Why AT&T Has Renewed a Slew of Major Carriage Deals

John Stankey - Getty - H 2016
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John Stankey - Getty - H 2016

The telecom giant has secured key networks for its upcoming DirecTV streaming services in deals with the likes of Disney, NBCUniversal, Turner and HBO.

AT&T has been on a carriage deal renewal spree. In late August, it unveiled a new partnership with HBO and Cinemax. On Sept. 8, it announced a deal with Discovery Communications, on Sept. 13, a new pact with NBCUniversal followed, and on Tuesday, it unveiled a deal with Turner.

One of the reasons behind the slew of renewals is the company’s planned launch of three streaming video services next quarter.

Thanks to its planned acquisition of Yahoo and such previous deals as the purchase of AOL, Verizon has been in the headlines with its efforts to change the look of pay TV and mobile video services with a focus on millennials.

Fellow telecom giant AT&T, maybe with less fanfare, has similarly been setting the stage to reinvent video services as consumers look for new offers in the digital age and entertainment companies look to gain traction with OTT offers. After its acquisition of satellite TV giant DirecTV, which closed in July 2015, it also bought some technology companies, including Quickplay, which powers over-the-top video and TV Everywhere services, in June.

Using its platform, AT&T has said it plans to launch three DirecTV streaming services in the fourth quarter. Industry sources say the early word and chatter about them suggests the biggest bundle will be closer to traditional pay TV services than so-called skinny bundles as AT&T looks to reach new subscribers.

AT&T CEO Randall Stephenson last year mentioned that the company was looking to target the 20 million to 30 million U.S. homes without pay TV subscriptions. That means it is going after people who haven’t had access to pay TV, have cut or want to cut the cord or have no interest in signing up for linear pay TV.

The most comprehensive streaming service to come from the company will be DirecTV Now, a name that could change like the two others. It is designed to offer a range of content packages, including much of what is available from DirecTV today, available streamed via a wired or wireless internet connection on-demand along with live programming from many networks, plus premium add-on options.

AT&T has signaled that the service plans to launch with more than 100 channels, making it closer to the DirecTV satellite TV service than a 25-channel skinny bundle. People at AT&T and working with the company say the telecom giant’s message has been that the appeal of skinny bundles is limited, something content company CEOs also have been saying.

One Wall Street observer predicts DirecTV Now would have many more channels on offer than Dish's SlingTV and cost slightly more, possibly starting close to $40, while Macquarie Securities analyst Amy Yong said that the price for DirecTV Now could run at around $50 to $60 per month. Sling offers around 20 channels, including AMC, Disney Channel, ESPN, History and TNT, for $20 a month. Add-on packages cost $5 each.

AT&T has included rights to offer various networks in its recent slew of carriage deal renewals, which have covered all AT&T Entertainment Group platforms and delivery methods, even though it is only expected to disclose which specific networks will be included in what streaming service packages.

Walt Disney chairman and CEO Bob Iger said on the company's most recent earnings conference call in August that "AT&T DirecTV, the largest distributor in the country, will feature ESPN, ESPN2, ABC, Freeform, Disney Channel, Disney XD and Disney Junior in all subscription packages offered in its upcoming DirecTV Now OTT service."

HBO and Cinemax in a late August deal secured a spot as add-on services available under the service. Discovery said its networks would be included in the DirecTV Now streaming service, while NBCUniversal said its channels would be available on DirecTV Now and DirecTV Preview.

Sources said that Viacom, in a carriage renewal with AT&T in October, also secured inclusion in the streaming service. Big content companies that haven’t announced new arrangements with AT&T for DirecTV Now so far are CBS Corp. and 21st Century Fox.

But observers say given the recent slew of announcements, more could be struck and unveiled in the near future. “We are real optimistic about our ability to get really good-quality content,” AT&T CFO John Stephens told an investor conference Sept. 15.

Industry executives say AT&T has pitched itself as a partner for content companies that are increasingly looking to make their networks available in various forms, including on OTT.

In that context, Dan York, chief content officer for AT&T, said about the Discovery deal: "By adding the Discovery networks to the growing DirecTV Now lineup, we are continuing to build a streaming service for the connected generation that we believe will be second-to-none in the industry."

?About the HBO deal, he said: “Our agreement with HBO is groundbreaking in the pay TV and wireless industries as well as the premium category. With this agreement, we have created easy access to subscribe and consume HBO’s premium content across all of our platforms.”

Content companies have also been elated. "Turner’s goal as a consumer-first media company is to make our content available everywhere our audience is, and this expansive deal with AT&T helps deliver on that promise by having our leading portfolio of popular networks and premium programming available on more services and platforms than ever before,” said David Levy, president of Turner, in announcing its carriage deal on Tuesday. “We’re pleased to further our relationship with AT&T and look forward to providing our leading networks and programming to them as they launch additional consumer offerings to their expansive subscriber base.”

Others have be similarly bullish on being part of the new streaming services. “We are thrilled to extend and deepen our valued and long-standing relationship with AT&T by announcing this groundbreaking agreement,” said Simon Sutton, president, global distribution, HBO. "The entertainment landscape has evolved, and we are excited to innovate on both AT&T's traditional and new platforms to further provide premium quality, extraordinary value and accessibility to viewers anywhere.”

And Eric Phillips, president, domestic distribution, Discovery Communications, said: “We are pleased that we were able to get a win-win deal done with the largest distributor in the country. Our agreement greatly expands the AT&T platforms that will distribute our award-winning content, including future distribution on DirecTV Now for our portfolio of brands.”

“AT&T is an important distributor and we are pleased they recognize the value of NBCUniversal’s leading portfolio of networks and will continue offering our unmatched lineup of entertainment, sports, news and Hispanic content,” said Matt Bond, chairman of NBCUniversal Content Distribution. “We are committed to growing our audiences, and we welcome the opportunity to offer our networks on DirecTV Now.”

That said, industry observers continue to have doubts about how big a business OTT can be in the near-term. “OTT sounds like a better business than in reality it is," NBCUniversal CEO Steve Burke said this week. "I think OTT is happening.... But I think it's a pretty challenged business model, and I'd be surprised if it flies out of the gate with a big number.”

He explained the consumers’ view this way: “The fact is if you want a decent-sized bouquet or bundle of cable channels, your programming costs are going to be 40, 50, 60 dollars. And if your programming costs are 40, 50, 60 dollars, you’re going to have a consumer proposition that’s going to be 40, 50, 60 dollars or more. If you’re a consumer that has cable and you get 200 channels, I’m not sure why huge numbers of people are going to run out and get excited about paying $45 for 25 channels. From a consumer point of view it doesn’t seem to make sense to me.”

But Burke did acknowledge: “I don’t predict large numbers, but I think the likelihood [is] there will be a significant portion of whatever the number ends up being that is truly incremental. That would be good for NBCUniversal.”

Content companies also look to benefit financially. Iger and Burke recently emphasized that the financials Disney and NBCU get for offering its channels via DirecTV Now and other OTT services are in line with traditional pay TV deals. “We're really quite neutral in terms of shifting from a traditional [multichannel video programming distributor] consumer to an over-the-top consumer,” said Iger. “Meaning, the pricing of our networks is similar on the over-the-top networks than it is on the MVPD platforms."

And he added: "These platforms will provide great user interface and functionality. And the better the user interface, the better it is for us because we think the customer's going to be more engaged and is likely to consume at higher levels, which could only be good for us."

Credit Suisse analyst Omar Sheikh in a recent report said that the DirecTV-Disney deal adds to the company’s growing OTT business. “The combination of [the acquisition of streaming technology firm] BAMTech, Hulu, DisneyLife and distribution on third-party services (Sling, PS Vue, DirecTV Now) finally gives investors real hope that Disney can build new, incremental, revenue streams which can mitigate the ongoing secular headwinds in the traditional video ecosystem,” he said.

Offering traditional video and digital-first video in various packages is also designed to boost AT&T/DirecTV’s subscriber trends. "We have uniquely positioned AT&T to lead in the rapidly evolving world of communications and video entertainment," Stephens said on a recent earnings conference call. "Our goal is to be the world's premier integrated communications company.... No one else can offer the integrated solutions that we can."

Stephens has called DirecTV Now "a game changer,” saying: ”We expect the millions of people who don't now subscribe to a video service and prefer a streaming option will be impressed.”

In addition to the broad-based DirecTV Now, the company's streaming services will include what is currently scheduled to be called DirecTV Mobile for people who want to watch premium video and made-for-digital content on a smartphone, as well as the free, advertising-supported DirecTV Freeview, which will showcase content from AT&T’s Audience Network, other networks and millennial-focused video from Otter Media, AT&T's joint venture with Peter Chernin's The Chernin Group.

“The service will not cannibalize subs from linear U-Verse/DirecTV, but will instead appeal to the 15-20 million broadband-only homes and pick off subs from [pay TV operators] like Mediacom and Cable One that are de-emphasizing video,” said Yong in a recent report.

She estimated total streaming subscribers could reach 1.5 million to 2 million for DirecTV by the second half of 2018, adding that the mobile offers could “importantly serve as a Trojan horse to gain wireless net adds as they open up the service to Verizon, T-Mobile and Sprint.”

John Stankey, CEO of the AT&T Entertainment Group, said at an investor day last year that the combined assets of the telecom giant would make it hard for rivals to compete effectively. “When you look at AT&T against our traditional and emerging competition, no one compares,” he said back then. “Mobile footprint, pervasive broadband scale and content, respected brand and world-class distribution. Comcast can't deliver that, neither can Verizon or those other wireless carriers, nor Netflix or the new entrants. We're poised to set the model for the others to chase.”

With its streaming service launches late this year, AT&T will also bring out its offers before similar launches planned by Hulu and YouTube. Yong noted that SlingTV, Sony Vue, Verizon’s Go90  and Co. are working in “a crowded space, but few have gained traction.”

But she predicted that DirecTV Now and the company’s other streaming services would succeed. Said Yong: “The three DirecTV offers should appeal to a wide range of subs.”