That allows Newsmax the ability to generate advertising revenue. 

“However the network is now seeking significant fees that we would have to pass on to our broad customer base,” DirecTV said.  

After losing 500,000 subscribers in the third quarter, DirecTV has about 13.3 million customers.

If Newsmax insists on receiving a fee, it could be dropped from DirecTV. That could happen as soon as Tuesday at 11:59 p.m.

The dispute has reached Washington, D.C., where freshman Rep. Wesley Hunt (R-Texas) wrote a letter to DirecTV and its owners seeking information about the situation. The letter was cosigned by more than 40 other members of Congress.

“It is our understanding that DirecTV — still majority-owned by AT&T and minority-owned and managed by TPG Capital — is moving to deplatform Newsmax by denying it cable fees on a fair and equitable basis,” the Hunt letter said. 

The letter notes that DirecTV no longer carries One America News Network, which is another right-leaning news service, and carries “11 ‘liberal news and information‘ ” networks, including Vice. OAN's owner, Herring Networks, cried foul over the OAN drop and sued DirecTV in California. A court recently dismissed the central claims in that breach-of-contract lawsuit. 

“Taken together, these two actions lead us to believe that DirecTV, one of the nation’s largest multichannel video programming distributors, is actively working to limit conservative viewpoints on its system,” the letter said. “This is extremely concerning for Members of Congress because it suppresses political discourse and hamstrings our ability to connect with our constituents.”

If Newsmax is dropped, following the removal of OAN, the letter said “Congress intends to conduct extensive oversight on the extent to which House Democrats and officials in federal offices colluded with private companies to limit, restrict, and circumvent First Amendment rights. These investigations will not be limited to social media companies.”

The letter asks DirecTV to respond and provide ratings for the ratings of the news networks, set-top box data and information about the fees paid to those networks.

According to Nielsen, Newmax’s averaged 101,000 households, or less than 0.1% of total TV households, which is 92% lower than Fox News Channel, 84% lower than MSNBC and 79% lower than CNN.

DirecTV noted that Newsmax makes its channel available to viewers at no charge via NewmaxTV.com, YouTube.com and streaming platforms including Amazon Fire TV, Roku and Google Play. ■

With Hurricane Ian threatening in the south, DirecTV has launched emergency services to provide viewers with up-to-date news on conditions and advisories.

A Severe Weather Channel is available on channel 361-2 carrying news from markets in the path of the storm. Those markets including Ft. Meyers-Naples; Tampa St. Petersburg, Orlando and Jacksonville, Florida; as well as Brunswick, Georgia.

U-verse TV is also carrying the service on channel 1226 and 226.  

Coverage of additional markets will be added to the channel in the next few days.

DirecTV has also assembled a Severe Weather Mix channel, which presents a mosaic of four news feeds offering updates on the hurricane’s progress, bulletins and how to access emergency services. Coverage originates from The Weather Channel, AccuWeather and CNN, as well as local coverage from broadcast stations.

The Weather Mix is on channel 200 and 361-1.

DirecTV said it has created similar channels during post storms, including Hurricane Ida in 2021, Hurricanes Marco and Laura in 2020, Hurricane Michael in 2018, Hurricane Irma in 2017 and Superstorm Sandy in 2012. ■

For a fifth consecutive year, U-verse TV — the bundled subscription video service AT&T stopped selling to new customers in April 2020, and spun off last year — topped the American Customer Satisfaction Index for pay TV services. 

For its ACSI Telecommunications Study 2021-2022 report, the ACSI polled 23,605 U.S. telecom consumers from April 2021 to March 2022. U-verse, which is now managed by the DirecTV unit spun off to private equity last year, scored a 73 on ACSI's 0-100 index, down 1 point from the 2021 survey. 

Also read: How Screwed Up Is the U.S. Pay TV Biz? U-verse TV, Which AT&T Doesn’t Even Sell Anymore, Ranks No. 1 in Customer Satisfaction

U-verse has actually topped the pay TV portion of the ASCI telecom survey since 2017, followed closely by the last different provider to lead the list, Verizon Fios, which has perennially topped the survey’s ISP section, as well. 

Notably, T-Mobile — which just entered the ISP business last year with the introduction of its 5G fixed wireless service — ranks second on the ISP list, and first on an ACSI ranking of in-home Wi-Fi providers. 

Comcast’s Xfinity and Charter's Spectrum platforms, the Nos. 1 and 2 providers of high-speed internet services in America, rank behind all three telcos — Verizon, AT&T and T-Mobile — on both the ISP and in-home Wi-Fi lists. 

The ACSI also ranks streaming providers, too, but its ranker is a little whack, placing a digital store (the Microsoft Store) atop a list that also includes SVOD providers like Disney Plus and Netflix. Seems pretty apples and oranges to us. ■

Broadcaster Tegna gave AT&T’s DirecTV and U-verse services another day to hammer out a retransmission consent deal, extending access to its 60 TV stations across the country until Dec. 1, allowing talks to continue.

The deal was supposed to expire at 7 p.m. on Nov. 30.

The stations involved include affiliates of all four major broadcasters in cities like Seattle, Washington, D.C, Minneapolis, Denver, Dallas, New Orleans, Cleveland and St. Louis. Tegna has said that AT&T has “refused to reach a fair, market-based agreement with us,” but that talks continue. 

“We have agreed to a temporary extension to allow negotiations to continue,” Tegna said via its various station websites.  “...We promise to keep you informed as we make every effort to resolve this situation and keep our stations on the air.”

AT&T said in a statement that it was disappointed that Tegna decided to make its negotiations public. 

“We’re disappointed to see Tegna put our customers into the middle of private negotiations,” AT&T said in a statement. “We want to keep the Tegna stations in our local lineups. Yet by law, Tegna has exclusive control over which homes are allowed to receive ABC, CBS, NBC, FOX or CW in certain cities, regardless of what provider they choose. As many station owners like Tegna keep losing viewers and sponsors, they’ve resorted to blacking out popular local teams or any remaining hit shows at the worst possible time in order to extract unwarranted increases over their already high fees despite their fading popularity, leaving consumers to foot the bill.”

AT&T claimed that in most cases, Tegna reaches a deal without interruption, and when blackouts occur they last only a few hours or a few days, calling blackout threats “shameless profiteering at the public expense,” made worse by the current pandemic “when medical news is at a premium and regular folks are struggling to make ends meet.” 

On its websites, Tegna pointed to the myriad deals it has reached with other distributors.

“Our track record proves it,” Tegna said on its station sites. “Over the past few years, we reached hundreds of multi-year deals with cable and satellite companies all across the country, including Dish, Spectrum, Comcast, Frontier and many others. It has been disappointing that DirecTV, so far, has refused to reach an agreement.”

Tegna is the latest broadcaster to warn of impending retrans blackouts. On Nov. 26, Dish Network warned that 164 Nexstar Media Group stations could go dark to its subscribers on Dec. 2, unless a deal is reached. Dish accused Nexstar of demanding exorbitant rate increases, while the broadcaster countered that talks have been ongoing since July, and that Dish has rejected several reasonable offers. 

AT&T reportedly wants to divest more than just DirecTV.

According to a CNBC, the telecom is also looking at possibly also selling minority stakes in two of its other pay TV platforms, virtual MVPD AT&T TV Now, and its legacy U-verse TV service. 

The telecom’s AT&T TV service, launched earlier this year, isn’t mentioned in the report. 

Also read: AT&T Presses on with 'Fire Sale' DirecTV Auction (Report)

The questionably credible New York Post reported last month that AT&T was talking Apollo Management and other private equity firms about a “fire sale” deal that would unload the DirecTV satellite TV business for around $15.75 billion. (AT&T paid nearly $67 billion for it back in 2015, factoring in debt.)

On Tuesday, CNBC reported that AT&T is talking to the same private equity companies about taking stakes ranging from 30% - 49% in AT&T TV Now and U-verse TV. For the latter, AT&T would keep the wireline infrastructure and technology that backs the U-verse brand, as well as the U-verse broadband component. Notably, AT&T stopped selling U-verse TV to new customers earlier this year. 

The rollup would effectively take the declining portion of AT&T’s pay TV businesses off its balance sheets. 

Final bids are reportedly due in December. 

Also read: AT&T Pay TV Losses ‘Slow’ to 627K in Q3

AT&T reported the loss of 590,000 customers in the third quarter across its “premium” pay TV brands, DirecTV, U-verse TV and AT&T TV. The telecom said the latter service, an IP-based linear service that launched earlier this year, is fueling its wireline fiber growth. So, ostensibly, it’s growing. But AT&T hasn’t said by how much. 

AT&T TV Now saw declining blood loss of 37,000 customers in Q3. But AT&T has long since stopped aggressive promotions that drove the live streaming service to a peak of around 2 million customers in the summer of 2018. AT&T TV Now had only 683,000 remaining customers as of the end of September. 

As analysts explain it, AT&T has a narrow path to walk with its declining pay TV assets. It needs to find a way to cut costs, without further accelerating cord cutting and the cash-generating potential of the platforms. AT&T also has to maintain shareholder dividends while paying down enough debt to meet the demands of credit rating agencies. All the while, the telecom has to find money to invest in growth business, such as HBO Max and the fiber deployment which AT&T TV is part of.  

After losing nearly 5 million pay TV subscribers across their various platforms in 2019, AT&T executives had told investors that cord cutting should start to decelerate this year amid the launch of the company’s new IP-based video platform, AT&T TV.

But the COVID-10 pandemic, and the related economic recession, will likely disrupt those plans and place AT&T’s pay TV business on an even more accelerated path of degeneration, said MoffettNathanson analyst Craig Moffett.

Related: AT&T Stops Selling U-verse TV

Moffett said that instead of an earlier prediction, which called for AT&T’s pay TV base to shrink by 13.1% in 2020 to 16.9 million subscribers, he believes it will now decline by 16.6% to 16.2 million customers.

Related: AT&T Stock Rises After Loan Deal

For starters, Moffett said economic recession will likely accelerate cord cutting for all providers, with subscribers under pressure to reduce household costs they deem non-essential.

In the more immediate term, however, the loss of live sports amid the pandemic will obliterate the pay TV market’s major linchpin. And no platform is more exposed than AT&T’s DirecTV satellite service, which is built around a robust portfolio of regional sports networks and expensive live-sports assets, like NFL Sunday Ticket.

Also read: AT&T TV: Everything You Need to Know About the Streaming Version of AT&T’s Premium Pay TV Service

Despite losing nearly 3.2 million customers last year, DirecTV is still AT&T’s biggest pay TV asset, with more than 16 million subscribers. AT&T has stopped promoting DirecTV, and is no longer coining new subscribers for its other linear pay TV platform, U-verse TV, as it tries to transition its pay TV base to its new IP-based platform, AT&T Now. As Moffett noted in his missive to investors sent April 3: “That would have been a difficult transition under the best of circumstances. These aren’t the best of circumstances.”

Speaking to investors during AT&T’s fourth-quarter earnings call, COO John Stankey said, “As we move through this year and we start shifting to AT&T TV, our gross add performance starts to get much stronger.”

We meant to do that.

That was one of the essential takeaways AT&T president and chief operating officer John Stankey had for investors as to why the telco was displacing DirecTV with a streaming pay TV service just five years after paying $50 billion for the satellite-TV company.

“I think, back in July of 2015, after we closed the DirecTV transaction, we were pretty clear that at that point in time we didn’t see satellite delivery as necessarily a growth vehicle for entertainment moving forward,” Stankey said March 3 at a Morgan Stanley investor event. “We like the DirecTV customer base — we thought it was attractive. But we felt like the march needed to be to delivering entertainment over software.”

Launching nationwide after tests in 13 markets, AT&T TV is a kind of hybrid, matching over-the-top and traditional pay TV services. It’s delivered over the open internet to a proprietary Android TV set-top box, which means AT&T doesn’t have to launch satellites to support the service. It’s self-installed, so the operational costs of truck rolls are also factored out of the equation.

The Android TV-based system includes access to Netflix, YouTube and virtually every other OTT app through the Google Play digital store, so AT&T doesn’t have to worry about developing native platform integrations of SVOD services. Voice integration is also handled natively, through Google Assistant.

Conversely, AT&T TV is as much “traditional pay TV” as it is OTT. There’s a two-year contract involved, with a full bundle of around 70 channels in the base tier — including the Big Four broadcast networks and ESPN — priced at $50 a month in the first year before shooting up to $93 for the second 12 months. There are hidden fees, notably an $8.49-per-month regional sports network charge, and additional costs for adding more Android TV set-tops. And there are charges for early cancellation.

Stankey didn’t disclose how many customers AT&T TV has at this point, but said “we’re really pleased with what we saw” on the service’s March 2 nationwide launch day. With AT&T losing 4.1 million subscribers in 2019 across its incumbent pay TV services — DirecTV satellite, U-verse TV managed IPTV and the erstwhile DirecTV Now virtual MVPD service (now confusingly called AT&T TV Now) — AT&T expects its new video platform will reverse its currently high customer-churn trajectory in 2020.

AT&T TV is also seen as the cornerstone of the telco’s fiber-to-the-home broadband sales effort, now in 4 million homes. AT&T is hoping to have around 3 million more of them by 2022, and being able to bundle in a premium pay TV service is part of that business equation.

“We’re getting higher attach rates than what we would traditionally get in selling broadband with satellite,” Stankey said. “We saw higher growth rates than what we would typically see, and I think that’s driven by the fact that the product is an updated, more feature-rich product. And of course, the fact that we can now bundle it more attractively in certain areas, such as our fiber footprint and offer very, very attractive bundles on it, customers are aware of that and are interested to try and kick the tires on it.”

DirecTV Finds ‘Rightful Place’

With the introduction of AT&T TV, the telco’s existing pay TV services are either being marginalized or put out to pasture.

Stankey didn’t comment on U-verse TV, the 14-year-old IPTV service that ended the fourth quarter with only around 3.4 million remaining subscribers. News site Cord Cutters reported that AT&T is no longer promoting U-verse TV on the internet.

Likewise, Stankey only passingly addressed AT&T TV Now, the skinny-bundled vMVPD that had a promotion-fueled rocket ride to nearly 2 million subscribers in its first 20 months in the market, before AT&T turned off the loss-leader taps. But priced at $65 a month for 45-plus channels, AT&T TV Now would seem to be undercut and antiquated by AT&T TV, even though it is free of contracts and early-termination charges. Stankey described the vMVPD as merely an “iteration,” a technological step on the way to AT&T TV.

”We will continue to offer satellite and DirecTV where it has a rightful place in the market, places where cable broadband is not as prevalent.” — John Stankey, president and COO, AT&T

That leaves DirecTV, which has seen a base of more than 21 million subscribers whittle away to just more than 16 million as of the end of the fourth quarter. DirecTV also recently saw the departure of senior VP and chief content officer Dan York, culminating a series of top-level executive departures for the satellite-TV service that began when former DirecTV CEO Mike White left its El Segundo, California, headquarters when AT&T closed its $50 billion acquisition in summer 2015. Now, AT&T isn’t even branding its flagship pay TV service with the DirecTV name anymore.

“We will continue to offer satellite and DirecTV where it has a rightful place in the market, places where cable broadband is not as prevalent,” Stankey said.

Despite investor pleas for AT&T to divest the satellite TV asset, Stankey reiterated the telco’s position that it’s not likely to do that soon.

“I would tell you we don’t see it really running in the regulatory environment,” he said. “And I would also say, you have to be a little circumspect as an executive right now. If you're doing anything that requires approval, my read of the environment is, it’s a little unpredictable.”

AT&T is gearing up for what could be a lengthy battle with about seven small television station groups that went dark to its video customers at the end of May, hoping to send a message to other programmers across the country that it is serious about reining in high content costs.

The seven station groups — Deerfield Media, MPS Media, GoCom Media of Illinois, Howard Stirk Holdings, Roberts Media, Second Generation of Iowa and Waitt Broadcasting, with 17 stations in 14 cities — came off DirecTV, DirecTV Now and U-verse TV on May 31. The stations, affiliates of all four major broadcast networks, The CW and MyNetwork TV, had granted AT&T several extensions after their deals expired in March. Another extension offer was on the table when they came off the telco’s platforms.

In a blog post on Broadcasting & Cable’s website, Stirk Holdings owner Armstrong Williams likened AT&T to a “19th century monopolist” using gatekeeper power to limit consumer choice.

“Compounding that sin, in the case of WEYI-TV [Saginaw, Michigan], an NBC affiliate, AT&T-DirecTV is also impacting diversity by truncating market access by one of fewer than 18 African-American owned TV stations in the nation,” Williams said. “As that African-American owner, I’m frustrated and mad.”

Ties to Tough-Negotiating Sinclair

Many of the affected stations are managed by Sinclair Broadcast Group, through agreements forged when Sinclair sold the properties in 2012 and 2013. Most of the stations are being represented by MAX Retrans, a consulting firm headed by former Nexstar Media Group executive Duane Lammers, a notoriously aggressive negotiator, sources said.

AT&T cited cost increases for the impasses and said it wants to pare back channels that have a high cost but are watched sparsely by its subscribers.

AT&T said it asked each of the station owners to “allow our customers to watch while we work this matter out privately. We need their permission to bring their stations back. Yet some have also disconnected their most loyal viewers before.”

Much of the programming is available for free over the air — though that’s not always true in rural markets — or via broadcast network websites or apps, AT&T said.

“Customers have sent a clear message,” AT&T continued. “They don’t want to keep paying more for channels they don’t care as much about anymore.”

At the Credit Suisse Communications Conference in New York, AT&T Communications CEO John Donovan, who oversees the company’s wireless, wireline and video distribution businesses, said the days of offering programming at a loss just to gain market share are over.

“[Y]ou have to know what the customer is willing to pay 100 bucks for,” Donovan said. “Trying to give them 100 bucks of value for $40 or $50 or $60, that’s not going to be a fit that is going to work for the customer or the organization in the long run.”

AT&T has followed that path in its talks with other content providers. In its most recent carriage deal with Viacom’s cable networks, the distributor negotiated lower rates, Viacom CEO Bob Bakish told The Wall Street Journal.

Retransmission-fee increases slowed in 2018, to 8.5% on average compared with 17.4% in 2017, according to the National Association of Broadcasters. They are increasingly vital to TV stations, though, as broadcasters face more competition for local ads from online platforms. Pressure to accelerate their growth is expected as financial players expand their presence in the industry, such as Apollo Asset Management, Blackstone Group and Providence Equity Partners.

Kagan, a unit of S&P Global Market Intelligence, predicts retransmission consent fees will rise to about $10.8 billion in 2019, up 6% from 2018, and then will tick up 4% in 2020 to $11.2 billion.

Fox Has Lots of Renewals Ahead

Also on the horizon: Fox Corp., the broadcast and cable entity that emerged from 21st Century Fox’s asset sales to the Walt Disney Co. this year, is entering a cycle of retransmission-contract renewals.

MoffettNathanson media analyst Michael Nathanson wrote in a report last week that he expects Fox to nearly double its retrans haul to $2.7 billion by 2023 from about $1.38 billion in 2018.

Fox has 28 owned and operated stations as well as cable networks Fox News Channel, Fox Business Network, FS1, FS2 and Big Ten Network. At an investor day on May 9, Fox said that about 50% of its TV affiliate deals (mostly retransmission pacts) are up for renewal in 2019, with another 30% coming due in 2021.

“Given these relative contract maturity profiles, along with our increasing investment in broadcast television programming, we anticipate TV-affiliate revenue growth to meaningfully outpace cable- affiliate revenue growth in the short to medium term,” Fox chief financial officer Steve Tomsic said.

Related:INTX 2016: AT&T Strives for 'Digital Bundle'

Some 10 months after closing its $48.5 billion purchase of DirecTV, AT&T has introduced a flurry of products aimed at exploiting its position as the largest pay TV service provider and the second-largest wireless communications company in the U.S. It’s combining video, broadband and wireless offerings in a variety of packages, including deep discounts for wireless service, mobile video and unlimited data plans. It has also raised some eyebrows with a plan to migrate U-verse TV subscribers to DirecTV, a move some see as a factor in the steep subscriber declines in its wireline business.

Most recently, AT&T formed a joint venture with former Fox chief Peter Chernin called Otter Media for long- and short-form content with three over-the-top services — DirecTV Now, DirecTV Mobile and DirecTV Preview — expected to debut later this year. It’s beginning to seem like investors will need a scorecard just to keep track of the latest movements in the phone company’s lineup.

AT&T Entertainment Services senior vice president of strategy and business development Tony Goncalves spoke with Multichannel News senior finance editor Mike Farrell about AT&T’s strategic direction and plans to navigate the evolving world of voice, video and data. Edited highlights follow.

MCN:It seems that DirecTV’s role in AT&T Entertainment has changed even in the short time since the merger was completed. Can you talk about that?

Tony Goncalves: I think, at a macro level, there are shifts in the value chain happening. The definition of a distributor is changing, but at the macro level our video strategy is pretty much intact. We were pretty overt, we were moving rather aggressively from a satellite-only and an IPTV-only video provider to one that would provide high-quality video to consumers, regardless of the connection. The OTT announcement we made earlier last month — ubiquitous delivery of video content across managed and unmanaged networks is our approach. One thing we bring to the table for both the consumer and the industry is the fact that we’re a network and connectivity company at heart. So we should be able to move the bits pretty efficiently between the origination and the end point for the consumer.

MCN:Right after the deal closed, there was some really deep discounting for handsets and a push toward pairing video service with cellphone service. Now, you’re moving toward an OTT product. Was that always the intention or is it more of a reaction to market forces?

TG: The intention had always been to build from what we had as a unified company and create points of differentiation wherever you possibly could, with mobility clearly being an area where we could employ some differentiation. What you saw was an out of the gate, highly promotional kind of approach. And what you subsequently saw earlier this year was [combining] unlimited data when you combine AT&T mobility on DirecTV. The third prong was the announcements on OTT. Underlying all of that is a video platform that will ultimately be delivery-agnostic — managed and unmanaged networks, WiFi or LTE, IP or satellite. The intent has always been, you get to a point where the platform is flexible and nimble and expands beyond the 26 million households we’re in today.

MCN:Millennials supposedly don’t watch TV, they watch shows on whatever device they happen to have nearby. Is that what you’re doing with the OTT service? Is it the first step in a series of products that consumers will use as their life situations change?

TG: Our OTT strategy is two-pronged. On one side, it’s a catch-all type of product. There are folks that are leaving the ecosystem that really still value the bundle, and the bundle has just gotten a bit out of reach. Our DirecTV Now product is intended to be a product that folks who are leaving the ecosystem, yet still value the premium content, can subscribe to rather easily. It’s pay TV as an app. They can subscribe rather quickly and cancel rather quickly. But we’re investing less into those consumers because we’re not rolling trucks or putting set-top boxes into their homes. On the other side of what we announced on OTT, which is DirecTV Preview and the mobile-specific products, it is trying to pull in some of those “cord nevers” that tend to be younger and present them with premium content from the more premium services. Over time, yeah, we do believe that at a certain life stage, cord-nevers will make a decision to buy more. And we’re in a unique position if we do this right to be able to establish a relationship with those customers.

Related:AT&T Deals for Quickplay

MCN:You have been migrating U-verse TV customers over to DirecTV. Once that is complete, will you still have a wire into the home? Will U-verse wireline broadband still be important, or do you see that eventually moving to fixed wireless?

TG: Fixed-line broadband is very, very important to us. We’ve committed as part of the conditions of the merger to build 12.5 million fiber households. There is a tremendous amount of investment that is traveling down the fixed-line broadband path. As far as fixed wireless, we are deploying some fixed wireless, largely in rural areas. As mobile networks evolve and we get into this IP era, there will be an opportunity to unify the broadband approach. We haven’t been overly specific as to what our plans are there. But to answer your question very directly, fixed line is very, very important. We’re putting a lot of fiber in the ground and we don’t intend to pull back at all.

MCN:So there will always be a line into the house?

TG: Yeah. How that line gets there is definitely evolving. It used to be twisted-pair copper that went through a central office and got distributed, then it became fiber to the neighborhood and now we’re at fiber into the home. There will be what I call a collision of wireless and wireline at some point. It’s hard to predict when [and] to what extent we’ll use it. We’re going to do whatever is more cost-efficient and delivers the best experience to the consumer.

SIDEBAR: Streaming Meemies

Beginning in the fourth quarter of this year, AT&T will make streaming video available in three separate packages for consumers:

DirecTV Now: On-demand and live programming from most of the networks available on DirecTV, plus premium and add-on options

DirecTV Mobile: Mobile-first experience for premium video and made-for-digital content for smartphones, regardless of wireless service provider

DirecTV Preview: Free, ad-supported service featuring some of the quality programming available on DirecTV, including the AT&T Audience Network and millennial-focused content from Otter Media

Source: AT&T

SIDEBAR: Sub-Traction

DirecTV net new-subscriber growth has been on the rise in the past few quarters, just as AT&T’s U-verse customer base has declined sharply. (In thousands)

Q1 2015           Q2 2015             Q3 2015         Q4 2015        Q1 2016

DirecTV . . . . . . . . . .  60 . . . . . . . . (133) . . . . . . . . . 26 . . . . . . . . . 214 . . . . . . . . 328

AT&T U-Verse . . . . . 49 . . . . . . . . (23) . . . . . . . . . (92) . . . . . . . .(240) . . . . . .  (382)

Source: Company reports

AT&T has stopped making set-tops for its U-verse TV service as the telco focuses video efforts on the lower-cost DirecTV platform and looks to head down a technology path that could eventually phase out its current IPTV platform, Bloomberg reported Tuesday.

Bloomberg noted that AT&T, which closed its acquisition of DirecTV last July, is working on a  centralized home gateway platform that, within the next three years, will consolidate all of the company’s services, but stressed that AT&T isn’t shutting down U-verse and is letting currently U-verse TV subs stay on the platform. But new customers are being steered to the DirecTV platform.

Update: AT&T said U-verse isn’t being phased out, and provided this statement: "To realize the many benefits of our DirecTV acquisition, we are leading our video marketing approach with DirecTV. However, our first priority is to listen to our customers and meet their needs, and if we determine a customer will be better served with the U-verse product, we offer attractive and compelling options." 

Of late, AT&T has been placing a bigger emphasis on the lower-cost DirecTV platform.

AT&T added 214,000 U.S. satellite TV subs but shed 240,000 U-verse TV subs in Q4 2015 as the company “focused on profitability and increasingly emphasized satellite sales.” At the time, AT&T chairman and CEO  Randall Stephenson said he expected  U-verse TV churn to improve as the company shores up its newly combined sales channels.

Arris is among the vendors that have been feeling the brunt of shifting video strategies at some of its largest telco customers, including AT&T and Verizon Communications. Arris, which recently expanded its global set-top market share lead after acquiring Pace plc, is scheduled to report Q4 2015 results on Wednesday (February 17). Cisco Systems, another maker of U-verse TV receivers, recently sold its CPE division to Technicolor.

AT&T has been dropping hints about its video future. Last fall, AT&T announced it had picked Ericsson to “enhance” its TV platform and evolve its satellite and wireline TV platform. AT&T’s current U-verse TV service runs on Mediaroom, the IPTV middleware platform that Ericsson acquired from Microsoft in 2013. Prior to that, AT&Tannounced (subscription required)that it would use a derivative of DirecTV’s gateway-client architecture to establish a more uniform, cloud-based video platform for the combined company.

Last fall, AT&T hired Enrique Rodriguez, a former Cisco Systems and Microsoft exec, as executive vice president and chief technical officer, where he’s now overseeing both U-verse and DirecTV and heading up the technical integration of those services.

In results that will likely add fuel to the cord-cutting debate, AT&T said it lose 22,000 U-verse TV subscribers, versus 190,000 net adds in the year-ago quarter.

However, AT&T, which ended Q2 with 5.97 million U-verse video subs and is closing in on its acquisition of DirecTV, did not chalk up that drop-off to cord-cutting but to typical “seasonality” seen in the period alongside the decision to target promotions to more profitable, higher-value subscribers.

On the U-verse video side, the first point to make is that the second quarter is always seasonally a challenge,” AT&T CFO John Stephens said on Thursday afternoon’s earnings call. “You’ve got a lot of relocations; you’ve got a lot of students returning from college. And with our limited footprint with regard to video capabilities, it’s always a challenge for us.”

The issue, he added, is to decide how much the company wants to pump into promotional activities that aim to stimulate growth. “We chose to be very disciplined and very limited in those promotional activities,” Stephens said.

While U-verse video dropped off, U-verse high-speed Internet remained strong, as AT&T added 241,000 subs in that category, extending its total to 12.9 million subs. AT&T said more than 90% of “IP-eligible subscribers” have its U-verse high-speed Internet product.

With DSL factored in, AT&T lost a total of 136,000 broadband subs, widened from a loss of 55,000 last year.

Stephens said U-verse services now account for more than 70% of consumer revenues, and that adjusted consumer U-verse revenues rose 19.2% year-over-year. More than 97% of AT&T’s video customers now take a bundle, and the ARPU for U-verse triple-play customer remains greater than $170.

Stephens said AT&T remains bullish on GigaPower, the telcos’s fiber-based platform that has been launched in 15 markets so far, most recently in Durham and Greensboro, N.C.

Stephens didn’t provide GigaPower sub numbers during the early stages of the deployment, but said AT&T is encouraged by the results so far.

“We are pleased with it,” he said. “The take rates, the satisfaction rates continue to outperform our expectations with our customers.”

Regarding the pending merger with DirecTV, Stephens reiterated that the company expects the deal to achieve $2.5 billion in cost synergies.

AT&T turned in an overall strong Q2, with revenues rising 1.4% to $33 billion, along net income of $3 billion and 69 cents per share that beat analyst expectations by six cents.