Will WarnerMedia Deliver on Its Streaming Video Strategy?

Dave Kotinsky/Getty Images for DirecTV
WarnerMedia CEO John Stankey

As the company kills niche services like FilmStruck, observers are skeptical about the attempt to roll out a larger digital platform to rival Netflix.

As shares in AT&T tumbled this week after unveiling its third-quarter earnings, Wall Street watchers singled out one bright spot: Ma Bell's legacy phone business. As for AT&T's closely watched strategy to transition from a cable bundle to Netflix over-the-top streaming contender, the company didn't get high marks. Analyst concern could be a red flag for a telecom giant, led by CEO Randall Stephenson, that has bet heavily on high-quality content and streaming to drive growth as its traditional satellite TV business shrinks. 

The latest financials spotlighted across-the-board revenue growth for WarnerMedia, with HBO, Turner and Warner Bros. in its corner. But AT&T's traditional satellite TV business lost 359,000 subscribers during the latest quarter as a two-year pricing guarantee to sign up new customers rolled off to improve the profitability of the entertainment business. That was offset by the OTT service DirecTV Now adding 49,000 subscribers, from 296,000 last year, but those subscribers pay less per-month than higher-value DirecTV customers.

All of which has observers questioning whether AT&T can succeed with its video strategy to combine WarnerMedia content with its scale and distribution in fat bundles to catch Netflix after its head start in streaming. Shares of AT&T on Friday fell another 66 cents, or just over 2 percent, to trade at $29.30 on the Nasdaq, which extended losses in its stock price from Wednesday and the release of its latest financial results.

A “mess” is how Moffett Nathanson analyst Craig Moffett, a longtime bear, in an investors note described AT&T's Entertainment Group, which houses DirecTV and where he predicted a satellite TV business with a shrinking customer base and rising programming costs will face even greater headwinds.

John Donovan, CEO of AT&T Communications, told analysts Wednesday during a morning call that the telecom giant can use its fiber footprint and broadband offerings as a launch pad to ultimately deliver a high-end OTT service across all of his technology platforms. "If you look at linear TV, it will be about broadband and how we use broadband to deliver results for premium TV, and then get an OTT package that's well suited to the heavily engaged user," he argued.

To tee up AT&T's planned direct-to-consumer streaming service, WarnerMedia has busily rejigged its existing streaming portfolio. First, Warner Bros. shut the doors on its Korean-centric subscription business DramaFever, and Turner Entertainment shuttered its Super Deluxe digital studio soon after Turner owner Time Warner completed its sale to AT&T. On Friday, Turner and Warner Bros. Digital Networks unveiled plans to shut down the FilmStruck indie film streaming service next month. 

A WarnerMedia streaming service will aim to put the company square into the race for streaming audiences alongside Disney, which is currently prepping a family-friendly subscription video service that it plans to bundle with other streaming products ESPN+ and Hulu. But market watchers foresee a communications behemoth, backed by WarnerMedia content, straining to roll out a competing streaming platform to Netflix, much less Hulu Live and YouTube TV, just as its pay TV business declines.

"While AT&T, through its acquisition of Time Warner, has laid out a game plan for a new streaming service in 2019, how well they do really remains to be seen and that’s how they’ll ultimately be valued," Mark Douglas, CEO at ad tech company SteelHouse, said.

That's a view shared by Jennifer Fritzsche, an analyst with Wells Fargo Securities, who said in her own investors note: "The company's strategy of owning both content and distribution differs from its competitors, and while we agree with their strategy longer term, we struggle with near-term integration of the TWX (Time Warner) asset and other catalysts."

There are dissenters. Macquarie Capital analyst Amy Yong agrees video is the culprit at AT&T, even as WarnerMedia performs. But Yong sees the telecom giant reducing the pressure on linear TV and capturing the online skinny bundle market by revamping its pricing and packaging strategies. Next year "is set to tell a different story. TV aside, the portfolio of mobility, entertainment, WarnerMedia, and LatAm/Xandr is yielding operational results," Yong said in an investor note.

Others question whether AT&T's combined businesses, including WarnerMedia, have more value than if each remained separate businesses, especially on the streaming front where the goal is pushing content and advertising to millennials. "We continue to question if this added scale and breadth will lead to positive momentum as the company seeks revenue synergies mainly through targeted digital advertising from the combination of its wireless, pay TV, broadband and content assets," Moody's senior analyst Neil Mack asserted.