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AT&T Inc. just saw the largest drop yet on a video subscriber metric, and things could get worse from here.
The telecommunications giant posted first-quarter earnings Wednesday that backed up what many expected of a business made up partly of a stable wireless division and partly of segments with much heavier exposure to the COVID-19 crisis.
There were positive signs in AT&T’s T, -1.67% wireless results as average revenue per user ticked up, but the video and WarnerMedia segments were weak.
Shares are down 1.8% in Wednesday trading.
See more: AT&T falls short on revenue, earnings amid COVID-19 outbreak
Since the pandemic began disrupting the U.S. economy only in March, MoffettNathanson analyst Craig Moffett is concerned that the problems witnessed in AT&T’s video and media businesses this quarter are just the tip of the iceberg.
He wrote that the company’s premium video business, which includes DirecTV and U-Verse, saw a 16.9% year-over-year drop in subscribers, the worst decline yet on that metric. Almost 900,000 people ditched their traditional plans over the last three months alone, while another 138,000 canceled the DirecTV Now streaming service.
Read: Why Apple investors should be worried by AT&T’s earnings
The problem is that AT&T had been seeing big declines in this metric even before the COVID-19 crisis began. Since the latest numbers only included a few weeks of impact from the pandemic, investors are about to find out what happens when a business that was already in secular decline faces a recession, in Moffett’s view.
“The lockdown was, after all, only a March issue in Q1, and as is the case with most subscription businesses, AT&T’s subscriptions were/are mostly paid a month in advance,” he wrote.
AT&T’s situation could be further complicated by recent strategic moves, he said.
“To offset the rapidly declining subscriber base, AT&T has had no choice but to keep raising prices, reduce discounting, and slash costs (including customer acquisition spending)… all of which only makes the cord-cutting problem worse going forward,” Moffett wrote. “And now, without sports on the air, the value proposition for consumers is made all the weaker.”
The company currently has its hopes riding on HBO Max, a streaming service set to launch in late May that will cost $15 a month and feature programming from HBO, Warner Bros. and more. Moffett sees both pluses and minuses heading into that debut.
“Having customers sheltering at home, and consuming inconceivable amounts of streaming entertainment (witness last night’s Netflix NFLX, -2.21% results) will help,” he wrote. “The fact that they will be starved of new content, and that their price point will be very, very high relative to peers, won’t.”
He rates AT&T shares at sell with a $23 target price.
AT&T’s results in video could be a warning sign for Comcast Corp. CMCSA, +0.60%, which also has a traditional video business and is set to post results next Thursday morning. Dish Corp. DISH, +3.66% has been a beneficiary of AT&T’s recent stumbles in satellite, but now its business is being tested by economic weakness that could derail recent progress.
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Shares of AT&T have lost 25% over the past three months, while the S&P 500 SPX, +2.62% has declined 16%.
