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AT&T Customers Miss Out amid CBS Blackout Dispute

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AT&T customers will not get CBS channels

Telecom giant AT&T (T) has reportedly failed to renew its carriage programming contract with CBS (CBS) amid disputes about higher fees. The disagreement has left millions of AT&T customers unable to watch CBS hit shows such as NCIS and The Late Show with Stephen Colbert. CBS has also dropped CBS sports network nationally from DIRECTV and its streaming service. CBS’s Smithsonian channel has also been removed from DIRECTV after the station owner pulled back its channels.  

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Last Tuesday, CBS had warned AT&T to settle the dispute to avoid CBS stations going dark on AT&T’s customers. However, AT&T disagreed with negotiating the terms with CBS as it was against paying exorbitant fees for the CBS channels. AT&T’s carriage agreement with CBS expired on July 19. The carriage dispute has affected AT&T’s DIRECTV Now, DIRECTV, and U-verse TV services. Also, AT&T customers in dozens of US markets, including New York, Chicago, Dallas, and many others were affected. CBS believes the loss of programming could last for a long time.

Carriage dispute

According to CBS, AT&T was reportedly not ready to negotiate with the station owner like other TV service providers for CBS programming. Instead, the TV provider AT&T was demanding unfair terms well below those agreed to by competitors.

CBS stated, “CBS has reached timely, fair agreements with hundreds of other cables, satellite, telco and internet providers to carry our industry-leading, fan-favorite programming.” CBS further reported that “AT&T, however, continues to propose unfair terms well below those agreed to by its competitors.”

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Per a Reuters report, CBS still wants to settle terms with AT&T but expects the distributor to negotiate at a fair price and not undervalue its programming. Notably, even after the blackout of channels, CBS is now urging AT&T customers to go to a website called “KeepCBS.com.” CBS wants AT&T customers to call and send messages to DIRECTV’s social media pages. In a separate statement, AT&T also stated that they were willing to negotiate with CBS.

Other carriage fee disputes

Telecom company AT&T is also trying to negotiate with broadcaster Nexstar Media. Currently, Nexstar’s news and other broadcast channels including ABC, CBS, NBC, Fox, and The CW have been dark for AT&T consumers since July 4. The company is currently in talks with TTV-station owner Nexstar to resume the channels on DirecTV or U-Verse services.

In March, AT&T had renewed its contract with Viacom (VIAB) and avoided a blackout of 23 channels including MTV, Nickelodeon, and Comedy Central for users of the telecom carrier’s pay-TV service DIRECTV.

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AT&T, as the owner of premium channels like HBO, TBS, and CNN, is also facing a carriage fee dispute with cable giant Dish Network (DISH). HBO and Cinemax channels have been dark for Dish customers since October 2018. The carriage fee dispute between Dish and AT&T has also resulted in subscription losses for DISH TV during the first quarter. In Q1, Dish Network incurred total net losses of 259,000 pay-TV subscribers. HBO and Univision channels were responsible for a little less than half of the Dish TV losses in Q1 2019.

Recently, broadcasters and station owners have demanded unreasonably higher fees from TV service providers for the channels they offer. The service providers are pressured to pay higher prices for the premium content. However, higher fees make no sense nowadays as consumers seek more content and value from TV offerings.

Customers are also increasingly shifting from traditional pay-TV subscriptions to cheaper streaming TV services provided by streaming giants like Netflix, and Amazon, among others.

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AT&T’s customers amid carriage dispute

The carriage fee dispute with CBS is likely to hurt AT&T’s DIRECTV customers. DIRECTV had 22.4 million customers at the end of March. On the other hand, DIRECTV’s streaming substitute, DIRECTV Now, has 1.5 million subscribers. AT&T has recently raised the subscription prices for DIRECTV Now plans, which might result in more customer losses.

Notably, AT&T’s traditional pay-TV customers are already facing declining viewership due to cord-shaving and cord-cutting. A decline in demand for subscription-TV packages and a shift to fast-growing over-the-top streaming services has resulted in the weakness. In Q1 2019, AT&T had faced losses of a net 544,000 premium TV subscribers (including DIRECTV and U-verse customers).

AT&T’s peers facing a decline in pay-TV customers

Cord-cutting is significantly affecting the pay-TV subscriber growth of traditional cable companies including Dish Network (DISH), Comcast (CMCSA), and Charter Communications (CHTR).

Dish Network lost 259,000 pay-TV subscribers in Q1 2019, as against 94,000 subscriber losses in the year-ago quarter. Comcast also lost 107,000 residential video customers in Q1 2019 as against 93,000 losses in the prior-year quarter. Charter lost 145,000 video customers in Q1 2019 in comparison to the year-ago losses of 111,000.

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AT&T to repay debt

Amid intense competition from online streaming rivals and continued decline in pay-TV subscribers, AT&T has also decided to spin off its satellite-TV business to Dish Network. The spin-off is expected to help AT&T reduce its debt burden.

Notably, the company is trying to lower its massive debt load, which increased after its $85.4 billion acquisition of Time Warner. As of March 31, AT&T’s long-term debt was $163.9 billion, while its short-term debt was $11.5 billion. Most recently, AT&T planned to sell its Puerto Rican operations to offload its debt burden. According to Reuters, the sale of AT&T’s Puerto Rico business could fetch about $3 billion.

The company’s top priority is to reduce its debt burden. AT&T is, therefore, making every effort to deleverage its business. In early-July, AT&T decided to sell four of its regional sports network and was hoping to get around $1 billion as sale proceeds.  Not only that, AT&T sold its stake in Hulu in April and its offices in New York and procured $3.6 billion to reduce its debt.

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Valuation and ratings ahead of its Q2 earnings

AT&T stock was down 0.91% and closed at $32.79 on July 19. However, the stock has gained nearly 18.7% on a year-to-date basis, almost in line with the S&P 500.

The stock currently trades at 9.21x its 2019 estimated EPS of $3.56 and 8.03x its 2020 estimates EPS of $3.63. These figures are unattractive based on the projected growth rates of ~1.06% and ~1.98% in those periods. Moreover, the company’s revenues are expected to grow by 7.19% in 2019 and 0.27% in 2020.

Out of the 28 analysts covering the stock, 14 analysts have rated the stock a “buy,” while 12 analysts rated the stock with a “hold” rating. Two analysts have recommended a “sell.” Analysts have set a target price of $33.70 for the stock, which implies a premium of 2.78% based on its closing price of $32.79 on July 19.

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