For some time now, I have been painting an admittedly bearish portrait of AT&T (NYSE:T). In my opinion, both its core wireless operations and its new DirecTV acquisition are under substantial pressure and unlikely to maintain current cash flows.
My argument has met with strong and well-reasoned rebuttals, and AT&T's status as a Dividend Aristocrat has clearly earned it the loyalty of many investors. While I do not intend to revisit the whole debate today, I did want to offer my perspective on the latest news concerning AT&T's new DirecTV Now initiative.
Latest News, NOT Straight From AT&T
Bloomberg has reported, though its sources decline to speak openly and identify themselves, that it has solid information that DirecTV Now, which achieved over 200,000 subscribers in its first month, rose to 328,000 in its second month before flattening in the last two months of the first quarter. As of end of Q1, Bloomberg says the service was sitting at around 325,000 subscribers or so.
Unsourced information is obviously not as reliable as an official statement from the company, or even just a third-party analysis that the third party is actually willing to put its name to. Doubtless AT&T bulls will point this out, and they absolutely should.
However, it is worth remembering that the reason we are all having to rely on third parties for news is because AT&T, after releasing a number in the winter quarter earnings report - over 200,000 - declined to update the subscriber number on DirecTV Now in its most recent earnings release. The company won't tell us how many subscribers it has, even though it was telling us before, or at least giving us a ballpark figure. That would seem to support the idea that the numbers are no longer as impressive as the initial burst of interest seemed to be.
Technical Problems Receding
DirecTV Now has attracted considerable negative press since launching, as myself and others have reported on already. There were early technical glitches that resulted in the service crashing several times over the course of its first few weeks of operation. One analyst suggested that Now was unable to get above 35K simultaneous streams. AT&T's policy of denying refunds to customers didn't go over well, either. It's certainly possible that this bad press was at least partly responsible for the declining interest in joining the service.
However, this point should not be overstated. That same analyst admitted that usually 25% of people are streaming at any given time. That penciled out to about 140,000 DirecTV Now subscribers. Since we now know that DirecTV Now had "over 200,000" subscribers at the end of December, and apparently 325,000 now, it's likely that whatever the system's breaking point is, it's higher than 35K. And was even when the estimate was issued.
What's more, the issue seems to be receding. DirecTV Now is growing more technically stable by the day. Bad news stories about the service are diminishing in turn. If this persists, one might expect it to reverse the damage as the service stabilizes.
Major Promotions Failing To Boost Subscribers
AT&T CEO Randall Stephenson would have the story more or less stop there. He said that AT&T had pulled back on marketing the service following its two-month burst out of the gate to get the overloaded support network for Now under control. The implication, though he never makes the claim directly, is that Now can start growing again whenever it wants to, and just wants to make absolutely sure its house is in order before it opens the spigots again.
Here I must disagree. More concerning for investors than the technical problems are the promotional problems. In point of fact, AT&T's promotional rollback has already ended, and it hasn't stopped the decay in Now.
As my analysis last month showed, AT&T had in fact returned promotional spending on DirecTV Now to pre-Christmas levels by early March. It began in mid-February, with a $25 per month credit for any wireless subscriber who also subscribed to any TV service, including Now. That matched the supposedly "limited-time" discount levels AT&T offered over Christmas.
In March, promotional spending actually exceeded holiday levels when HBO was tossed in for free to all subscribers at the top two tiers. Later HBO was made free for the bottom two tiers as well, if the subscriber was also a wireless subscriber. While March came in better than February, it was only marginally so, and according to Bloomberg, no real burst in growth resumed.
Craig Moffett believes that each DirecTV Now subscriber from last year's $35 promo period has a negative lifetime value of $355, owing to promotional spending at that time. Even higher levels of current promotional spending now probably means that number has, if anything, gotten worse. While AT&T says that it is running Now as a loss-leader, not as a profit center, the inability of massive promotional discounts to boost subscriber levels significantly must be taken as a major warning signal by investors.
Hardware Subsidies Continue To Distort Picture
Investors must also consider the possibility that the decline in subscriber interest in Now has nothing to do with such transitory factors as technical glitches. Rather, it is quite possible that this "decline" is actually just evidence the interest was never that strong to begin with.
As I also noted at the time, DirecTV Now's promotional offers over the holidays were so good that they muddled the picture of what exactly people were buying. DirecTV Now offered Amazon (NASDAQ:AMZN) and Apple (NASDAQ:AAPL) TVs bundled with Now for less than their standalone selling price to those who would prepay for a Now subscription for a set time, either one or three months. That meant that anyone who wanted to buy one of those devices was better off buying them through AT&T even if they never once so much as glanced at the DirecTV Now app. With Amazon and Apple selling millions of TVs each per year, it was no surprise that AT&T saw a spike in Now memberships during the holidays.
But there was always the question, as I noted, of what those subscribers would do when their commitments ran out. Since Now buyers and TV buyers both had the same incentives to take the deal, it was hard to separate out who was buying AT&T, and who was buying Amazon and Apple. The decline in subscriber interest as those lock-up periods expire should at least make investors consider more seriously the possibility that it was the latter.
The reason this matters is that AT&T has resumed these same hardware subsidies now, to boost subscriber levels in the current second quarter. This is obviously good for Amazon and Apple, and should boost their TV sales this quarter. But it means that AT&T will face a similar roll-off in the third quarter, even if it is successful in boosting subscriber levels for Now in the second.
The news isn't official, and the service is still in early days even if it's true. But Bloomberg's report tracks with AT&T's own decision declining to update the Now figures for the first quarter, and if it is true Now has indeed stalled despite ever-higher promotional spending, that must be regarded as a bearish indicator for AT&T, regardless of whether it is a loss-leader or not.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.