AT&T’s new internet-TV service promises to be disruptive. The problem is that the telecom giant will be disrupting itself.  AT&T plans to launch DirecTV Now later this month. The video streaming service will feature more than 100 channels for $35 a month, making it cheaper than comparable packages from Sony’s PlayStation Vue and Dish Network’s Sling TV. It will also undercut cable companies, whose average revenue per video subscriber is about $80 a month. Most notably, the service will be far cheaper that DirecTV’s own satellite offering where average revenue per user is about $118, including the National Football League’s Sunday Ticket, according to UBS. Any cannibalization could pose a risk to AT&T’s margins.  The $35 price helps AT&T appeal to regulators concerned that its proposed deal for Time Warner will result in higher prices. And it should help the company take video market share. Shares of Comcast and Charter Communications are down 6.6% and 3.6%, respectively, since AT&T announced the $35 price on Oct. 25. DirecTV Now’s low price also will set up a hurdle for coming streaming services from Huluand Alphabet’s Google.  But $35 may barely cover the cost of content. Monthly programming expenses for DirecTV Now are in the low-$30s range, UBS estimates. MoffettNathanson puts them at $34. That suggests AT&T is getting just a dollar or two in gross margin, compared with DirecTV’s current video gross margins of around $60 a month.  Those don’t account for costs such as marketing, customer service, data transport and storage or set-top box installation for satellite service. MoffettNathanson puts those at $3 per subscriber per month for the internet service and $18 per subscriber per month for satellite. That leaves satellite margins at $42 and pushes DirecTV Now margins to slim, or even negative.  Granted, most DirecTV Now sign-ups probably won’t come from current satellite customers. AT&T has said it would target the 20 million U.S. homes without a pay-TV subscription, offering only one or two streams to reduce cannibalization. AT&T also likely plans to raise the price of DirecTV Now at some point.  Still, investors should expect some satellite customers to trade down. Meanwhile, AT&T’s ability to raise prices could be affected by the competitive landscape or by merger conditions imposed by regulators.  AT&T’s July 2015 deal for DirecTV was done at a relatively high multiple. Any erosion in video profits would make the price it paid that much harder to justify.  Write to Miriam Gottfried at Miriam.Gottfried@wsj.com
AT&T’s $35-a-month internet TV service could help it win over regulators and customers, but it poses a serious threat to margins.