first base, AT & T unveiled its long-awaited extraordinary piping military service — DirecTV now. With a humble $ 35 per month promotional rate for a package sport over 100 popular channels, this is an attractive offer for many subscribers. not to be outdo, Netflix rolled out offline screening, a have that has been in high requirement among customers, specially since a major rival made it available in 2015 .
On this episode of Industry Focus : Consumer Goods, we discuss the fresh services, the waves they might make in the industry, and how important they will end up being to shareholders of both companies .
A full moon transcript follows the television.
This podcast was recorded on Dec. 13, 2016 .
Vincent Shen: Welcome to Industry Focus, the podcast that dives into a different sector of the stock commercialize every sidereal day. I ‘m your host, Vincent Shen, and it is Friday, December 2nd. With me in studio apartment nowadays is Fool.com subscriber Dan Kline. We ‘re taking advantage of your sojourn, Dan, to Fool headquarter this week, so we ‘re pre-recording this episode, which you will hear on Tuesday, December 13th. Dan, it ‘s always great to have you on the show. How are you ?
Dan Kline: I ‘m doing great. You treated me to lunch today, which is, if anyone thinks we ‘re a small less energetic than usual …
Shen: We had a very big meal of Bonchon wings. My beginning time I had them was in New York, but they have since made their way, have several locations around Alexandria, Virginia here, besides in D.C. big wings .
Kline: I will say, we ‘re not getting paid for this, and they did n’t send us release wings. If you do n’t have one where you live, get on a airplane nowadays .
Shen: ( laughs ) Our main subject for the show nowadays is the newfangled over the crown cyclosis service from AT & T called DirecTV immediately. That launched at the end of November. We ‘re going to break down the offer itself, but then we ‘re going to take a broader look at some of the competing services, and the likelihood that they end up driving any kind of meaningful top and bottom trace gains at their respective rear companies .
But before we do that, I want to touch on another associate floor. That is the announcement from Netflix and their decision to last allow offline viewing to their subscribers. The company broke this news on the like day as the DirecTV now launch, probably stealing a short bit of their thunder. But if you are a Netflix user or follow the company in general, you credibly know that management has been fighting this move for a long clock time. Amazon beginning upped the ante in September of 2015, they introduced the offline viewing to Prime video users. I think Sean and I talked about that on the express last year around that fourth dimension. At the time, headman product officer at Netflix, Neil Hunt, he tried to ward off critics by arguing that adding options and complexity to the military service would result in confusion or inaction from users. so, rather of just letting viewers download the subject while they were traveling or somewhere without a good internet connection, the company tried to find other alternatives, like special servers that they could put on an airplane or coach, for example, that could carry the integral Netflix library. Or, they tried to figure out better video engineering that would reduce the file size and the datum needs of television. But basically, lo and behold, the simplest option prevails, correct ?
Kline: Yeah. I mean, that ‘s a tad ineffective. ( laughs )
Shen: precisely .
Kline: I do n’t think we need to bring all of Netflix with us everytime we fly. That seems a fiddling bit reaching. And the reality is, his distributor point about complexity is correct. good fortune on Amazon figuring out how to download things. It ‘s not super elementary. The Amazon interface is light years behind the Netflix interface. That ‘s true whether you ‘re renting something on Amazon, or you ‘re actually watching it through Prime — figuring out how it is, where it goes —
Shen: I will absolutely agree with you. recently, I tried to watch something on my mobile earphone for the inaugural fourth dimension through the Amazon Prime video library, and it required two extra app downloads. It was identical surprise for a party that, in the past, has broadly been therefore good at making shop or using their services deoxyadenosine monophosphate easy as possible .
Kline: I think the Amazon video experience is by and large lousy. I ‘m a subscriber and a Prime count, I ‘m a Netflix extremity. And I think what Netflix has done is removed the last barrier to any person who had immunity to a $ 9.99 price rag, because the people who do n’t get Netflix are the people who are distillery spending money renting movies, or going to Redbox. Look, I ‘m a parent, and before I would take my 12 year-old son on a plane ride, I would pay for a season of The Simpsons, or a couple of movies he wants to watch, and I would rent them or buy them so he could watch them offline. We ‘re a Netflix subscriber. I am never again going to have to do that. sol, if I ever have to make the decision of, “ Is Netflix worth my $ 9.99, or should I drop it for a calendar month or two because I ‘m not watching anything ? ” it ‘s a no-brainer, because we were spending money elsewhere that now just goes into the Netflix bundle. I do n’t see why anyone would n’t get Netflix now .
Shen: Yeah. In the beginning, I did n’t think this was that significant or that boastfully of a game-changer. But something to keep in mind is, they ‘re rolling this have out worldwide. The fact that, I think Netflix is now approaching about 90 million subscribers worldwide, and a growing share of that 90 million is external, and you have some markets where possibly the internet is costlier and not as dependable — this is possibly going to convince some fence-sitters that “ Hey, if I can find a good connection or a cheaper connection, download it, and watch it at my leisure offline, that makes it that much more compel. ”
Kline: And the world is, the internet is not that dependable. If you remember, last week, we were going to tape one of these shows, and I was remote in an office with a high-speed, wired internet connection, and we could not get Skype to connect in decree to give us a adept signal .
Shen: Sure, average enough .
Kline: How many times have you been watching Netflix in your surviving room, where randomly it stops, and you have to restart —
Shen: Or let it buffer, yeah .
Kline: Yeah. So, even at home sometimes, we have a family home in the woods in New Hampshire, and the internet connection is satellite internet, it ‘s frightful. I would much quite wait an hour to download a movie and then watch it that night than have to deal with the cushion and the stops and the sound recording not being right, or whatever is going on. This is good a ache move. And I understand, the rationality they resisted it was pirating. I can now download a series of House of Cards and pass you my laptop and you can watch it. But guess what ? I could give you my Netflix password, besides .
Shen: Yeah. so, big takeaway, possibly it helps some of those fence-sitters that I mentioned, in areas where the internet connection is n’t as reliable. But all in all, I think it ‘s precisely the stickiness of that Netflix product that they ‘re offering. And ultimately, I think if they ‘re able to keep those subscribers loyal, we saw some churn when they increased their rates earlier this class, but make it a compelling as possible, with their capacity, but besides with the serviceability of that subject, possibly in the future, if there ‘s another price increase, people are more will to stomach that .
Kline: This is a valuable give-back. You have to listen to your customers, and people clearly wanted this, for all the reasons we ‘ve listed. so, when they go to $ 12.99 or $ 11.99 in a year or two, at least they can say, “ Hey, we gave you what you asked for. ”
Shen: Yep. A few details I do want to add, in terms of, anybody who did n’t know about this or wants to look into it is, you need the newest adaptation of the Netflix app to do so. And the library is n’t comprehensive examination. It ‘s growing, they ‘ll be adding more content to it, in terms of what you can download and view offline. It includes most of their master serial .
Kline: It ‘s a doubt of rights. You ‘re going to see this, when we talk about the OTT services, some of these rights scenarios were n’t ever considered when they made these deals. so, as these movie deals come up, and television deals, they ‘re going to start asking for the veracious to let people download it offline. It ‘s not a technology issue .
Shen: Yep. And one big example of content that is presently not included in this sport is Disney content. They signed that actually big, expensive deal that gave them some of that exclusivity .
Kline: And Disney might be a holdout, because they ‘re one of the last few places that actually still sells DVDs. so, if you ‘re Disney, you may not want Netflix to be allowed to have your content offline, because it might cost you a $ 19.99 sale. It ‘s the one thing, as a parent, you can justify, because a little pull the leg of is going to watch Cars 300 times in a row, and you ‘re getting your money ‘s worth. therefore, not everything is coming to this overhaul. But as an adult, as a father, it ‘s placid a very valuable offer .
Shen: so, out with one streaming service, in comes another. DirecTV now is presently available for free test. Why do n’t you give me some basics, Dan ? How a lot is it, and what are customers getting ?
Kline: DirecTV now is your latest option to cable television. It ‘s alive streaming cable television channels. And the promo extend is a $ 35 a calendar month box, which, in theory, AT & T is taking a bath on, though, let ‘s assume they’ve negotiated some good deals there, for at least a unretentive time. You get about 100 cable channels, including, in some markets, local channels, but that’s very limited, like, if you live in New York, you might get NBC, but you can only watch certain programs on demand. But in general, you ‘re getting the top cable companies like TBS, TNT. It ‘s very like to Dish Sling, or Sony PlayStation Vue, where you do n’t have cable, you want to watch some live television, you want some sports, and you ‘re going to pay and you ‘re going to get a streaming-only cable service .
Shen: Yep. I should add, there ‘s four tiers to the service —
Kline: Which are made a little bit irrelevant by the promo extend properly now .
Shen: Yeah. They have cute names. The first base tier is $ 35 a month, it ‘s called Live a Little. The following one ‘s $ 50, barely Right. And then the promo one is Go Big which is normally $ 60, but the current promotional rate is $ 35 .
Kline: And they say they ‘re going to honor that forever. now, constantly, for AT & T, is not trustworthy. Just like they ‘re going to grandfather your unlimited design constantly, and then lento make it severe for you. But, in the short terminus, it ‘s probably the cheapest per-channel batch. dish Sling is at approximately 22 channels for $ 20, it varies a fiddling snatch how many channels .
Shen: And you can stack on extra, correct ?
Kline: You can add stuff. so, it ‘s probably $ 35 for 100 channels. And 20 of those channels are n’t dazed ones you do n’t watch. Most of them are dear channels .
Shen: The fully net tilt is n’t available, at least that I could find, but a reasonably good sample of them are here. And as you mentioned, it includes most of the bad networks. And like you mentioned, if you can get it, it includes three of the big —
Kline: No CBS.
Read more: Jersey International Private Offshore Banks
Shen: No CBS. And then, the biggest package is Got tantalum Have It $ 70 a month. I ‘m trying to think if there was any other … sol, there ‘s the promotional extend that ‘s $ 35 …
Kline: And there ‘s a promo where you can get HBO and one of the other wage services for $ 5 .
Shen: And some perks that come with the military service are, the fact that you can cancel it at any time, there ‘s no annual abridge, no fees that direction, and there ‘s no waiting for a cable guy to come install it, no box, it will stream directly to your bright television, your phone, your pill, your personal computer, any devices you have like Apple television, the Amazon Fire TV Stick. There ‘s besides a bunch together of on-demand titles, excessively, justly ?
Kline: And they ‘ll give you those devices. If you commit to three months, they ‘ll give you an Apple television. I will point out that Apple TV is $ 149, and 35 times three, I ca n’t do that mathematics live on their publicize …
Shen: But it ‘s less than $ 149 .
Kline: It ‘s $ 105. so, if you were thinking about an Apple television, getting this for three months merely to play with it while you ‘re traveling is worth it, barely to try it. But the world is, they have built a me-too serve. This is somewhere in-between what Dish and Sony are doing. Sony has a reasonably traditional cable offer, in terms of its price and its package, whereas Dish is going for more Millennials — “ this is the best of the best, this is what you ‘re going to watch. ” AT & T is somewhere in the middle. At that $ 70 price, it ‘s not that cheap ; at the $ 35 price, it ‘s a good deal. The problem is, consumers have not shown that they actually want these services. I know you have the numbers, but the cable universe is about 94 million homes, even with the slow decline in cord carving. Why do n’t you jump in with how many people are getting these ?
Shen: You mentioned Sling and Playstation Vue as the main, what people would see as the competitors of this service. I want to mention, as a beginning foray into this world from AT & T and DirecTV, it ‘s pretty competitive. I think it ‘s actually, for what this world is, a reasonably potent prove .
Kline: At the promo price, it ‘s by far the best offering, because not alone do you get $ 35 for 100 channels, you besides can stream two streams, whereas the Dish offer is alone one. Sony ‘s is multiple, but it ‘s much more money .
Shen: I think the bottom line, at least for customers, is that this is an attractive box. I think some people have been looking for that live television receiver rival to your standard cable television package. For some people, it will very much be cheaper if you can get in at that promotional rate, it becomes very compel. After that rate expires, or once that promotion ends, I think it loses some of its luster, for sure .
In terms of the impingement for the caller, indeed if you ‘re an AT & T investor, and you ‘re looking at this like, “ Is this a plot record changer for us ? ” I think, you have to keep in take care the scale of the business and what kind of impingement this can have. I was actually surprised. even with Sony ‘s Playstation Vue, the service has been out for how long, Dan, do you know ?
Kline: Just a few months, not that long. Six months or so .
Shen: I think it has, just recently, in the past few months or so, crossed 100,000 subscribers .
Kline: And Sling is coming up on two years, I would say .
Shen: Yes, Sling came out in early 2015, so coming up on two years. That is besides now approaching about one million subscribers. so, even the best case scenario, let ‘s say that DirecTV now can pick up one million subscribers to match Sling in the first six months, and every single one of those people adopts it at the $ 70 “ go big ” package .
Kline: And none of them drop DirecTV ‘s regular box to get it .
Shen: precisely. You ‘re looking at $ 70 million incrementally, whereas in terms of these segments within AT & T, its cable television television receiver business is a $ 20 billion business. sol, it ‘s significant to think about where this actually falls into things, and what you described as a me-too offer, that ultimately rings true .
Kline: We ‘ve talked about this : I ‘m extremely veto on this product. And I like Sling, I used Sling for a long clock time when I traveled, I played with it. But the world is, they ‘re going after you. They ‘re going after younger potential cord cutters, or cord nevers, and saying, “ well, we ‘re not going to get you for $ 110 a month for cable, possibly we ‘ll get you for $ 20 or $ 30 or $ 40. ” And the problem is, the person who does n’t have cable television is watching something else. He has Netflix, he ‘s watching YouTube, he ‘s watching Twitch video recording games. It ‘s not person who desperately misses cable .
Shen: I will say, veracious nowadays my internet box gets paired with a pretty basic television receiver pack. This is the kind of thing that would make me rethink that. If I can get in at $ 35, get way more value out of that, it does become attractive. AT & T specifically says, there are 20 million people not subscribed to any kind of pay television receiver service that they think this will appeal to. I think that ‘s very affirmative .
Kline: I was going to say, that includes the Amish, that includes the aged. Every cable company is doing this. Comcast is working on a military service. Everyone is going to have one. And possibly you will see the end of the cable box, and this type of rescue will just become the norm, so the 94 million will morph over into slightly less expensive packages with a small bit more choice. But, this estimate that there ‘s this huge untapped consultation of people who, they wo n’t pay $ 70 for cable, but they will pay $ 35. And the second they drop their cable subscription, their internet bill is going to go up $ 5 to $ 15, and then Comcast is going to put a data cap on them. And if they start watching a crowd of movies, and downloading 4K video, then they ‘re going to pay overage charges. so, the reality is, these are products built for a theoretical future that cipher has proven is actually coming .
Shen: Alright, so, that is our pessimist opinion. I ‘m going to put on my optimist capital right now, because I do think there are a few things that we can keep in mind in terms of how this becomes attractive. For example, AT & T having this diversify suite of different businesses, including its radio business, some people argue that this can be a loss leader because, guess what, AT & T have made it so that anything you watch, if you ‘re signed up for DirecTV nowadays, does not count against your data cap for your wireless service .
Kline: And AT & T ‘s ability to bundle, because they ‘re not going to invest more money in physical cable lines. They own DirecTV, which is a satellite product, and the biggest decliner in the cable business has been their wired cable business, because if you own DirecTV, which you can market countrywide, why would you spend money market locally ? thus, they can go to their earphone customer and say, “ here ‘s a promo, add DirecTV now for $ 20 for the future three months, I ‘ll give you a thousand channels, ” or whatever it is. They ‘ll have a short moment of success with that, but there ‘s a ways to go on the product. I think that ‘s crucial to point out. I tested Dish, I did a report for fool.com on cutting the cord, and I lived with Sling and with Sony, and to say it ‘s an unpleasant experience when it ‘s your prime means of watching television receiver is putting it gently. People, when they watch cable, flip around. They do n’t sit down like they do with Netflix and binge-watch. They do n’t always watch hale programs. even if you’re watching your favored football team, during the commercials you might flip to a dwelling improvement read, or whatever it is. Doing that on these services is irritating. It ‘s a little better on Sling than it is on Sony. From the demonstration I ‘ve seen of DirecTV now, there ‘s a draw lacking. You besides can only pause for five to 10 seconds on most channels .
Shen: Yes, that ‘s something to keep in mind. DirecTV now, at the moment, at launch, it does not have a DVR capability built in, but that ‘s supposed to be coming adjacent year, as is supports for some extra …
Kline: And, to be carnival, the world is, cipher very does. Sony has some limited DVR capability, better than others, but their price is higher. Sling is just this week testing some DVR. But the reality is, most of their deals with the cable companies preclude DVRs, pausing. There ‘s some on-demand contentedness. But by and large, it ‘s the type of on-demand content you could get with a Hulu subscription .
Shen: Looks like we’re going back to our pessimist angle .
Kline: ( laughs ) But hey, good caper, AT & T .
Shen: I do want to add some extra details on numbers I was able to find. I think it ‘s kind of interest, in terms of the profitableness, what the contribution might be in terms of their margins. You mentioned the $ 35 promotional deal for the 100 channels is quite compel. The fact is, it ‘s not come bum. One analyst I have, they believe the arrant margins for the assorted packages will range anywhere from 2 % to 15 %. This is, for AT & T overall, their engage gross profit is about 17 %, so not even close. The fact of the matter is, SNL Kagan, they estimate that that $ 35 monthly bill, even for the lowest tier, which I think is where a lot of people will end up signing on for those kernel 60 or sol channels, that barely covers the price of the program, based on their estimates. then you factor in things like the back-end support, customer service, the infrastructure, and you ‘re potentially looking at what is identical much a loss leader .
Kline: I think there ‘s one thing you can factor in there, I think we ‘re about to see a bite of a come-to-Jesus. The cable television companies have had all the leverage. ESPN has been able to say, “ You ca n’t get rid of ESPN. We want 10 % more. We want to go from $ 5.80 to $ 6.25 to $ 6.45 per subscriber. ” nowadays, we ‘re starting to see the cable companies say, “ Wait a moment. We’re going to offer a software without ESPN. ” person could go to one of these services and possibly not get certain higher-priced channels. There are going to be reductions in some of those costs. You are not going to, as a low-watch distribution channel — possibly VH1 Classic gets $ 0.02 per cable subscriber, and 80,000 people are watching it at the absolute best separate of the day, they ‘re either not going to exist because no one ‘s going to pay them anything, or they ‘re going to get lower fees. even the big-ticket companies, ESPN ratings are down. so, you ‘re going to see a trickle-down across the board. ESPN is either going to stay the same or take cuts, and they ‘re going to spend less money on program. so, you ‘re going to see some of these college billion-dollar deals get lessened, and start to go down .
Shen: I will add that, big word picture, there ‘s two other things that I want to wrap up with. The first is, even if, I think DirecTV now, with this military service, they wanted to raise prices and boost margins, let ‘s say it truly does take off, and they ‘re able to build up five to 10 million subscribers, and it starts to make a bigger affect on their financials, it ‘s lone going to get more competitive in this space. Hulu is coming out with a competing service. Amazon, you know, is coming out with one .
Kline: Apple is talking about one, Comcast is talking about one .
Shen: Amazon will put that out at or below price, excessively, good to take marketplace share .
Kline: And the problem is, when you ‘re selling a serve based on price, you lose a fortune of pricing flexibility. So they are not going to be able to lento raise this so it costs what cable does, unless cable goes off, which, as we talked about earlier, the physical cable television box might. But for that to happen, these services have to feel like the experience of watching television .
Shen: That is a hypothesis, though, in terms of, looking out three to 10 years, as, they understand, or they see this as becoming the future without the cable corner, no more waiting for the cable guy, replacing their model, and this is their test .
Kline: Some of this I blame on your generation, who is volition to watch television on an iPad when you have a 60-inch flatscreen sitting in movement of you. ( laughs ) I ‘ve never understood this !
Shen: The second thing I did want to discuss was with the coming acquisition, calm uncertain, of Time Warner, which will give AT & T an incredible library of content. Think about what Time Warner runs — HBO, Warner Brothers, they have some capital networks like AMC. obviously, there ‘s going to be some rules and regulations about making indisputable that there ‘s reasonably bonny competitive practices. But ultimately, Time Warner gives them that leverage to offer exclusive content to DirecTV now subscribers. And that has worked for companies like Netflix .
Kline: And even, forget the ability to say, “ Hey, you ‘re going to get HBO shows two days early, ” or some of the things that possibly will fall under rule, though debatable, given the incoming administration and their stand on —
Shen: call that uncertain, yeah .
Kline: Yeah. Tom Wheeler, the FCC chair, has been pushing a lot of this, and he is probably not in political favor going forth. But, forgetting that. The buying power of this combined party — one of the foremost deals they announced was a Taylor Swift Channel. nowadays, I know you ‘re a big Swiftie. I am not thus much. I am much more a Gwen Stefani camp — no, I ‘m teasing, wholly. But that said, Taylor Swift has a decide hearing. And they could throw the money at her. indeed, her spinal column catalogue of performances, videos, exclusive interviews, whatever the heck it is, Taylor cooking Thanksgiving dinner, I have no mind, can be a channel. And that itself may not be a draw, but you start to pile two or three of those things together, and they have the ability, equitable like HBO has a consider with Bill Simmons and Jon Stewart, some of those deals are very amorphous as to what the content is going to be. They could say, “ Hey, look, Bill Simmons ‘ podcast is going to be on video recording on a channel, ” the way they do with The Dan Patrick Show on Audience, which is the AT & T video distribution channel. so, their ability to just buy up the market in terms of content — and I ‘m certain they offer Audience to other cable companies and none of them take it — finally, they might be able to tip the balance in favor of them. But it ‘s distillery not going to make you buy an inferior, unpleasant service .
Shen: Yep. so, it seems, overall, you are not all that bullish on what this offer provides them .
Kline: not for today .
Shen: My view is, it ‘s an concern step. I would watch it rather tentatively. But ultimately, this could be what the company sees as a dance step into what the future of distribution is going to look like .
Kline: I think every cable and wireless player believes in this a lot more than I do, to be positivist. ( laughs )
Shen: Thanks a set, Dan .
Kline: Thank you .
Shen: That wraps up our discussion for nowadays, but you can reach out to us and the rest of the Industry Focus crew via Twitter @ MFIndustryFocus. Or, you can send us any questions via e-mail to industryfocus @ fool.com. People on the course of study may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so do n’t buy or sell anything based entirely on what you hear during the program. Thanks for listening and Fool on !