Four key takeaways from AT&T’s Q4 results

AT&T’s fourth-quarter earnings for 2018 saw it miss Wall Street estimates and CEO Randall Stephenson reveal key tidbits on its strategy for its upcoming WarnerMedia streamer.

On Tuesday afternoon AT&T reported its Q4 earnings results, narrowly missing Wall Street estimates.

The telecoms giant reported a revenue of $48bn and missed analysts’ estimates of $48.5bn. Earnings per share in the quarter ending 31 December came in at 66 cents, down from an adjusted 78 cents in the year-ago quarter.

AT&T said the figure reflected a downward adjustment of 20 cents due to integration costs related to the $84.5bn Time Warner deal, which is has now closed.

For WarnerMedia, AT&T is reporting financials in the film and TV unit without full year-to-year comparisons as the acquisition only closed last June. The third quarter of 2019, from July through September, will be the first official quarter with like-for-like figures.

AT&T’s Q4 results show that WarnerMedia revenue reached $9.2bn. Warner Bros. lead the growth with revenue that totalled $4.5bn, with $2.1bn coming from theatrical releases and $1.8bn coming from television. Box office returns from Aquaman and A Star is Born contributed to the positive results, according to the company.

HBO’s total revenue was $1.7bn, relatively flat from reports last year, although digital subscriptions to HBO Now have gained by 37% from those reported last year to 7m.

Elsewhere, Turner reported $3.2bn in revenue and DirecTV posted subscriber losses of 403,000 in the quarter, ending 2018 with 19.2 million subscribers, down 6% for the full year compared with 2017.

Stephenson shared some notes during AT&T’s earning call on what he expects to happen to the upcoming WarnerMedia streamer, its programme licensing policies and competitors, which you can find below.

AT&T’s content cost approach

Stephenson said the company will balance content costs and how much it charges subscribers as AT&T enters an increasingly competitive streaming market with its WarnerMedia player.

“The customer is just not willing to pay more for content as content costs have been increasing over the last few years,” he said. “So we’ve got to get the content cost growth in line with what the customer is willing to pay, and the customer is willing to pay virtually no additional money right now. The content costs have to reflect that.”

In December, Stephenson laid out that the company will lean on existing Warner Bros. HBO and Turner content to populate the new platform and that it will be more conservative than Netflix when it comes to spending for new content.

The exec added that: “There’s some cases where the customer engagement is high and so it might be hard to take the content cost down, but the objective is to keep the equation in balance.”

AT&T has particularly been looking to reduce its debt after its Time Warner acquisition.  Stephenson said late last year that company is focused on bringing its debt down so that it is no more than 2.5 time its earnings by the end of 2019.

A ‘two-sided business model’

WarnerMedia’s new streamer will work with a mix of ad-supported and ad-free models to keep the business profitable, according to Stephenson.

He said: “We are strong believers of what John Stankey likes to call two-sided business models.”

This is where you get subscription commercial free elements, like with HBO and Netflix, something select customers still demand. “But there are other elements where advertising supported models are going to be important to keep prices down, to keep costs for the consumer down and actually fund additional content acquisition and purchasing.”

AT&T’s ad division Xander will be a big part of making that model work according to the exec. The business is already integrating Turner and Xander to fuel more advertising on Turner’s digital properties.

There is no ‘cookie cutter’ approach to licensing

Stephenson said that AT&T will continue to make licensing deals with other media companies, like the $100m Friends deal it made with Netflix, but that there is no ‘one-size-fits-all’ way to do this.

“I don’t think all content is equal in that decision-making process,” he said. “Each of these decisions on significant content are going to be evaluated in terms of how critical is it to our platform to have it as exclusive versus you know the economics of licensing it to others.”

With Friends, he said the company evaluated how important it was to have the content versus allowing others to use it. “We said exclusivity is probably not that critical on that type of content, but it’s critical to have on our platform. So we did license it to Netflix as you saw, but on a non-exclusive basis.”

Deep IP will set key streamers apart

The AT&T boss said that the only streamers that will survive in the long-term will be those with deep IP.

“We have really high expectations for our streaming service. We don’t think there is going to be a proliferation of these that will succeed over time, but those who have very, very strong IP, deep libraries of IP are the ones that we think are going to succeed over time,” he said.