Companies are never more generous than when they are facing intense regulatory scrutiny for a potential multi-billion deal, a situation in which AT&T (T) and Time Warner (TWX) currently find themselves.
To that end, AT&T-owned DirecTV announced a new low-cost internet subscription service aimed at regaining some of the recent cord-cutters who have turned the pay-cable industry on its head in recent quarters.
"In a clever demonstration aimed at reassuring anti-trust regulators that the combination of AT&T and Time Warner has no such base motivation as, say, making money, AT&T announced that they will price their first DirecTV NOW package of more than 100 'premium channels' at just $35 per subscriber per month," a MoffettNathanson note stated today.
To put that price point in perspective consider that Sling, one of the main beneficiaries of the pay-TV exodus, charges $20 a month for 30 channels and $25 a month for 44 channels. Meanwhile, DirecTV is offering 100 premium channels for just $35.
MoffettNathanson estimates that the package will yield DirecTV a gross margin of just $1 per subscriber. "The low price point is a dramatic departure from the 'premium,' fat OTT bundle they had promised a few months ago," the note read. "We've been told to expect it to be similar to DirecTV's linear 'Entertainment' package, including ESPN -- a good estimate of the monthly programming expense for the package is around $34."
Despite those razor-thin margins, Goldman Sachs' (GS) Drew Borst -- who actually doubled the profit margin expectations to $2 -- believes that DirecTV NOW may benefit from scale.
"Although a DirecTV Now product priced at $35 against $33 of content costs would have a 7% gross margin, every 10% reduction the content costs equates to 940 [basis points] of incremental gross margin," Borst wrote. "Additionally, addressable/targeted advertising could help improve the gross margin."
Borst sees DirecTV Now as more of an investment in the future than a ground-breaking innovation designed to drive profits now. The lack of data charges for AT&T customers viewing DirecTV Now could drive more bundling and lower churn, "thereby boosting wireless margins," Borst wrote.
That is a sentiment that UBS analyst John C. Hodulik agrees with. "The company will not make much on this service. However, it will avoid costs for satellites, set-top boxes and installations/trouble shooting, while also reaching customers who have left the pay TV market or never joined."
DirecTV NOW has already secured content deals with A&E, AMCX, Action Alerts PLUS holding Comcast (CMCSA) , Disney (DIS) , Discovery Channel (DISCA) , Starz (STRZA) , Scripps Network (SNI) , Time Warner, and Viacom (VIAB) . Meanwhile, deals with 21st-Century Fox (FOXA) and CBS (CBS) are still in the works.
As consumer viewing and spending habits change, content providers must change as well. AT&T/DirecTV is trying to play catch-up, and a discount for consumers not willing to sign up for long contracts is a good start. Whether DirecTV NOW could appease regulators and consumers in the way AT&T hopes remains to be seen, but could gain points, and loyal customers, just for trying.