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AT&T Is Now Forcing Unlimited Customers to Take a Bundle

Adam Levy, The Motley Fool

AT&T (NYSE: T) told investors it was going to double down on bundling in 2018 after finding some success with the strategy of combining wireless and video packages last year. Now, AT&T is introducing new unlimited data plans for wireless customers that include access to Watch TV, its new streaming video service featuring around 30 live channels.

In fact, customers who want unlimited data will soon have no choice but to take the Watch TV bundle, and pay a slight premium over AT&T's previous plans. At the same, AT&T is removing HBO from its lower tier bundle, which is puzzling considering it now owns the network's parent company. HBO is now one of several options for the free premium service included with AT&T's new higher-priced unlimited plan.

AT&T hopes its bundle can differentiate its product from competitors like Verizon (NYSE: VZ) and T-Mobile (NASDAQ: TMUS), and improve its customer retention. But as it adds more options to the bundle, it could deteriorate its margins without providing meaningful value to many customers.

A phone featuring Watch TV on screen surrounded by video app icons.

Image source: AT&T.

What is Watch TV?

Watch TV is AT&T's new skinny bundle of non-sports-focused networks. It includes its newly acquired Turner networks such as TNT, TBS, and CNN, as well as channels from several smaller media companies. The product will soon be available as a $15 per month stand-alone service, but it's currently limited to AT&T's unlimited plan subscribers.

AT&T can charge so little for the product because it now owns Turner, which makes up the bulk of the bundle. Additionally, AT&T hopes to integrate its ad technology into Watch TV in order to maximize the value of ads displayed to viewers. In fact, improving the value of ad breaks on live TV is also integral to AT&T; making a meaningful profit from DirecTV Now, its more robust streaming video product.

Is Watch TV a differentiator?

Bundling video services can be a differentiator for wireless companies, which are seeing a significant convergence in the quality and coverage of their wireless networks. T-Mobile offers its unlimited plan subscribers free Netflix after AT&T offered customers free HBO. Those are streaming services with broad appeal that most customers actually value. Even AT&T's DirecTV Now service doesn't hold the same appeal with consumers as Netflix or HBO, according to a survey from Raymond James research.

It's not clear if Watch TV will have the same broad appeal as Netflix or HBO. Watch TV will appeal to a certain crowd, but that market appears to be relatively small. Philo, a similar service to Watch TV, had just 50,000 subscribers at $16 to $20 per month as of January. That's not exactly earth shattering for AT&T, which has over 140 million wireless customers.

AT&T's Unlimited & More Premium plan, which costs $7.50 to $10 more per line per month than its lower-tier plan, might offer more of a differentiation from competitors. But that stems largely from including a choice of premium streaming services, including HBO, and the $15 per month TV service discount offered with its older unlimited plans. The plan's bundle should appeal to a broader audience, and it still costs less than Verizon's premium unlimited plan.

Impact on margins

AT&T's new plans cost slightly more, on average, than its old unlimited plans. At the same time AT&T likely faces higher costs with Watch TV despite now owning Time Warner. Removing the $15 per month video service voucher and HBO from its lower-tier bundle could offset some of those costs, but adding more options in the higher-tier plan will only increase costs.

Overall, AT&T ought to see a slight negative impact on its margins. The impact could be worse if Watch TV doesn't improve customer retention to the same degree as its previous unlimited offer. Considering the seemingly limited appeal of Watch TV, there's a good chance that's the case.

AT&T has seen its EBITDA margin decline across both its wireless and entertainment businesses over the past couple years as it becomes more aggressive with bundling. Meanwhile, competitors Verizon and T-Mobile have seen stable to improving EBTIDA margins.

AT&T's new bundle probably won't do much to improve the company's margins, and it's unclear whether it'll attract a lot of new customers after removing the free HBO benefit from the lowest-tier plan. Investors should pay close attention to EBITDA margins on the company's earnings reports in the second half of the year.

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Adam Levy has no position in any of the stocks mentioned. The Motley Fool owns shares of Verizon Communications. The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy.