AT&T’s merger with Time Warner (Entertainment) is now complete, and despite repeated promises to antitrust regulators AT&T would not use consolidation as an excuse to raise rates, the company is reportedly doing exactly that on its DirecTV Now online streaming service.

According to a report by Cord Cutters News, most current subscribers will be formally notified this week their rates are going up $10 a month and new customers will be offered only two choices for DirecTV Now packages going forward — a slimmed down Plus package of 40 channels and HBO for $50 a month and a slightly larger Max package with 50 channels bundled with HBO and Cinemax for $70 a month. Both represent fewer channels for more money.

News about big changes for AT&T’s streaming services were first announced by AT&T CEO Randall Stephenson in late 2018, telling investors he planned to wring more profit out of DirecTV Now by raising rates and slimming down the number of channels in the remaining packages.

Current customers can keep their current packages indefinitely, but they will pay more starting in April. The $10 rate increase comes on the heels of a $5 rate increase in the summer of 2018, and AT&T has made it clear more price hikes are forthcoming as needed.

AT&T also told Cord Cutters News that DirecTV’s satellite service will soon debut on its own streaming platform, but it won’t come discounted or cheap:

• 65 channel DirecTV package: $93/month
• 85 channel DirecTV package: $110/month
• 105 channel DirecTV package: $124/month
• 125 channel DirecTV package: $135/month

AT&T hopes its simplified menu of offerings for DirecTV Now will prove attractive to subscribers, in part because both packages bundle either AT&T-owned HBO or HBO and Cinemax. But subscribers are also likely to notice the dramatically smaller package of cable channels, now missing AMC, Viacom and Discovery-owned networks. They are also likely to be confused by the forthcoming introduction of DirecTV satellite streaming packages, which will be marketed separately from DirecTV Now. AT&T plans to eventually mothball its satellite fleet and move DirecTV entirely to an internet streaming platform, but will take several years before switching off the last satellite.

AT&T’s DirecTV Now will slim its packages down substantially as early as tomorrow, while raising prices.

An informal FAQ:

Q. When will AT&T make these changes?

A. AT&T is expected to email current customers on or about March 12, 2019 to inform them of the $10 rate hike. At the same time, AT&T is likely to stop signing up new customers for its current DirecTV Now packages and begin offering DirecTV Now Plus or DirecTV Now Max instead. Current customers can expect to see their first bill with the new rates in April.

Q. Will current customers be grandfathered?

A. AT&T plans to tell current customers they can keep their current packages as long as they do not make changes to their account (or cancel), but effective April 12, 2019, rates will increase $10 a month for those subscribed to: Live a Little, Just Right, Go Big, and Gotta Have It.

Q. If I subscribe today to the older packages, can I avoid some of the price increases and channel changes?

A. Yes and no. If AT&T’s schedule holds, today is the last day you will be able to signup for DirecTV Now’s old packages, and you will need to make a payment today and skip the free 7-day trial to lock in these packages or you could face choosing only between Plus and Max after your trial ends. You will pay existing rates for March, but the $10 rate increase will impact you starting in April.

Q. What about the prices for premium channels?

A. If the rumors are true, and we stress these are only rumors at this point, current DirecTV Now customers that already subscribe to premium networks like HBO or Cinemax prior to March 12, will be able to avoid planned rate increases on premium networks that are also supposed to be announced as early as tomorrow. If you sign up today and subscribe to HBO and/or Cinemax, you will pay $5 a month for each going forward. Showtime and/or Starz are also available for $8 a month each going forward. The rumor claims that starting tomorrow, HBO will triple in price to $15 each, with Cinemax, Showtime and Starz supposedly increasing to $11 a month each. These new prices would only apply to grandfathered customers on older packages that want to add a premium network on or after March 12 to their existing package. AT&T would use this new pricing to incentivize customers to abandon their old package in favor of Plus or Max, which bundles HBO and HBO and Cinemax into the base package price. So if you are thinking about subscribing to a premium network and want to keep your old package, you should subscribe today and lock in the current lower price.

Q. What happens to pricing for add-on international channels?

A. If you subscribe to international channels (Vietnamese – $20/mo, Brazilian Portuguese – $25/mo, or Korean – $30/mo) before March 12, your rates stay the same. If you add these channels on or after March 12, you will likely pay more to do so. If you are considering these channels, you may save a lot in the long run subscribing today for at least a month to lock it current prices. If the rate increase does not happen, you can drop the add-on after a month.

Q. What are the biggest differences between the old and new packages?

A. You are getting fewer channels for more money from the new Plus and Max package tiers. DirecTV Now is stripping out popular cable networks from AMC, Discovery-Scripps, and Viacom from the new packages, but bundles HBO in the new Plus package and both HBO and Cinemax in the new Max package. An unofficial new channel lineup of both new packages can be found here.

Q. Why are they raising rates like this?

A. AT&T shareholders have been increasingly critical about the company’s 2015 acquisition of DirecTV. Executives sold Wall Street on the acquisition on the theory that acquiring the country’s largest cable TV programming distributor with 21+ million customers would deliver AT&T’s much smaller U-verse TV (with 4-5 million customers) dramatically better volume discounts on cable TV programming. More importantly, it would help AT&T become a powerhouse in video entertainment and cut through the red tape of getting that programming on AT&T’s mobile products. If you are a cable network’s biggest customer, it helps in negotiations seeking streaming and platform distribution rights.

Stephenson

After the merger, AT&T began de-emphasizing its U-verse brand and even started selling DirecTV satellite service to video-only AT&T customers. DirecTV Now was AT&T’s response to cord-cutting, and its promotional pricing and strong package of channels was customer and regulator friendly. At the same time AT&T was seeking to win regulator approval of its acquisition of Time Warner (Entertainment), it did not hurt to argue AT&T’s prior acquisitions had not hurt the marketplace, and may have even enhanced it, pointing to the DirecTV Now offering in the cord-cutting marketplace.

But Wall Street analysts have often argued AT&T is losing money on DirectTV Now, because the wholesale programming costs plus the distribution and marketing expenses likely exceed the prices AT&T charges. Some analysts are even questioning the wisdom of acquiring DirecTV in the first place, especially as the era of cord-cutting has taken a particularly harsh toll on DirecTV’s satellite subscriber numbers. Just a few weeks after the Justice Department abandoned further court action to block the merger of AT&T and Time Warner, Stephenson followed through on his commitment to shareholders by preparing to prune back DirecTV Now’s packages and dramatically increases prices at the same time.

“We’re talking $50 to $60,” Stephenson told investors last December. “We’ve learned this product, we think we know this market really, really well. We built a two-million subscriber base. But we were asking this DirecTV Now product to do too much work. So we’re thinning out the content and getting the price point right; getting it to where it’s profitable.”

Stephenson fully expects DirecTV Now will soon shed a large percentage of ‘low value’ customers that subscribed only because they locked in a low price or promotion, telling investors he prefers to deal with high-value customers that appreciate AT&T’s brand and quality, and won’t cancel over price increases. He does not want to deal with customers that chase promotions.

AT&T is also using the changes to reset its video portfolio of products, and the audiences each will target. Those most sensitive to price will be marketed ultra-skinny bundles like AT&T Watch, which can also be used to try and get customers to switch to AT&T wireless. Middle ground customers partially sensitive to price, but want a channel lineup that better reflects what they actually watch will be pushed towards DirecTV Now, which will be marketed as cheaper than cable and a good option for cord-cutters. DirecTV’s forthcoming satellite streaming service will be the new home for customers that gravitated towards DirecTV Now’s higher end bundles. Marketing will focus on customers that want an alternative to cable television, but won’t sacrifice their favorite cable channels just to get a lower bill. These customers will be willing to pay a higher price to have a less-jarring transition from the traditional huge cable TV package to DirecTV’s alternative.

Q. What does AT&T risk doing this?

A. Hundreds of thousands of DirecTV Now subscribers are likely to cancel service as a result of this rate increase, which will leave DirecTV Now at a higher price than many of its competitors. AT&T’s loss will likely deliver a sudden spike of new customer signups for YouTube TV and Hulu Live TV, which are the closest equivalents. Other services like Philo, Vue, and even Sling TV are also likely to grab new customers, albeit in smaller numbers.

AT&T’s biggest threat may turn out to be cable operators — especially Charter Spectrum, which has launched its own response to cable TV cord cutting. Its slimmed down and pick-your-own-channels packages could be more attractive than other streaming services, and bundle all local channels.

More specifics about those options are ‘below the fold’:

… Continue Reading

In the last three months of 2018, Frontier Communications reported it said goodbye to 67,000 broadband customers, lost $643 million in revenue year-over-year, and had to write down the value of its assets and business by $241 million, as the company struggles with a deteriorating copper wire network in many states where it operates.

But Wall Street was pleased the company’s latest quarterly results were not worse, and helped lift Frontier’s stock from $2.42 to $2.96 this afternoon, still down considerably from the $125 a share price the company commanded just four years ago.

Frontier’s fourth quarter 2018 financial results arrived the same week Windstream, another independent telephone company, declared Chapter 11 bankruptcy reorganization. Life is rough for the nation’s legacy telephone companies, especially those that have continued to depend on copper wire infrastructure that, in some cases, was attached to poles during the Johnson or Nixon Administrations.

Frontier Communications CEO Dan McCarthy is the telephone company’s version of Sears’ former CEO Edward Lampert. Perpetually optimistic, McCarthy has been embarked on a long-term ‘transformation’ strategy at Frontier, to wring additional profit out of the business that provides service to customers in 29 states. Much of that effort has been focused on cost-cutting measures, including layoffs of 1,560 workers last year, a sale of wireless towers, and various plans to make business operations more efficient, delivering mixed results.

McCarthy

Frontier’s efforts to improve customer service have been hampered by the quality and pricing of its services, which can bring complaints from customers, many who eventually depart. Frontier’s overall health continues to decline, financially gaining mostly through rate increases and new hidden fees and surcharges. In fact, much of Frontier’s latest revenue improvements come almost entirely from charging customers more for the same service.

McCarthy calls it ‘cost recovery’ and ‘steady-state pricing.’

“One of the things that we’ve been focused on really for the better part of two years is …. taking advantage of pricing opportunities [and] recovering content costs — really dealing with customers moving from promotional pricing to steady-state pricing, and then offering different opportunities for customers both from a speed and package perspective,” McCarthy said Tuesday. “The quarter really was about us targeting customers very selectively and really trying to improve customer lifetime value.”

By “selectively,” McCarthy means being willing to let promotion-seeking customers go and being less amenable to customers trying to negotiate for a lower bill. The result, so far, is 103,000 service disconnects over the past three months and 379,000 fewer customers over the past year. A good number of those customers were subscribed to Frontier FiOS fiber to the home service, but still left for a cable company or competing fiber provider, often because Frontier kept raising their bill.

Spectrum cable television customers with Silver or Gold tiers will find two premium channels have disappeared from channel lineups, with no corresponding decrease in rates.

This hidden rate increase took effect Feb. 15 after Spectrum dropped Cinemax from its Silver and Gold packages and EPIX from its Gold package, with little explanation. Customers have been notified they can acquire these channels a-la-carte, for an additional $9.99/mo for Cinemax and $5.99/mo for EPIX.

The premium network cutbacks were originally planned to be significantly worse, however, after Charter Communications notified some customers it was also planning to delete Starz and Encore from its Gold tier, potentially making the $40 add-on not worth the price. Just days before the changes were to take effect, Charter changed its mind about Starz and Encore, allowing those channels will continue to be available as part of the Gold package.

Some customers are upset about the changes.

“It’s a hidden rate hike,” complained Lois Blumenthal. “We are still paying the same price for Silver or Gold, only getting fewer channels for it.”

Spectrum customer service appeared to be sensitive to customer complaints and threats to downgrade cable TV service, which would only increase the impact of cord-cutting. So the company is offering a hidden deal to current customers who subscribed to Silver or Gold TV tiers before Feb. 15 and who call 1-855-70-SPECTRUM to share their displeasure about the changes:

• Silver Plan customers qualify for one year of Cinemax at no charge, after which the network will cost $9.99/month.
• Gold Plan customers qualify for one year of Cinemax -and- one year of EPIX at no charge, after which Cinemax will cost $9.99/mo and EPIX will cost $5.99/mo.

Customers can ask about these promotions when they call. While no expiration date was available on these offers, it makes sense to call sooner rather than later in case they disappear.

It could have been worse. Spectrum notified many of its subscribers the premium network cutbacks originally envisioned also included Starz and Encore. Charter changed its mind, but it was too late to stop notifying some subscribers about the channel deletions.

Spectrum has adjusted its advertising:

Spectrum Silver (includes TV Select — add $20 a month)

• 175+ cable channels with FREE HD
• Includes HBO, SHOWTIME & NFL Network
• On-the-go with HBO GO, SHOWTIME ANYTIME
• Enjoy thousands of On Demand choices to watch when & where you want
• Watch on your Apple TV, Samsung Smart TV, Roku, Xbox One, tablet, smartphone or visit SpectrumTV.com
• Download 80+ network apps and take on-the-go

Spectrum Gold (includes TV Select and TV Silver — add $40 a month)

• 200+ cable channels with FREE HD
• Includes HBO, SHOWTIME, STARZ, TMC, ENCORE, NFL Network & NFL Redzone
• Enjoy thousands of On Demand choices to watch when & where you want
• Watch on your Apple TV, Samsung Smart TV, Roku, Xbox One, tablet, smartphone or visit SpectrumTV.com
• Download 80+ network apps and take on-the-go

For all Spectrum customers, the cost of adding most premium add-on channels a-la-carte (without a promotion) decreased effective Feb. 15:

• HBO remains unchanged at $15/mo
• Showtime remains unchanged at $15/mo
• Starz was $15, decreasing to $9.99
• Encore was $15, decreasing to $5.99
• Cinemax was $15, decreasing to $9.99
• TMC was $15, decreasing to $9.99
• EPIX was $15, decreasing to $5.99

Spending less, charging more in 2019.

Despite repeated claims from some in Washington that eliminating net neutrality would stimulate U.S. telecommunications companies to invest more in their networks, Charter Communications has announced a dramatic $1.9 billion cut in capital expenditures (CapEx) spending on its Spectrum cable systems for 2019.

Charter posted 2018 revenue of $43.6 billion (up 4.9 percent over 2017), with especially healthy returns for its internet service, which grew 7.1%. Charter earned $11.2 billion in revenue, up 5.9% in the fourth quarter of 2018 alone, partly from rate increases, reduced costs, and additional broadband customers.

Republican FCC commissioners have repeatedly argued that deregulating the internet by sweeping away net neutrality would stimulate companies to invest more in their networks. But it now appears the reverse is true. In 2017, Charter spent $8.7 billion on network investments; in 2018 the company spent $9.1 billion. But this year, with net neutrality no longer the law of the land, the cable company is planning to dramatically cut investments in 2019 to just $7 billion. The combined company, which now includes Time Warner Cable (TWC) and Bright House Networks (BH), has never spent this little on capital expenditures. The 2016 merger between Charter and TWC and BH forced a 189.4% spike in spending after the deal was completed, as Charter began a cable system overhaul and upgrade.

Charter is expecting it can distribute more of its revenue to shareholders, share buybacks, and debt payments as a result of the completion of its all-digital conversion project, which eliminated analog television signals from cable systems to make more room for revenue-enhancing internet service. The company also gets to lease more set-top boxes to customers seeking to view digital television signals on older analog TV sets.

Charter also reports it has successfully completed its DOCSIS 3.1 internet upgrade to more than 99% of its cable systems, allowing the introduction of premium-priced gigabit internet speed.

Charter executives signaled investors earlier this month Charter expects to post greater revenue and profits as a result of the spending reductions, but these new-found gains will have no effect on the company’s ongoing plans to continue mildly aggressive rate increases in 2019.

Charter has not disclosed how much it plans to spend on its new mobile business in 2019. The company is marketing its mobile phone service more aggressively this year as it prepares to accept customers bringing existing phones to its cellular service, powered by Charter’s in-home and in-business Wi-Fi and Verizon Wireless’ 4G LTE network.

AT&T shareholders are frustrated. They are not getting the dividend payouts and shareholder value they expected after AT&T put itself $170 billion in debt last year — the highest debt load of any non-financial American corporation.

As AT&T has bet big in recent years on video-related acquisitions, including DirecTV and Time Warner (Entertainment), investors are skeptical AT&T can properly monetize its video business. Many have sold shares after criticizing company executives over the company’s strategy and high debt, driving AT&T’s market capitalization down to around $225 billion, comparable with considerably smaller Verizon Communications.

But no worries, AT&T CEO Randall Stephenson, has reassured. AT&T expects those investments to yield results this year, helped by forthcoming broad price hikes for AT&T’s consumer services.

“2019 candidly is the money year,” Stephenson said in an interview with the Wall Street Journal. “This is a year when we get everything rationalized.”

According to AT&T, customers are irrationally paying too little for AT&T’s video-related services, which include DirecTV (~19 million customers) and DirecTV Now — the two-year old streaming service that has attracted nearly two million subscribers.

Stephenson

Although DirecTV has recently been extremely aggressive about offering deep discounts to convince satellite customers to stay, AT&T plans to pull back on those discounts as two million DirecTV customers see their two-year contracts end this year. Instead of granting renewed discounts for signing another contract, AT&T plans to deliver significant rate increases.

“As those customers come due, we’ll get closer to market pricing,” AT&T’s John Donovan told investors at a November investor conference. “We’ll be respectful of our customers, but [prices] will move up.”

That may prove a difficult sell for DirecTV satellite customers, who have recently been abandoning the satellite platform in favor of cheaper streaming TV alternatives. Even with package discounts, DirecTV is the pay television industry’s most expensive provider, collecting an average of $120.36 a month for its TV packages. In contrast, Dish Networks gets an average of $103.99, Charter Spectrum earns $91.14 and Comcast, $84.50.

DirecTV defections, largely over price, have been growing at an accelerated rate, with 1.4 million customers turning their back on the satellite provider over the last two years. Analysts expect AT&T will report 300,000 more lost subscribers in the last three months alone. At that rate, AT&T will lose at least $1 billion in operating profits in 2019 from its declining satellite TV unit alone.

(Image courtesy: WSJ)

DirecTV Now customers, who already absorbed a $5 rate hike last summer, and will face even more rate increases and channel reductions in 2019. Stephenson expects DirecTV Now’s price point to be in the $50-60 range, which means many customers will likely face an average of $10 in rate hikes this year. For AT&T, that would deliver “the right price” and gets the service “to where it is profitable,” according to Stephenson.

But customers are likely to balk if AT&T reduces channel lineups at the same time it raises prices. AT&T has already faced substantial DirecTV Now customer defections after last summer’s rate increase, and the company has also reduced new customer sign-ups by cutting back on new subscriber promotions, which often included a free set-top streaming device. Waiting to pick up exiled streaming and satellite customers are AT&T’s competitors, especially Google. YouTube TV has proved to be a DirecTV Now killer, now charging $40 a month for 60+ channels. It also comes with an unlimited cloud DVR feature and a complete lineup of local channels across most of the country. YouTube TV is reportedly still growing, attracting more than one million customers so far. AT&T executives claim the service is popular only because Google is suspected of subsidizing what they believe to be an unprofitable venture by around $9 a month.

Investors are also unhappy about customers slimming down their TV packages, because average revenue per customer is cut in the process, sometimes dramatically. Wall Street was accustomed to video packages bringing in at least $100 a month. In many cases, that revenue is cut in half after a customer switches to a streaming provider. AT&T hopes investor pressure on those new ventures and ongoing wholesale programming rate increases will both conspire to bring back familiar annual rate hikes for streaming services as well. Programming cost inflation almost feeds itself. As programmers set new wholesale rate records for their networks, other programmers believe there is now room to raise their wholesale rates as well.

Programming costs are not just important for consumers, either. Wholesale programming rate inflation was one of the reasons AT&T spent $49 billion to acquire DirecTV. Volume discounts for DirecTV meant the satellite provider was paying an estimated $20 a month less on programming than AT&T’s own U-verse unit, which had a much smaller customer base. AT&T’s purchase of Time Warner, which owns several popular cable networks, was also a hedge against programming rate increases because AT&T would effectively pay any increases to itself.

(Image courtesy: WSJ)

The Journal reports AT&T executives were unprepared for the speed cord-cutting has taken hold. Most most under-30 have abandoned the concept of paying for live, linear cable television at any price, preferring a combination of on-demand streaming from Netflix, Hulu, and other video streaming services with an over the air antenna to watch local stations for free. Older Americans are gradually following suit.

According to the Journal, AT&T’s latest tactic to slow down customer departures is to make cancellation as difficult as possible:

“There’s no way that we could make the numbers we were told to make,” said Altrina Grant, former manager of a Chicago-area AT&T call center. She said some agents would promise to call back a customer about a request to drop service rather than immediately disconnecting, which would count against their compensation. Irate customers would later call another employee to ask why their request wasn’t honored, she said.

“These reps were getting thousands of dollars because they knew how to manipulate the system,” Ms. Grant said.

Cyrus Evans, a former call-center manager in Waco, Texas, said employees’ pay could swing between $50,000 and $80,000 a year depending on their performance, which was often influenced by how many disconnection requests they could deflect. Mr. Evans said employees often got angry calls from customers who had been promised their service would end, only to receive a bill the next month. He said the incentive structure rewarded bad behavior.

Former AT&T workers said the company launched a new audit team in 2017 to crack down on support staffers making promises they couldn’t keep. Ms. Grant said this initiative led the company to fire some workers but several customer-care executives are still in their jobs.

AT&T disputes these allegations, claiming false promises to customers violate AT&T’s Code of Business Conduct and are “extremely rare.”