For ‘Now,’ DirecTV Makes a Splashy Bet on OTT

NEW YORK — Amid the flash and celebrity sightings at the much-anticipated launch of its DirecTV Now service last week, AT&T made one thing clear — the telecom icon is betting its future on the over-the-top concept.

Stepping to the stage at the New York Gallery Building in Manhattan, AT&T Entertainment Services CEO John Stankey said the DirecTV Now launch was bigger than the introduction of the telco’s last game-changing service — U-verse TV — about a decade earlier.

U-verse TV has largely become a second thought to its parent company, as AT&T is in the process of transitioning its 5 million telco-TV customers to the DirecTV satellite-TV platform. But Stankey said this time is different.


“Why is it bigger?” Stankey asked at the Nov. 28 launch event. “Because for the first time in our history, we have control of the full stack — the full stack of software, the platform and bringing it all the way out to the end user customer experience.”

On the surface, DirecTV Now looks like it could carve out a big piece of the pay TV market. Its target customers are the 20 million people who have no pay TV connection, Stankey said — the focus of every other OTT service on the street. Also on AT&T’s radar: the 5 million customers that don’t pass credit check muster for its pricier DirecTV satellite service.

DirecTV Now’s biggest advantage may be its extremely aggressive pricing. In some cases, it charges less than half of what cable, satellite and telco TV distributors are charging for their most popular offerings. Although its $35 monthly price point for 100-plus channels is a promotional deal that rises to $60 per month eventually, the lower price will be grandfathered for as long as those customers have the service.

AT&T is definitely targeting DirecTV Now at a younger audience, evidenced by the pithy names it has slapped on the various tiers of service: “Live a Little” for the 60-channel, $35 per month package; “Just Right” for the 80-channel package priced at $50 per month; “Go Big” for the 100-plus channel offering; and “Gotta Have It” for a 120-plus channel, $70 monthly tier.

Perhaps the most striking part of the offerings is how little fat there is in every package. All the top networks are represented, with the exception of broadcaster CBS and premium service Showtime, and many analysts believe that deal will eventually come. Unlike other past pay TV promotions that could be padded with music channels and other programming detritus, each DirecTV Now tier appears to be chock full of watchable networks.

In addition, DirecTV Now is offering HBO — including access to HBO Go and all of the service’s different feeds — for $5 per month, one-third of the $15 other distributors normally charge for the service. Cinemax, HBO’s sister premium service, also is available for the same additional price.

Additional content is mainly targeted to millennials, including subscription video on demand service Fullscreen, available for $5.99 per month. The millennial content continues with “Taylor Swift Now,” a 13-episode jaunt through the pop icon’s life, regularly updated and including an exclusive concert for AT&T customers. Hello Sunshine, a content venture formed by actress Reese Witherspoon, offers women-focus programming. A free service — FreeView — offers content from AT&T’s Audience Network and Otter Media.


While that should make consumers happy, Wall Street isn’t so sure. In a blog post last week MoffettNathanson principal and senior analyst Craig Moffett marveled at the scope of networks available on the service, but said it doesn’t answer the biggest question that investors should be asking of DirecTV Now.

Moffett estimated that AT&T’s programming costs for the lowest-service tier alone could be as high as $35.96 per subscriber, per month. Add in the normal costs of doing business, and profit margins move deeper into negative territory.

“By stacking their base package with all the best networks — likely a requirement for getting the programming contracts at all — they still have the same problem,” Moffett wrote. “Put simply, they aren’t going to make any money.”

While AT&T may be willing to sacrifice profit for scale, there is a question as to how many subscribers DirecTV Now can attract. Its main rival, Dish Network’s Sling TV service, which offers about 30 channels for $20 per month, has been around for nearly two years and has about 800,000 customers by some estimates. Sony’s more robust PlayStation Vue service has an estimated 200,000 customers paying between $34.99 and $44.99 per month for different packages.

DirecTV Now should fare better, and analyst estimates range from 1 million customers by the end of 2017 from Morgan Stanley media analyst Ben Swinburne to 3 million by the end of 2020 from UBS telecom analyst John Hodulik.

“The main question for us is the quality of the connectivity users will get and the overall user experience, especially as the product scales,” Hodulik wrote.

Already DirecTV Now has encountered some glitches, with customers complaining in the first days after the launch of login troubles, error messages and other problems.

Technical glitches notwithstanding, Swinburne was most encouraged by the DirecTV brand and the strong programming choices, including $5 HBO. But he added that the service is not without programming holes.

In addition to no CBS or Showtime, DirecTV Now customers also don’t have access to NFL Sunday Ticket and won’t be able to stream NFL games on mobile devices because of the league’s exclusive mobile deal with Verizon.

“Perhaps its biggest content hole, however, comes from what appears to be a complete lack of TV station affiliates, meaning that outside of major markets and indeed in most of the U.S., there will be no live feeds of CBS, NBC, ABC, Fox and other over-the-air channels,” Swinburne wrote.


Concerning profitability, AT&T has a two-fold answer — addressable advertising and lower costs.

AT&T has been one of the more aggressive distributors on the addressable ad front, as its Ad Works unit generates about $2 billion in sales. With DirecTV Now users consuming video on their phones, tablets and TVs, the ability to target and personalize advertising messages increases exponentially.

“We truly believe that this has to be a two-sided model, where in order to keep subscription prices down we also have to develop more relevant, more data-driven monetization tools within advertising,” AT&T Entertainment Group executive vice president of marketing Brad Bentley said during the launch event. He said that includes developing smarter and better ways to deliver VOD ads, more targeted messages and lighter ad loads.

“This is how we’re going to keep our pricing down, by creating innovative, data-driven ad placements across our streaming products,” Bentley said.