Thursday, December 24, 2015

How Much Advantage Does Quad Play Provide?

Just how much advantage--beyond the free cash flow--AT&T will derive from DirecTV remains unclear. In some large part, one’s optimism or pessimism is driven by one’s beliefs about the coming power of quadruple play offers.

Many are skeptical of consumer demand for bundles of fixed services and mobility, while others, including cable TV operators, believe quad plays will drive both customer acquisition and loyalty.

To be sure the actual benefit of triple play offers has been driven by consumer discounts for buying the bundle, and not necessarily some new service or app potential based on the buying of voice, video and Internet access.

The issue for AT&T might be the extent to which that also extends to the quad play, while mobile services are added to fixed network services.

Count Walter Piecyk of BTIG Research among those who remain skeptical about the benefits AT&T can wring out of DirecTV. The upside?

DirecTV has 15 million customers who don't use AT&T for mobile services and three million DirecTV customers who have access to U-verse but use another Internet service provider. If AT&T can convert a significant percentage of those customers into AT&T mobile or fixed network Internet access customers, there is upside beyond the ability to take advantage of DirecTV’s free cash flow to support AT&T’s dividend.

The downside? Consumer willingness to switch mobile or fixed ISP accounts for relatively modest bundle discounts might be limited, especially when the level of promotions for mobile switchers is presently so high, and churn levels for AT&T and Verizon so low.                                                                                                                             
The analysis all comes down to the expected value of bundling now possible.

AT&T has argued the DirecTV buy would help reduce churn, overall. But Piecyk expects AT&T postpaid account losses to widen from 1.4 million in 2015 to 1.6 million 2016 and further to 1.7 million in 2017, in large part on account of fierce promotional activity by T-Mobile US.

On the other hand, many would argue that DirecTV will be a useful asset as AT&T launches a streaming TV service of its own, soon.

It is fair to say the divergence of opinion is largely centered in the legacy telco part of the market, not the cable TV segment. Where some believe telcos will not get many benefits from quad play, most believe cable TV operators will win.

For some of us, that implies the quad play does have strategic value, even if, as always, the attackers in the market benefit disproportionately.

Incumbents arguably do benefit from enhanced retention (lower churn) and, in AT&T’s case, some incremental ability to cross sell.

The former will be hard to quantify; the latter easier to demonstrate. One way or the other, we shall know, in a rather few years, whether the upselling reality matched the potential.

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