Jessell | Satellite TV’s Orbit Is Failing Fast

AT&T ran a commercial against itself last year.

In the spot for DirecTV Now, AT&T promises that the new OTT skinny bundle would do away with all the annoyances associated with its creaky, old DirecTV satellite service — “no annual contract … no satellite, and no bulky hardware.”

To underscore the point, a front loader dumps a bucket full of satellite set-tops into a flaming caldron. There was also an image of a hapless astronaut trying to fix a broken satellite with a wrench.

One part of me admires the spot. One of the hard lessons many legacy media businesses have learned over the past 20 years — most too late — is that if your business is going to be cannibalized, it’s best if you do the eating yourself.

On the other hand, it’s remarkable to see a company undercut a business generating billions of annual revenue for one whose prospects are far from certain. I would add that it is also a business for which AT&T paid $67 billion just four years ago.

The spot is graphic evidence of the troubles that satellite TV is facing. Both DirecTV and long-time rival Dish Network have recently reported fourth quarter 2018 operating results and the numbers are not good.

DirecTV lost 403,000 subs in the quarter, compared to 147,000 in the same quarter of 2017. The service is now shedding subs at a rate of 6.1% per quarter. “DirecTV’s subscriber trajectory was already bad … but it is still getting worse,” said securities research firm MoffettNathanson.

Things are even worse at Dish. It lost 381,000 subs in the fourth quarter, up from 121,000 in 2017. According to MoffettNathanson, its sub base “is now shrinking at a terrifying 10.5% rate …, a sharp acceleration from the 8.7% [year-over-year] rates a quarter ago. Those are subscribers that matter. They are the ones that make money.”

The satellite operators are suffering from the same problem that cable operators are — the proliferation of broadband OTT services. They include skinny bundles like AT&T’s DirecTV zNow as well as SVOD services like Netflix, Amazon Prime and Hulu and a blizzard of ad-supported channels and on-demand programs.

The OTT skinny bundles are low-cost alternatives to the satellite and cable fat bundles. The SVOD services are attracting millions of subscribers in the old-fashioned way — by offering better programming.

And let’s not forget the big cable programmers like HBO and Showtime that are giving consumers the opportunities to buy them direct on the internet and bypass cable and satellite.

DirecTV and Dish are in no immediate peril of disappearing. At the end of 2018, they still served 19.2 million and 9.9 million subs, respectively. And I presume that there will always be a small place for satellite TV, for those homes beyond the reach of cable, fiber and 5G wireless.

But the erosion that started several years ago is real and it is accelerating. There is no stopping it.

And, of course, the financials — revenue and profit, however measured — are following the subs on the downward course.

Cable operators are being impacted by the OTT services, too, but they have something the satellite operators don’t — the broadband business. Ironically, it undergirds the OTT streaming that is gutting their TV business.

Like AT&T, Dish has responded to the broadband threat by joining in. In fact, it was early in on the new business. It launched Sling TV in 2015 and it now counts 2.4 million subs. AT&T’s DirecTV Now has 1.6 million subs.

As AT&T and Dish are discovering, the skinny bundle biz is highly competitive and margins are low or sometimes non-existent as several players scramble for market share in the early going. Others in the space include Apple TV, Sony PlayStation Vue, YouTube TV, fuboTV, Hulu with Live TV and Philo.

“Many of our competitors have been especially aggressive by offering discounted programming and services for both new and existing subscribers, including bundled offers combining broadband, video and/or wireless services and other promotional offers,” Dish explains in its annual report. “Certain competitors have been able to subsidize the price of video services with the price of broadband and/or wireless services.”

Not all of these services are going to survive — at least one has already failed — but it will take some time for the winners and losers to sort themselves out.

None of this is good news for broadcasters, although I know that they have had countless retrans battles with both services. Many loathe Dish founder and CEO Charlie Ergen for cheating on the prohibition against selling distant broadcast signals instead of local ones and for his never-ending campaign against broadcasters’ retrans rights.

But recall that it was only after satellite TV began offering local broadcast signals that broadcasters worked up the confidence to demand retrans cash from cable operators. They knew that cable operators feared loss of subs to satellite if they lost broadcast signals in a retrans dispute. Broadcasters became adept at playing satellite and cable off against each other.

And over the years, the satellite TV operators have proved reliable sources of big and growing retrans checks, occasional retrans blackouts notwithstanding.

Yes, broadcast signals are being included in most, but not all, of the skinny bundles, but so far the bundles have not been offsetting the subs losses of either the cable or satellite operators. In other words, the slow migration of subs from cable and satellite to OTT will likely suppress retrans revenue growth.

For the record, Dish lost 1,125,000 satellite subs in 2018, while picking up just 205,000 Sling subs for a total pay TV net loss of 920,000. DirecTV lost 1,236,000 satellite subs in the year, while picking up just 436,000 DirecTV Nows subs for a total pay TV net loss of 800,000.

So, we are witnessing the beginning up the end of satellite as a major force in TV. It looks as if AT&T and Dish are planning to milk the business without making any big investments to even try to turn things around. Both have chosen to make their big capital investments in a business that has unlimited potential — wireless.

That may be the smart business move, but — I’m speaking to AT&T now — there is no need to advertise it.

Harry A. Jessell is editor of TVNewsCheck. He can be contacted at 973-701-1067 or here.