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Is This How AT&T Plans to Make DIRECTV Now Profitable?

Adam Levy, The Motley Fool

AT&T (NYSE: T) has nearly 1.5 million DIRECTV Now subscribers as of the end of the first quarter. The company's over-the-top linear TV streaming service has grown faster than competitors like DISH Network's (NASDAQ: DISH) Sling TV, Sony's (NYSE: SNE) PlayStation Vue, or Hulu Live. It seems like only a matter of time before DIRECTV Now's subscriber base surpasses Sling TV's 2.3 million subscribers to become the most popular streaming TV service.

But one thing AT&T doesn't mention is that its DIRECTV Now subscribers aren't very profitable. In fact, the average subscriber probably produces a loss for AT&T. The average DIRECTV Now subscriber generates an estimated $31 per month for AT&T, and content costs alone costs an estimated $30 per month.

AT&T expects to reduce its margin pressure through alternative services, the first of which it's rolling out publicly this month. AT&T is now offering DIRECTV Now customers a cloud DVR service and the option for a third simultaneous stream (standard subscriptions are limited to two streams).

A person holding an iPad with the DIRECTV Now app loaded.

Image source: DIRECTV Now.

Catching up to the competition

DIRECTV Now is the last of the major over-the-top linear TV services to offer DVR functionality.

The DVR service for DIRECTV Now actually has a tier that is included for all of its streaming services at no additional charge. Customers can record 20 hours of video and save it for 30 days. If they want more storage, customers will have to pay an extra $10 per month for 100 hours and a 90-day time limit. Here's how that compares to the competition.

Metric DIRECT TV Now (Included) DIRECT TV Now (Add-On) Sling TV Hulu Live (Included) Hulu Live (Add-On) PlayStation Vue
DVR hours 20 100 50 50 200 Unlimited
DVR time limit (days) 30 90 none none none 28
Price included $10 $5 included $15 included

Data source: CNET, TechCrunch, Sling, and Sony.

It's worth noting all of these DVR options have their own peculiarities. Sling TV restricts the channels you can record. You have to pay for the premium DVR on Hulu Live to be able to skip commercials.

All in all, DIRECTV Now's cloud DVR option compares favorably to its competitors' in most regards.

DIRECTV Now is starting to look like fee-laden cable

If you've had a traditional pay-TV subscription in the last decade, you know cable providers can really throw in a lot of extra fees. Each TV you want to hook up requires its own cable box, which comes with a monthly fee. If you want to unlock the DVR functionality that's already available on all of those boxes, you have to pay a monthly fee for it. Cable companies have become experts at adding fees.

One of the biggest attractions of services like DIRECTV Now is the straightforward pricing. People are easily frustrated when they're advertised one price, but end up paying significantly more. AT&T is diving down that rabbit hole with cloud DVR and additional streams.

That's not to say AT&T isn't transparent with its DIRECTV Now pricing. It's very clear that if you want more DVR space or an additional stream, you'll have to pay more. But that could erode AT&T's pricing advantage over the competition. It turns out you'll pay roughly the same price for extremely similar services across all the competitors in this article if you want premium DVR functionality. That means AT&T will have a harder time signing up those premium customers than the price-conscious customers it's been attracting.

Other avenues to profits

AT&T might have better luck with other ways to increase the revenue from streaming television besides asking customers to pay more each month. On the company's first-quarter earnings call, CFO John Stephens told analysts, "The real growth here is gonna be in these alternative services, whether it's cloud DVRs, pay-per-views, data insights, advertising, doing those kinds of things."

Pay-per-view could be an interesting source of revenue. AT&T is the largest pay-TV provider in the United States, and it could use that leverage to acquire exclusive pay-per-view events.

More interesting, however, is the use of data and advertising to improve monetization. Digital streaming opens the door to collect a lot more data and improve ad targeting over traditional television distribution. That's an area that could be far more fruitful for AT&T than simply asking for more money from its subscribers.

While additional consumer services like cloud DVR and add-on streams are a good start for AT&T, they simply bring DIRECTV Now up to par with the competition. They're unlikely to move the needle much on average revenue per user or profitability. (Remember, it still costs money to provide a cloud DVR, and most customers will use the free tier.) The ability to generate more revenue through sources that don't cost consumers more is what could really drive profitability, but there's no timeline for when we might see that.

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Adam Levy has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.