1 Thing AT&T's Management Doesn't Want You to Know

If you look at AT&T's (NYSE: T) Entertainment Group results for the past year, it might appear as though the company is managing to maintain its television subscriber base while still growing how much revenue it brings in per subscriber.

During 2017, AT&T lost just 288,000 of its 25.5 million subscribers, and its reported monthly average revenue per subscriber climbed from $125.25 in the fourth quarter last year to $126.65 this year.

During the last quarter of the year, the company managed to add 161,000 subscribers thanks to the strength of its over-the-top DIRECTV Now streaming service. Management expects the strength of DIRECTV Now to more than offset future losses from its legacy TV services.

But AT&T is leaving out a crucial detail in its average revenue number. You have to dig into the footnotes of its financials to find it: "Linear Video ARPU is defined as Video Entertainment revenues, excluding regional TV sports networks and DIRECTV NOW revenues, during the period divided by average linear video connections during the period."

By not including DIRECTV Now in its ARPU calculation, AT&T is denying investors a lot of information about its video services' profitability.

A model for the future of AT&T

DISH Network (NASDAQ: DISH) was one of the first mainstream television providers to offer a streaming alternative -- Sling TV. Much like AT&T's DIRECTV Now, Sling TV is priced considerably lower than DISH's satellite television service.

Sling launched in 2015, and the impact really started to show up in 2017. For the full year, Dish's ARPU fell to $86.43 from $88.66 the year prior. Results worsened in the fourth quarter, when DISH Network's ARPU fell to $84.69 compared with $90.80 in 2016.

Sling TV now accounts for nearly 17% of DISH's total subscriber base. By comparison, DIRECTV Now is less than 5% of AT&T's video subscribers.

But it's important to note that DISH Network's subscriber trends looked a lot like AT&T's current trends just two years ago. It was the first year of Sling TV; it accounted for about 5% of subscribers by the end of the year; subscriber growth was down just modestly; ARPU continued to increased.

It wouldn't be too surprising if AT&T's video business plays out similarly over the next two years as DISH Network's has over the previous two years.

Finding DIRECTV Now's ARPU

The benefit to AT&T's trying to obfuscate the impact of DIRECTV Now on its ARPU is that it's made it a bit easier to estimate the value of a DIRECTV Now subscriber.

Last quarter, AT&T generated $9.4 billion from its video subscribers. It had about 20.5 million satellite subscribers on average in each month of the quarter and an average of 3.7 million U-Verse subscribers. Those subscribers brought in an average of $126.65 per month, or $9.2 billion. Those subscribers also paid regional sports network fees, which conservatively cost $1 per subscriber per month, or about $73 million. That leaves about $90 million left over for DIRECTV Now subscriber revenue (plus regional sports network fees).

With an average of about 971,000 DIRECTV Now subscribers in the quarter, those subscribers generated about $31 per month. That's less than DIRECTV Now's lowest subscription tier, but it's unclear how AT&T recognizes revenue from bundling discounts and whether it counts free trials as subscribers. My guess is a lot of subscribers are paying less than $35 per month, and this number makes sense to me.

It's worth noting that number is also close to Sling TV's entry-level price of $20 per month, especially when compared as a percentage of ARPU for the legacy video products of their respective companies. That lends credence to the idea that DIRECTV Now could have a similar impact on AT&T as Sling TV had on DISH.

Moreover, AT&T packs a lot more into DIRECTV Now than DISH offers in Sling TV. In fact, its content alone costs an estimated $30 per month for the base package.

As such, AT&T may in fact be losing money on each DIRECTV subscriber. Upsells like cloud DVR or an extra stream, which management says is coming this year, may make the service profitable in the future, but it doesn't look to be the case right now. And AT&T definitely doesn't want you to know that.

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