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How low can the DirecTV Now subscription go?

DirecTV SAC

AT&T’s not-so-skinny bundle OTT service will be priced “very, very aggressive”, and to do it the company is prepared to accept “slightly” lower profit margins. How low can that price go?

AT&T chairman and CEO Randall Stephenson said the forthcoming OTT service DirecTV Now will be priced “very, very aggressive”. The 100+ channel service will be introduced in the fourth quarter of 2016 and be targeted initially at the 20 million homes without pay TV.

Mr. Stephenson says that the aggressive pricing is possible because of a completely different cost structure to the satellite TV business. One of the things he points to as being different is subscriber acquisition costs (SAC). Are their big savings to be had from lower SAC?

SAC costs are very high for satellite

SAC costs are a huge burden on the pay TV industry, particularly for satellite operators. To acquire a new customer, the operator must provide a set-top box or DVR and a satellite dish. Typically charges for these are waived. In addition, a technician must go to a customer’s home to install all the equipment. Again, charges for the install are usually waived.

DirecTV reported its subscriber acquisition cost was $883 in Q4 2014.* DISH Network also reported a similar number in Q4 2014, though in the last quarter it reported it had declined to $782.

DirecTV is currently requiring a two-year agreement. Fully allocating the lower DISH Network SAC cost across the full 24-month agreement yields a monthly SAC load of $33 a month.

SAC costs are very low for SVOD

SVOD SAC costs essentially boil down to a marketing expense. The customer provides the equipment, installs the app on his or her device, and signs up directly online. The last time Netflix reported SAC was back in 2010. The company said it was just $18, and continuing to fall fast. Commenting on the importance of subscriber churn to his business, Roger Lynch, CEO of Sling TV, recently said: “When they come back it’s not like they cost us money to start them up again.”

Chances are for most SVOD services SAC is less than $10.

No savings in content costs

One area that Mr. Stephenson is also bullish on is content costs. He said:

“We had to acquire content rights, and being the largest-scale TV provider in the U.S. gave us a lot of opportunity to get a best-in-class cost structure.”

Notwithstanding his statement, it’s unlikely DirecTV Now will face lower programming costs. The best he can hope for is to mirror the costs faced by the satellite business, which are considerable.

Comcast video ARPU versus per sub programming costsIn Q4 2014, DirecTV was paying 47.5% of revenue directly to programmers in content license fees. In the same quarter, Comcast was paying 47.9%. However, in Q2 2016, Comcast video ARPU was $83.10 a month, and it paid $42.61 per video subscriber directly to programmers for the TV channels it provides. In other words, 51% of video revenue went directly to pay for content.

How much will the OTT service cost?

The two biggest expenses faced by AT&T’s satellite business are programming and SAC. They dwarf everything else. It’s pretty clear the only area AT&T can save money on is in SAC costs.

DirecTV offers a package of 145 channels for $81 a month (this is the regular price after a 1-year discounted price of $50.) Assuming it can save almost all of the SAC cost, the same package could be offered online for around $51 with the same profit margin. If Mr. Stephenson accepts a slightly lower profit margin, we may see the company offer it for $48-$50 a month. Any lower than that and revenue will barely cover the cost of the programmer license fees.

At $48-$50 a month DirectTV Now will be very competitive. It will be about the same price as the 60 channel Playstation Vue. It will be more than twice Sling TV’s base cost, but offer 7 times more channels.

Why it matters

AT&T’s claims that SAC cost savings will allow it to charge much less for its DirecTV Now OTT service are certainly true.

However, the largest expense faced by the service will be programming costs. This will dramatically limit how low the DirecTV Now subscription cost can go.

*SAC and programming cost data was obtained from financial fillings of DirecTV from before the AT&T acquisition, and from quarterly fillings of DISH Network and Comcast.

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