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Analyzing AT&T’s ‘Zero Rating’ Strategy

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Dec. 22 2016, Updated 5:35 p.m. ET

AT&T’s zero rating strategy

AT&T (T) launched its DIRECTV Now service in November 2016. However, AT&T has “zero-rated” DIRECTV Now content for AT&T wireless subscribers, meaning that AT&T will not charge its wireless subscribers for data consumed while using the service. This will set AT&T’s wireless service apart from the services of competitors Verizon (VZ), T-Mobile (TMUS), and Sprint (S). AT&T’s wireless division has been losing subscribers for the past several quarters.

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However, the FCC (Federal Communications Commission) began examining zero-rating to see if some or all varieties of it could violate net-neutrality. Meanwhile, in a Senate hearing this month regarding the AT&T-Time Warner (TWX) deal, Senator Franken expressed concern over how AT&T pays itself for the service. However, AT&T defended itself by stating that there is a real cost to providing free data to subscribers even if the company is doing business with itself.

DIRECTV Now is a video streaming service that delivers pay-TV content directly to subscribers over the Internet rather than through a cable or satellite connection.

Comparing over-the-top offerings

AT&T’s OTT (over-the-top) DIRECTV Now video streaming service has a huge growth potential, as users have been subscribing to OTT services in greater numbers than ever before. This subscription growth is mainly due to the high monthly bills that users are paying cable and satellite TV providers.

A 2Q16 report from Digitalsmiths suggests that about 35% of users pay more than $100 every month to their pay-TV provider, as shown in the chart above. Currently, the major players in the video streaming market are Netflix (NFLX), DishTV’s (DISH) Sling TV, and Sony’s (SNE) PlayStation Vue.

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