AT&T is on the hunt for a Netflix killer

AT&T and The Chernin Group announce $500M joint venture to invest in OTT video services

Just hours after Netflix trash-talked AT&T in its quarterly letter to shareholders, AT&T has announced a new $500 million joint venture with the Chernin Group to fund the next Netflix. Specifically, the venture will “acquire, invest in and launch over-the-top (OTT) video services.”

It’s an interesting move, signaling that AT&T doesn’t see much of a future in the current model of pay TV as it stands. The overall goal, the companies say, is to invest in advertising and subscription video-on-demand channels and streaming services—like Netflix. If it works, it could become a viable competitor not only to Netflix, but to Comcast’s X1 platform (which has been predicted to out-Netflix Netflix). Currently, Comcast is the largest cable/Internet provider in the U.S., but if AT&T is able to offer a competing Netflix service, the company could see a bump in its market share (and it’s going to have to work that much harder with the merger of Comcast and Time Warner).

Of course, the success of the venture will hinge on the quality of the content. Netflix isn’t Netflix for no reason.

AT&T has over 110 million wireless subscribers and 16 million broadband subscribers. The company posted $33.2 billion in revenue for the fourth quarter of 2013, with net income of $6.9 billion, up from a $3.9 billion loss the year before.

“Consumers are increasingly viewing video content on their phones, tablets, computers, game consoles and connected TVs on mobile and broadband networks,” said Peter Chernin, chairman and CEO of The Chernin Group, in a statement. “AT&T’s massive reach on those platforms across mobile and broadband and their commitment to the online video space make them the perfect fit for this venture with us.”

The Chernin Group brings its majority stake in Crunchyroll to the table. The Chernin Group took a majority stake in Crunchyroll—an anime video distributor—last December.

Both companies are well aware of the fact that more than 50% of Internet traffic today is driven by video. So it stands to reason that AT&T will have to upgrade its ports to provide decent performance for a streaming video service. Netflix CEO Reed Hastings took the ISP to task in his quarterly letter to shareholders Monday afternoon, essentially outing AT&T for its crappy service (before it can strong-arm Netflix into paying a toll for better streaming quality a la Comcast).

“The surprising news is that AT&T fiber-based U-verse has lower performance than many DSL ISPs, such as Frontier, CenturyLink & Windstream,” writes Hastings. “The 249 customer comments on AT&T’s anti-Netflix blog post indicate that AT&T customers expect a good quality Netflix experience given how much they pay AT&T for their Internet service. It is free and easy for AT&T to interconnect directly with Netflix and quickly improve their customers’ experience, should AT&T so desire.”

Netflix made a deal with Comcast back in February in which it agreed to pay a “toll” for a direct route to Comcast subscribers, thereby bypassing the clogged tubes that were causing major delays and hiccups in Netflix’s streamed content.

Image source: phandroid