AT&T's stock tumbled Thursday after the Dallas telecommunications giant disclosed that its satellite television service DirecTV lost 188,000 customers in the first quarter.
Shares fell nearly 6%, or $2.10, to $33.10.
DirecTV defections have been accelerating as satellite subscribers opt for lower-cost streaming services, including the company's own product, DirecTV Now. AT&T, which released its first-quarter earnings Wednesday, announced that DirecTV Now has nearly 1.5 million subscribers, cushioning the cord-cutting blow.
The company signed up more than 312,000 DirecTV Now streaming service customers during the first quarter and those additions have helped AT&T maintain its base of pay-TV subscribers.
But the problem is lower-cost products like DirecTV Now are not as profitable for AT&T as the traditional satellite television subscriptions. For example, the company's entertainment group, which includes El Segundo-based DirecTV, generated $8.4 billion in revenue for its video products in the first quarter. But that was $600 million less than in the first quarter of 2017, when video entertainment generated $9 billion.
Three years ago, AT&T was eager to acquire DirecTV to transform itself into the nation's largest pay-TV provider. But ever since, AT&T has been fighting to hold on to television subscribers. "Transitions like this are never easy," John Stephens, AT&T's chief financial officer, said Wednesday in a conference call with analysts.
Such shifts in the television industry are motivating AT&T to try to buy Time Warner Inc., which owns HBO, CNN, TBS, Cartoon Network and the Warner Bros. television and movie studio. The U.S. Justice Department in November sued to block that $85-billion purchase, and a trial to determine the deal's fate is underway in Washington.
AT&T has acknowledged the challenges facing DirecTV during the monthlong trial playing out in Washington.
"Last week's revelation that DirecTV has underperformed expectations ...was an eye-opener," analyst Craig Moffett of the MoffettNathanson firm wrote in a report late Wednesday. "Discounting is rarely a path to value creation."
Stephens told analysts that pay-TV service discounts would put pressure on the company's profit margin.
AT&T has a total of 25.4 million pay-TV subscribers — a number that has held steady during the last two years as more customers move to the lower-cost DirecTV Now offering. AT&T launched the streaming service in November 2016.
The 188,000 satellite TV subscribers that DirecTV shed during the first quarter was a higher drop-off rate than in the fourth quarter of 2017, when 147,000 subscribers defected. (DirecTV typically enjoys a strong fourth quarter due to the popularity of its NFL Sunday Ticket package.)
The satellite TV service has 20.3 million subscribers. Meanwhile, AT&T's legacy U-Verse television service held on to its base and now has 3.6 million customers. Still, that number represents a 10% decline from the first quarter of 2017 when U-Verse had more than 4 million customers, according to AT&T's financial filings.
On Wednesday, Philadelphia-based Comcast Corp. reported that it lost 96,000 video subscribers during the first quarter. Comcast, the nation's second-largest pay-TV provider, increased its overall customer base due to strong demand for its high-speed internet product.
2:00 p.m.: This story was updated with stock price information and analyst commentary.