Though total revenue grew from $170.8 billion in 2018 to $181.2 (6.1% y/y) billion, 2019 was in many respects a difficult year for AT&T. Mobility revenue grew by 0.8% y/y, with total subscribers growing 9.2% thanks to growth in the number of lower revenue connected devices such as cameras, cars and wearables. The companies Entertainment Group saw a 2.1% y/y contraction in revenue to $45.1 billion thanks to the loss of 4.1 million premium and OTT TV subscribers in 2019. That was a significant acceleration from the 750,000 lost in 2018, exacerbated by the OTT service also moving to the negative, cutting total subscriptions by 16.7% y/y.

Though total revenue grew from $170.8 billion 2018 to $181.2 (6.1% y/y) billion, 2019 was in many respects a difficult year for AT&T. Mobility revenue grew by 0.8% y/y, with total subscribers growing 9.2% thanks to growth in the number of lower revenue connected devices such as cameras, cars and wearables. The companies Entertainment Group saw a 2.1% y/y contraction in revenue to $45.1 billion thanks to the loss of 4.1 million premium and OTT TV subscribers in 2019. That was a significant acceleration from the 750,000 lost in 2018, exacerbated by the OTT service also moving to the negative, cutting total subscriptions by 16.7% y/y.  Preparing for the May 2020 launch of HBO Max, the company has foregone licensing revenue for titles which will be exclusive to the new service when it launches. As a result, WarnerMedia brought in $8.9 billion in revenue versus $9.2 billion in 2018.

Regardless of the industry wide declines in TV subscribers (5.4 million lost in 2019), certain segments showed positive growth. Turner grew overall revenue by 1.6% in Q4 2019 to $1.9 billion, thanks to growth in carriage fees, the fees paid by pay TV operators for the ability to include the channel in their lineup. Like turner, HBO grew in Q4 2019 to $1.7 billion in revenue, up 1.9% compared to the same quarter of 2018.

Total broadband connections (U-verse, Fiber, and DSL) fell 2.0% from 2018 to 14.1 million, however, total fiber connections grew by 40.7% in the same period. While AT&T has accelerated its fiber deployment in recent years, cable, with its’ easier upgrade path, has been an apparent beneficiary of demand for higher speed connectivity. 

Our analysis

The company’s mobility segment is a powerhouse which continues to support its sister business divisions, generating 39.2% of revenue and 51.2% of adjusted EBITDA. Postpaid continues to give way to prepaid as the preferred method of payment. The loss of 435,000 higher value postpaid customers was offset by the growth of 677,000 prepaid customers for the fourth quarter, though with reseller connections falling, total core device connections continued to trend down over the year. However, growth in connected devices stood out in 2019 with 14.7 million more connected devices on its network than in 2018 to reach 66.0 million in total. While they have not recently outlined the key sources of growth, in 2018 this was ascribed to connected cars which accounted for half of the segments’ connections.

The market leaders are already seeing pressure from T-Mobile’s solidifying strength under soon to depart CEO John Legere.  The Sprint/T-mobile merger is currently entering the final stages and while facing some significant uncertainty over the judge’s final decision, if passed would put additional pressure on both AT&T and Verizon. By adding Sprint’s 54 million subscriptions to T-Mobile’s 86 million, T-Mobile should be able to offer greater scale efficiencies. Adding Sprint’s extensive spectrum holdings will also provide the developing 5G network with an effective mix of coverage and capacity . If the merger is approved, it is likely that the company will face pressure to prevent cannibalization of its already shrinking postpaid base. The merger is also positioned as creating a 5G network that is competitive with fixed broadband services.

AT&T purchased DirecTV without a clear plan to deal with satellite’s future limitations, primarily the lack of true 2 way communication which makes providing broadband access possible. Initial plans to offer DSL in rural areas as a bundle with satellite TV, have missed the mark, with cable competition serving up much faster average download speeds; cable operators continue to build out their networks, pushing further out into formerly rural areas. Losses in pay TV subscribers are a particularly acute problem as the company still hasn’t found the recipe (such as the ability to lower prices) which will make their TV operations grow again. The core of the problem is the growth in carriage fees, and the learned behavior that content can be accessed easily and at significantly lower cost through internet based on-demand services.

Even as subscribers flee pay TV, carriage fees continue to grow, befitting AT&T’s programming groups like Turner. Carriage fee inflation has however exacerbated the issues for the companies within the Entertainment Group like DirecTV and AT&T TV Now. In aggregate total carriage fees are expected to be $52.1 billion in 2019. Carriage fees grew 1.4% in 2019 which can be considered excessive in the context of the loss of more than 5.4 million total pay TV subscribers in 2019. Carriage fees will continue to rise, contributing to the circular problem of carriage fee increases being passed on to the customer, who then cuts the cord.

The launch of HBO Max is a two-pronged strategy. First, the company is following the trend of going direct to consumer with a recognizably branded, full-service OTT offering. Second, the company is hedging its bets that the SVOD replacement of lost pay TV subscribers will restore the company to video growth in the future. With this strategy HBO Max aims to be a profitable business in its own right by 2024/2025. The service as planned has a compelling offering, with contributions from its cable networks, sports deals, premium channels, and vast movie and TV libraries all available from launch. We anticipate that existing unlimited mobile subscribers and existing HBO premium TV and HBO Go subscribers will also get HBO Max at no cost.

WarnerMedia’s investment is a great gamble considering how significant licensing revenue losses will be in the coming year relative to their overall portfolio. If you look at the other new D2C competitors, they seem to be diversifying their risk more broadly than Warner is.

Apple is able to lean on significant device penetration and sales for their streaming service. Content losses for Apple are much more easily masked by their gains in other divisions of the company. Disney+ has a cohesive IP strategy, revenue streams from consumer products, theatrical box office, and their parks. Disney+’s partnership with Verizon also offers a strong subscriber base buffer at launch, which is already larger than the penetration of HBO Now. NBCUniversal comes from a similar place as Warner, but they also have parks, integration with Comcast and Cox, and an ad-based revenue strategy. This ad strategy relieves pressure from exclusive streaming revenues.

In order to stay afloat, IHS Markit Technology expects Warner to both test pricing strategies or tiers, and launch with a partnership like the other three streamers have. It would make sense to offer the service free through pay TV providers, or alongside all of AT&T wireless for a certain period. Warner did mention that they were planning to launch an AVOD component of their service in the future. These losses may put pressure on them to accelerate the AVOD option of their service to build out more robust revenues in the near term.

These new entrants are still getting on their feet domestically and it will take years for them to scale up to the international penetration that Netflix holds. Netflix still remains a market leader regardless of this new domestic saturation.

2020 is going to be a key year for AT&T as it fundamentally reshapes itself to better compete in the SVOD era. Bundling SVOD services with new mobile subscriptions is a strategy that has been working for Netflix, Amazon, and Disney+. IHS Markit Technology expects that if HBO Max is to stay competitive in the D2C market, HBO Max will need to be flexible with its promotions, pricing, and tiering strategies.