AT&T "Harvest" Strategy is Not New; DirecTV Buy Makes Sense

Some have questioned the wisdom of AT&T’s bid to acquire DirecTV, the argument being that the capital is better invested elsewhere, while the linear video business is declining.

AT&T thinks differently, and perhaps partly because of its historical legacy and business culture. Keep in mind that AT&T (the former SBC) grew primarily by acquisition, organic growth notwithstanding.

Also, AT&T contains many executives who remember vividly the former independent AT&T’s strategies related to a declining business (long distance calling). While attempting to create new replacement revenue streams, AT&T harvested its declining, but substantial long distance business.

That is what AT&T sees in linear video, a mature business that throws off enough cash flow to be interesting, as the legacy business slowly erodes. Yes, there are risks. If the business declines precipitously, the gambit will not play out so well.

But AT&T is betting it will see what it has seen in the past: a major legacy business declining at a predictable rate.

Precisely what happens to the linear video subscription business once over the top streaming alternatives proliferate is as yet uncertain. But it is hard to imagine aggregate revenue increasing, and a stretch to think revenue will be no worse, but no better, than at present.

The best scenario for AT&T is gradual revenue descent, at predictable rates.

And there is reason to believe new alternatives will have incremental impact. Though a full-blown transition to “every channel is available, a la carte” would be more damaging, that does not seem to be the general pattern for developing streaming services.

Instead, the general pattern is smaller packages of channels, not full a la carte sales.

The economics of full streaming access of a la carte channels, should that be the dominant model, arguably would be worse for the ecosystem than a linear model.

Consider the Sling TV package of 20 streaming channels. That “skinny” bundle includes ESPN.

In a full a la carte regime, where a channel such as ESPN could be purchased by itself, the implied cost, at a revenue neutral outcome, would be more than $36 a month, MoffettNathanson analysts have estimated.

Obviously, Sling TV is being sold for far less than the implied cost of ESPN alone, on a revenue-neutral basis.

The same problem is faced by other less-popular channels. Disney might cost more than $8 a month. but HGTV’s implied cost might cost only $1.42 a month.

Many observers believe fewer channels will be viable once on-demand and a la carte content viewing becomes easy and affordable. The reason is simply that the implied cost of a single channel is more than a reasonable consumer would pay.

So the context for AT&T’s bid to buy DirecTV is not that linear video is a growth business; it is not. The expectation is that DirecTV will throw off huge amounts of cash flow, despite a shrinking overall business, long enough to help AT&T make a transition of revenue sources.

Yes, there are risks. But AT&T has done it before.
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