AT&T's wireless growth stung by tablet losses, but Aquaman did great

In hindsight, AT&T's Time Warner acquisition looks pretty good.

The business, now renamed WarnerMedia, gave AT&T a few things to crow about in its fourth-quarter earnings released Wednesday. They include WarnerMedia's operating income growth of 33.2 percent, a popular slate of films like the blockbuster Aquaman and strong digital subscriber growth for HBO.

Offsetting that positive news, however, were continued drags on AT&T's legacy businesses. The company added only 134,000 phone customers in the quarter on a post-paid basis -- those are people who pay their bills at the end of the month. In total, the company added just 13,000 post-paid subscribers thanks to a loss of 410,000 customers with tablets and other connected computing devices after AT&T scaled back its promotions. The rate of customer turnover also increased from a year ago due to decreased promotional activity.

In comparison, Verizon  on Tuesday reported 653,000 net new phone customers in the fourth quarter.

On the video side, AT&T lost 391,000 traditional pay TV customers and 267,000 DirecTV Now  customers.

DirecTV Now, the subscription streaming service, took a big hit after AT&T raised its prices, and the company said essentially no customers are on discounted plans anymore.

Growing pains

Randall Stephenson, AT&T's CEO, said on a conference call with analysts Wednesday that it's been "a year of learning" for the DirectTV Now product. He explained it became apparent early on when the live TV streaming service launched with a promotional price of $35 that customers weren't so engaged with the product. As a result, when the promotion ended, subscribers dropped off rapidly.

But Stephenson said the service is starting to turn a corner.

"The customer base that remains is growing and highly engaged," he said. "It has good churn characteristics, and we like our positioning with the streaming product."

Still, he admitted the company needs to find a way to keep pricing of its streaming services low. The company is planning a subscription streaming video-on-demand service that will include some of its premium content, such as HBO shows like Game of Thrones.

"The customer is simply not willing to pay more for the content even though the content cost is increasing," he said. "So we need to get content cost down to a price customers are willing to pay."

You simply can't have "subscriptions declining and costs rising," he added. 

The results underscore AT&T's awkward lurch forward in the midst of transformation. The company wants to become an entertainment powerhouse, but also must keep an eye on its more traditional service business.

Its wireless business has struggled enough that the company has resorted to touting the broad deployment of 5G E service, which is not actual 5G but suggests a level of network superiority over other carriers that doesn't exist. AT&T has said it's proud that it renamed its 4G service 5G E.

Real 5G is coming

Still, Stephenson emphasized that "standards-based 5G" is coming, and it will be nationwide by 2020. This is in large part thanks to the first responder network called FirstNet that the company is building using an initial $7 billion investment from the FCC's 700 MHz auction. FirstNet is a public private partnership between AT&T and the first responder community. It is designed to give priority access to first responders in the event of a disaster, but will also serve as the foundation for AT&T's commercial 5G service.  

Stephenson said construction of the new network is already ahead of schedule, and he expects the majority of the country to get true mobile 5G service by 2020.

AT&T has already launched pockets of standards-based 5G in a few cities. Currently, the service is only available via hotspot "pucks." But he said as phones are introduced this year, AT&T will begin making the service more widely available.

"It's an evolution and it's real," he said. 

Stephenson said AT&T will eventually offer a fixed 5G broadband replacement service, like its rival Verizon. 

"We are mobile first, like the standard [dictates]," he said. But he added that in three to five years he sees 5G evolving to serve as a fixed broadband replacement product.

"Back in the '90s everyone said that wireless would never substitute for wireline voice," he said. "The reality is that 5G will have enough capacity to serve all the broadband for streaming, DirecTV Now, Netflix, and any other services. So I'm convinced as we get millimeter wavelength spectrum out there, we'll see a true replacement service with 5G fixed line broadband."

Banking on entertainment 

The company can count a number of successes in its entertainment business, including A Star is Born and Crazy Rich Asians. Aquaman, which premiered in December, is another standout and is the first DC Extended Universe film to cross the $1 billion mark.

Going forward, Stephenson said the company's deep catalog of Warner Brothers content will be what sets it apart from competitors.

"Those who have strong IP (intellectual property) and deep libraries of IP are the ones who will succeed over time," he said.

Stephenson explained that AT&T will use this in a number of ways.

"I'm a strong believer in two-sided business models," he said This means not only finding ways to "right-size" content packages for services like DirecTV Now to maximize value, but also offering some content as part of a premium subscription service, like the one the company is planning to launch, while offering other content as part of an ad-supported service, like DirecTV Now.

He added that AT&T also needs to figure out which content should be exclusive to AT&T and its streaming services and which TV shows and movies it can sell to other distribution platforms like Netflix.

"There isn't going to be a cookie-cutter approach," he said. "All content is not equal."

He said AT&T is in a good position to capitalize on this.

"Having a 90-year inventory of incredible IP is a really important thing," he said. "When you look at the landscape of what's being consumed, you'd be surprised at how much is Warner Brothers intellectual property."

For the period, the Dallas telecom giant said it posted a net profit of $4.9 billion, or 66 cents a share, compared with a year-earlier profit of $19 billion, or $3.08 per share, which was helped by the federal government's tax reforms. Excluding special items, the company posted adjusted earnings per share of 86 cents. Revenue, meanwhile, was at $48 billion.

Analysts, on average, forecast earnings of 86 cents a share and revenue of $48.5 billion. Shares slipped 0.1 percent to $30.66 in pre-market trading.

First published Jan. 30 at 4:22 a.m. PT.
Update: 9:15 a.m. PT: Adds comments and information from the company's conference call with investors. 

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