Who Are the Winners and Losers in Pay TV’s Unbundled Future?

The pay-TV bundle is a gigantic iceberg that’s slowly melting.

As Internet-video options proliferate, consumers will have a growing list of reasons to stop paying $90 or more per month for multichannel television. And the jockeying is now under way among programmers and distributors to prep the life rafts if viewers decide to jump en masse.

A key change in the landscape: Major media companies, after years of resisting the Internet’s pull, have finally decided to step into the brave new over-the-top world, with video delivered not via satellite or cable TV, but through broadband.

Last month, HBO announced plans to bow a stand-alone, broadband-only service in 2015, and CBS launched an over-the-top subscription package with current and past primetime series as well as live-streaming of 14 local stations.

Meanwhile, “virtual pay-TV” providers have gained traction by signing distribution deals that promise slimmer alternatives to existing services. Dish Network has secured pacts with Disney, A+E Networks and Scripps Networks Interactive, granting unprecedented rights for live and on-demand TV streamed over the Internet to various devices. Sony, plotting its own OTT debut in early 2015, has Viacom onboard, and is in talks with other studios; and Verizon Communications has thrown its hat into the ring for a wireless TV bundle tentatively slated to launch in mid-2015, also inking a deal with Viacom.

How quickly these moves might undercut the traditional pay-TV ecosystem is anyone’s guess. But a shift is coming.

“The dominant way people consume television is going to change,” said Robert Levine, author of “Free Ride,” a book about how digital distribution has disrupted content industries. “People don’t know if that change is going to happen in two years or 20 years. But (with the recent announcements), the industry is acknowledging that it’s inevitable.”

The big concern for programmers is that they’ll get stripped out of the bundle, if Internet-delivered video spurs a migration to less-expensive packages or a la carte OTT services. That’s a growing risk as the price of pay-TV packages keeps heading north: The average monthly cable and satellite TV bill in the U.S. has risen 8% in the past two years, from $85.32 in 2012 to $92.61 in 2014, per research firm SNL Kagan.

“Virtual MVPDs, depending on channels and pricing, could cause people to choose smaller bundles,” BTIG Research analyst Rich Greenfield said. And there would be potential losers if that happens. Greenfield recently downgraded Viacom, Discovery Communications and AMC Networks over the prospect of smaller pay-TV packages: “We’re concerned about not everybody making it into the bundle.”

Indeed, ESPN’s motivation for striking a deal for Dish’s forthcoming OTT service was to ensure the sports cabler a place in the lineup. If users trade down to a cheaper package of TV channels, “the good news is, we’re in it,” ESPN president John Skipper said at an industry conference in September.

Should the unbundling of multichannel TV finally kick in, it could impact the nearly $24 billion U.S. distributors are expected to fork over for the rights to carry dozens of networks. And as those healthy growth rates indicate, that would hit content companies hard.
 

The Internet-only services from HBO and CBS are aimed partly to establish beachheads in the OTT arena — but they’re also designed to gain leverage in future negotiations with TV providers, according to analysts.

For CBS, the All Access $5.99-per-month service (which excludes live NFL games) is an attempt to establish a “pricing umbrella” that it will use in the coming years for both retransmission-consent negotiations and compensation negotiations with affiliates, according to RBC Capital Markets analyst David Bank. The idea is to drive retrans fees “to closer to $3 per sub and justify higher reverse compensation — and it just might work,” Bank wrote in a research note.

HBO’s planting of the over-the-top flag “is about protecting the ecosystem and its partners,” said BTIG’s Greenfield. “I don’t think this is going to be like Netflix, where anybody can sign up.” The premium cabler has said it wants to work with broadband providers, to cater to the small (but potentially growing) cadre of consumers who don’t want full-blown TV.

With content costs continuing to rise, particularly for sports, there have been early symptoms of the traditional TV bundle cracking. Dish has dropped several regional sports networks in recent years, and DirecTV refused to offer Time Warner Cable’s SportsNet LA, the cable home of the Dodgers, saying the cost outweighed the benefit. Still, viewers who want a proprietary mix of sports in their channels — like the NFL or MLB networks or certain regional sports nets — may be among the reasons OTT offerings haven’t taken a stronger hold in the marketplace.

But Dish, for one, has identified what it sees as an opportunity to reach younger consumers who are loath to pay for regular cable or satellite TV. The satcaster’s hope is that the service, targeting a $20-$30 monthly price point, will stanch the slow but steady drip of subs cutting the cord or give new reasons to people who would have never signed up for pay TV in the first place.

Still, not even Dish chairman Charlie Ergen, who is said to be passionate about launching the Internet TV service, is sure the strategy will pay off. “We think OTT is a good, smart move. But we’re not absolutely positive,” he said on the company’s second-quarter 2014 earnings call.

A key challenge is delivering a compelling TV package at a price that will hook so-called cord-nevers. High prices are the biggest complaint among pay-TV customers. But so far, economy-priced, slimmed-down TV packages haven’t seen tremendous success among traditional providers.

Last fall, Comcast was the first distributor to introduce a low-cost service that combined HBO with broadband and broadcast TV, an offering aimed at millennials. “I think clearly there is some shifting in the ecosystem, and we are focused on targeting every customer segment,” Comcast Cable president Neil Smit said on the company’s Q3 earnings call. But, he added, the MSO signed up fewer subscribers for the Internet Plus option in the most recent quarter vs. the year-ago period — indicating its narrow appeal.

For Dish, there will be additional encumbrances in launching a virtual pay-TV service. Per its Disney deal for ESPN, ABC and other nets, it’s limited to a single video stream per household. For example, if the kids are watching Disney Channel in the living room on a Roku, that means their older sister can’t watch ESPN on the iPad in the kitchen.

Moreover, the satcaster intends to sell local broadcast TV channels in a separately priced tier, according to sources familiar with its plans. That’s a proposal most broadcasters would spurn. Dish declined to comment.

Sony’s OTT aims are different. The approach is to deliver a full TV lineup that rivals cable or satellite, delivered to its array of connected devices. The company could price its package more attractively than similar bundles, by either subsidizing the content or accepting lower margins. After all, the consumer electronics giant is more interested in selling Bravia HDTVs and PlayStations than it is in minting coin on pay television.

But despite the Sony service’s reportedly snazzy features (it has a “really elegant consumer interface,” according to Viacom topper Philippe Dauman) skeptics wonder how much demand it can attract. “There isn’t a big number of people who will suddenly pay full price for the bundle because it’s now coming through the PlayStation,” said Guggenheim Partners analyst Michael Morris.

Ultimately, the next great leap forward for pay-TV distributors might not be in re-creating the bundle for the Internet. DirecTV and AT&T, the latter of which is in the process of acquiring the satcaster, don’t see promise in putting old wine in new bottles. Rather, they see the next big wave of video entertainment services geared around niche-oriented content subscription.

DirecTV is looking at delivering targeted SVOD bundles “more in the mode of a Netflix,” CEO Mike White said at an investment conference in September. The company is planning to launch a Spanish-language OTT package, with Univision Communications reportedly in the mix. AT&T, for its part, has formed a joint venture with the Chernin Group called Otter Media, whose mission is to invest in, acquire or develop OTT video services.

To be sure, winds of change have blown softly in this biz. The Internet hasn’t destroyed the industry, the way, say, digital music decimated record stores. At best, however, growth has stalled: In 2013, for the first time over a full-year period, U.S. pay-TV subscriptions shrank, according to SNL Kagan. The 251,000 net loss among cable, satellite and telco TV providers was tiny — just 0.25% of the estimated 100.9 million total pay-TV households at year-end, according to the firm.

Between the twin trends of cord-cutting and over-the-top services, something has to give, eventually. What’s different this time around, after years of fretting about the looming specter of people abandoning the bundle? Said analyst Craig Moffett, “The content companies are no longer part of a united front trying to forestall OTT substitution.”

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