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AT&T’s Answer: More Mobile Video

Now the nation’s biggest pay TV provider, with DirecTV in the fold, AT&T said the key to growing its video business is to convince video subscribers to watch more content on their mobile devices, by pairing satellite-TV and wireless offerings.

The strategy shift comes as AT&T continues to weather criticism of its $48.5 billion DirecTV acquisition. In a research note titled “It’s AT&T’s Problem Now,” MoffettNathanson principal and senior analyst Craig Moffett opined that DirecTV closed the deal in timely fashion, mere weeks before disclosing its worst second-quarter net subscriber losses ever (133,000).

DirecTV may have been thought of as a growth source in the past, but not anymore, in Moffett’s view. “Now DirecTV’s business is being viewed as a source of cash to fund AT&T’s dividend, a piggy bank for cost synergies to boost earnings, a springboard for AT&T’s ambitions in Latin America, and a rationalization for discounting wireless service in the name of bundling with pay TV,” Moffett noted.

AT&T chairman and CEO Randall Stephenson, who helped engineer the DirecTV acquisition, declared at the company’s Aug. 12 Analyst Day that AT&T knew where the subscriber trends were going (downward) and didn’t care.

Stephenson said he expects cord-cutting and cord-shaving — the two most-feared hyphenated words in the media business, next to over-the-top — to continue.

But he said AT&T has the antidote: mobility.

Mobility is not a new aspiration. Verizon plans to launch its own over-the-top, exclusively mobile service, called Go90, later this summer, and other OTT services like Sling TV tout their ability to allow customers to view video on the go.

AT&T thinks it may have a leg up on the competition by pairingwireless service with TV — both DirecTV and AT&T U-verse TV — and is offering a ton of incentives, starting with a $500 discount to customers who switch their wireless provider to AT&T. That breaks down to $300 for switching providers and $200 for buying a smartphone under its AT&T Next plan.

The discounts are per line and per phone, not per household, so a family of four could net a savings of $2,000.

Customers who combine their wireless and DirecTV billing get an additional $10-per-month discount. Here’s the thinking: Younger subscribers consume a mountain of data and video on their phones, with AT&T claiming wireless data traffic has increased 100,000% since 2007. So why not make it easier by pairing wireless service with a video subscription?

Moffett wasn’t too excited about the discounts. He said they send a clear message that the new strategy is to “buy share.” He said he expects a similar offer for AT&T Wireless customers who sign up for DirecTV in the near future.

“Those kinds of offers will inevitably help with unit growth … but not with profitability,” Moffett wrote in his research report.

At the Analyst Day, Stephenson recalled a meeting the day before with a roomful of AT&T interns in Dallas, all of them so-called millennials. He asked them if any subscribed to a pay TV service. Only one raised a hand.

When the CEO asked if the interns watched football or other sports, all said yes, but they watch online using passwords connected to their parents’ pay TV subscriptions.

“TV everywhere is what is being consumed,” Stephenson said. He expects cord-cutting and cord-shaving to continue to eat into traditional pay TV subscriptions, but at a “manageable” rate.

Later, he hinted that AT&T could give customers incentives to watch more video on their mobile devices, but just how it would do that wasn’t articulated. As the linear TV world continues to be under pressure, Stephenson said, broadband and wireless pricing could increase.

“There’s going to be a re-shifting of revenue and our expectation is that we can probably grow revenue per household for the foreseeable future,” Stephenson said.

John Stankey, AT&T’s CEO of Entertainment & Internet, put it more bluntly.

“I want Comcast to really regret the fact that they don’t own a wireless asset and maybe have to do something about it,” he said.

Just what that means for the cable industry remains to be seen. In the second quarter had its best video subscriber performance in years, cutting losses almost in half to 280,000 from 534,000 in 2014, according to MoffettNathanson. But no one is expecting cable operators — which have flirted unsuccessfully over the years with several wireless partnerships and consortiums — to commit heavily to a wireless product.

Comcast, along with Time Warner Cable and Bright House Networks, reached an MVNO deal with Verizon Wireless after selling spectrum to the carrier in 2011. The Wall Street Journal recently reported that Verizon and Comcast were in “ongoing” talks about updating the arrangement in areas, including pricing for shareable data plans.

Cable operators have embraced WiFi as a way to retain broadband customers — and Cablevision Systems introduced Freewheel, a low-cost, WiFi-only phone service, earlier this year. But so far the industry has resisted getting into the highly competitive and extremely price-sensitive wireless phone business.