What DirecTV Now Means for Hollywood, Netflix, Pay TV
One Wall Street observer says the new offer could mitigate pay TV subscriber erosion and, along with other expected streaming video service launches, be positive for media stock valuations.
AT&T on Monday afternoon unveiled pricing and bundling details of its much-anticipated DirecTV Now streaming video service, which launches Wednesday for as little as $35 per month, and Wall Street on Tuesday morning started discussing what it will mean for content companies, Netflix and the broader pay TV industry.
RBC Capital Markets analyst Steven Cahall in a report asked whether the streaming service was "good for media?" DirecTV has unveiled "a potentially great product with Now, in our view, that leverages having some of the best programming costs in the business due to scale, as we think DirecTV's programming costs are some 20 percent-30 percent below the industry average," he said. "This may force competitor products to come down to DirecTV's price point even if their wholesale costs are much higher."
This would not only be good news for consumers, but will "as a result likely mitigate pay TV sub erosion, though by how much is impossible to know just yet," Cahall argued. "On the flipside, we think some of those subs may come from smaller linear multichannel video programming distributors, and virtual multichannel video programming distributors' churn would be higher."
Concluded the analyst: "We see the mitigation of TV sub erosion as THE biggest issue for media investors. We see DirecTV Now and future launches as constructive to media valuations."
Telsey Advisory Group analyst Thomas Eagan said Tuesday that he also remains bullish on pay TV companies and doesn't expect "material cannibalization yet from DirecTV Now."
Discussing its effect on competitors, Wells Fargo analyst Marci Ryvicker wrote: "We view this product as competition for the Slings and PlayStation Vues of the world rather than for the core cable customer." She concluded it would be "no real threat" for cable operators.
Eagan similarly wrote in a report that the new service "could compete with [Dish's] SlingTV," while "Netflix [is] still a complement." He explained: "While we estimate the number of broadband-only video households grows to 5 million this year, it's still relatively small and price elastic to support multiple OTT players. We, therefore, expect share shift from within OTT services. We see DISH's SlingTV (the only other live TV streaming service) as vulnerable due to the streaming issues that have lowered retention. Conversely, we see a neutral to possibly favorable impact to Netflix. With its original programming and low price, it remains a complement to a pay TV or streamed base package."
Which consumers will DirecTV Now appeal to? "Priced at between $30-$50 per month, the cost with broadband could total $80-$100 per month yielding nominal savings versus pay TV for households that watch a lot of TV, especially with only 1-2 streams," Eagan said.
Cahall said DirecTV Now's starting price point of $35 per month should help it make a statement compared with competitors from launch. "This offer, while potentially not money-making on a per-sub basis, should help Now attract critical mass in subs early on," he wrote. "The unusually low on-sale $35 per month price point [promotion] for the $60 per month package suggests to us that AT&T has more business in mind. For one, DirecTV Now will stream free on AT&T mobile subs, suggesting gaining mobile subscribers is a key cross-sell strategy of Now. Secondly, we suspect that AT&T hopes to graduate Now subs up to premium DirecTV packages over time at far more accretive price points, long-term contracts etc."
Overall, he argued that AT&T and other companies planning streaming video service launches are using content as a cross-seller. Peers "will also have additional services unique to their respective businesses they will seek to promote and cross-sell with, including Hulu (media now owning some distribution), YouTube (adding Google/YouTube users) and potentially Amazon and Apple," Cahall said. "The 'content as a cross-sell' model is, In our view, the reason AT&T is paying such a premium for Time Warner."