AT&T Reportedly Ready For Hardball DIRECTV Content Negotiations

AT&T is reportedly ready to engage in hardball negotiations which in turn could redefine what it means to be a video service provider. As AT&T is now understood to be looking to redefine the arrangements it has with media companies in a bid to drastically reduce the costs associated with offering content through its DIRECTV service. The details on this come from a new report out of The Information which in turn credits “people familiar with the situation.”

What this effectively boils down to is the costs associated with the all-for-one, one-for-all approach typically favored by media companies when arranging deals with service providers. This is where providers agree deals to offer multiple channels from the same media company for one price. In other words, the most popular channels by a media company are bundled with less popular channels by the same media company with the aim to secure a relatively equal level of customer exposure/availability to all of the channels. An approach which while beneficial to the companies who own and operate the channels, is typically less beneficial to the provider who could in theory secure the services of the most popular channel(s) at a lower, and unbundled rate. Which the report suggests is exactly what AT&T is now trying to change and at a somewhat industry-wide scale considering the report claims AT&T has agreements that are all up for renewal within the same 18-month period with multiple major media companies. This include agreements with CBS, FOX and Viacom, with the unnamed sources claiming the talks with FOX have already begun due to this being the first of the wave of agreements to be nearing the end of its original term.

Background: AT&T has been extremely active in the TV sphere over the last year or two as it has not only launched a prime on-demand streaming video service in the form of DIRECTV NOW, but also a secondary budget version in the form of WatchTV. The company is also planning on launching a third steaming service towards the end of next year, as well as a new streaming device to better cater to DIRECTV NOW customers during the first half of 2019. This is all in addition to padding out its owned content through a financially-heavy acquisition of Time Warner that included big-name entities, such as HBO. The suggestion made here is the costs associated with that acquisition, coupled with the rising costs of programming in general, and the losses AT&T has encountered through its traditional video services (DIRECTV and U-Verse) have resulted in the need for the company to look at ways in which it can radically decrease upcoming costs. With this hardball approach the company is now expected to take on during negotiations being a prime example.

While the report is only a report at the moment with no independent confirmation of the points made, the timing of these suggestions do chime with the recent allegations made by DISH Network. In that instance, and in an unprecedented situation, DISH and Sling TV customers recently experienced a HBO blackout due to the two operating companies unable to agree terms of a new deal. While both DISH and AT&T blamed each other for the blackout, DISH publicly made the claim AT&T had made unreasonable demands suggesting DISH pay an undisclosed, but set, cost to provide HBO through its DISH and Sling TV services. In essence, DISH argues AT&T wanted to agree an amount for HBO access irrespective of whether any customers subscribed to HBO through DISH's services. A move DISH argued was designed to allow AT&T to offset the costs involved with providing HBO to free to its own wireless customers. In response, AT&T argued DISH had declined the new deal as part of its collaboration with the Justice Department to further undermine the approval of the Time Warner acquisition - approval the Justice Department is currently in the process of appealing against. While the HBO issue is not directly related to the suggestions made in the new report, the DISH allegations could be interpreted as an example of how AT&T has now gotten tougher in its content negotiations with other media companies and providers - and irrespective of which way the content is flowing.

Impact: The impact of all this is highly dependent on whether AT&T is actually taking the firm stance suggested, and also how successful that stance will be in the end. On the one hand, if AT&T does manage to negotiate the deals in the ways it wants, the end result could be an altering to the content lineup customers experience through its relevant DIRECTV services. On the other hand, and as the HBO/DISH situation has already proven, even if a deal is not reached there remains the possibility subscribers could be impacted by a change, or even a loss in access to certain channels.

Regardless of how the negotiations could play out, and what services are affected, what is becoming increasingly clear by AT&T’s actions -- and even its own words during its most recent earnings call - is that AT&T does need to cut costs associated with its video services. Especially considering any losses it has realized either through its traditional video service offerings, or by setting lower charge rates to streaming customers (in a bid to attract more customers) is only going to increase going forward. As the expectation is DIRECTV and U-verse will continue to see lost subscribers quarter-over-quarter, in conjunction with the continued rise of consumers heading down a low-cost streaming route.

A recent report, for example, suggested that by the end of 2018 there will be 33 million cord-cutters in the US alone, which further highlights not just that more people are changing how they consume video, but that the change is become more rapid, more quickly. Therefore, the question that’s most applicable here is not whether AT&T lowers its costs going forward, but how AT&T achieves it. As the primary way cost reduction can occur outside of paying less for services it already pays for, is to charge customers more to further offset against those incurred costs. An issue nearly all streaming providers now face as not only has competing services like YouTube TV, PlayStation Vue and Sling TV all upped the cost of their baseline packages (as did AT&T with its DIRECTV NOW solution) to help with rising programming costs, but in some instances those services are understood to still be operating at a loss.

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