Off the Beaten Path: Niche Subscription Video Services Between Boom and Bubble

Niche subscription video services are launching at record speed. Can all of them survive?

Are you a fan of horror movies? Anime? Arthouse? British dramas? Whatever your off-the-beaten-path obsession is, there’s a subscription video service just for people like you out there.

Parks Associates estimates that there are now close to 100 video subscription services in the U.S. and Canada. Barely a week goes by without a network or a studio announcing the launch of another subscription service, with many betting on niche programming to establish themselves next to giants like Netflix. But do consumers really want that many standalone services? Or are we about to reach peak niche, with inevitable consolidation ahead?

Ellation CEO Tom Pickett believes that we haven’t seen the end of the niche subscription video boom yet. “We will see even more services launch,” he says, while also cautioning: “Not everyone will be successful. Some will struggle.”

Pickett’s Ellation is the subscription video arm of Otter Media, the joint venture between AT&T and the Chernin Group that’s all about monetizing the niche with paid services. Ellation’s Crunchyroll is leading the charge in this space with more than one million subscribers, which pay around $7 a month for ad-free access to anime shows, including some that aired on Japanese television the day before they debut on the service.

Pickett also cautions others in the industry that Crunchyroll didn’t get where it is overnight. “It took awhile to get traction.” Turning a niche service into a successful business can take multiple years, he argues. “You shouldn’t expect instant success out of the gate.”

Data about some of the smaller subscription video services is often hard to come by. Acorn TV, which has been offering British TV fare for a fee since 2013, said this January that it had ended the previous year with 430,000 subscribers. Rooster Teeth, which produces original content for video game fans and also belongs to Otter Media, claims to have 200,000 paying subscribers.

Cinedigm, which runs three subscription services including the Dove Channel, has 3.5 million users and more than 80,000 paying subscribers across its portfolio. The Urban Movie Channel, which is run by the same company that also owns Acorn TV, reached 20,000 subscribers by the end of 2016.

Many others aren’t sharing any metrics at all. Absent of official numbers, some clues can be won from the performance of mobile apps of subscription video providers on Apple’s and Google’s app stores. Data shared with Variety by app analytics company App Annie shows that the niche subscription segment is unsurprisingly being led by Crunchyroll, followed by Fullscreen and NBC’s comedy subscription service Seeso. Korean drama service DramaFever, the Lifetime Movie Club, and the Dove Channel all fared well in 2016 as well, but plenty of others barely make a blip.

Mobile app rankings are admittedly an incomplete measure for a video service’s success, in part because many of them also have dedicated apps for streaming devices like Roku and Apple TV.

But App Annie’s data still gives us some general idea of how different services stack up against each other. Shudder, for example, an AMC-backed subscription service for horror fare, was only the 911th-most-popular iOS entertainment app in 2016, and didn’t even make it into the top 1000 of entertainment apps on Google Play that same year. Crunchyroll, on the other hand, was able to capture spot 71 and 62 in the entertainment app categories of both app stores, respectively.

Some of these differences have to do with different upsell models. Shudder asks all of its subscribers to pay up after a week of free trial. Crunchyroll, however, has a free, ad-supported tier that allows users to stream content without having to pay for it. That’s a crucial approach to deal with churn as well, believes Cinedigm EVP Erick Opeka. “It’s important to bolster subscriptions with other revenue streams. That’s why I prefer a hybrid advertising and subscription model.”

Here’s another aspect that makes Crunchyroll work: It has successfully tapped into an existing audience with a huge hunger for content. Anime viewers are self-identified fans that flock to conventions, complete with costumes and photo opps. Before Crunchyroll, anime viewers would often pirate their favorite shows, and spend hours subtitling each and every episode to serve their community.

“The category that we started with has something going for it,” admits Pickett. He’s convinced that there are similar opportunities in other categories, but implores anyone looking to launch a service to find areas of untapped demand first. “You have to think about: is what you are offering scarce?”

Creating scarcity, long a proven strategy for media companies like Disney and its mythical vault, may not work in the niche. That’s a lesson that short-form video subscription service Vessel learned the hard way last year. Vessel, which was founded by former Hulu CEO Jason Kilar, was trying to convince fans of YouTube stars to pay for early access to new videos from their idols.

The idea had some early buy-in from notable YouTubers looking for an additional revenue stream, but it never took off with consumers. Vessel closed its doors late last year, and sold its assets to Verizon, which is now using the Vessel team to re-build its own Go90 video service. Separately, Verizon decided in February that it was not going forward with plans to launch a dedicated subscription video service for the tween audience of its AwesomenessTV multi-channel network.

One of the key questions for niche players is how many services consumers are really willing to subscribe to at any given time — a question that also has implications for the ongoing discussion around cord cutting and unbundling. “If you don’t subscribe to cable, there is quite a big amount of money on the table,” believes Pickett.

He’s getting support for this argument from BTIG analyst Rich Greenfield, who has long been touting the end of the traditional TV bundle. “If you end up not spending $80 on live TV, it frees up a lot of meaningful wallet share to spend,” Greenfield believes. “There are lots of opportunities for new services to exist.”

But many consumers do subscribe to Netflix. Chances are, they may also pay for another service promising access to shows from major TV networks, be it Amazon Video, Hulu, or HBO Now. There may not be that many consumers willing to open their wallets for additional services. A 2016 study from Parks Associates suggests that only five percent of all broadband consumers pay for a video service other than Netflix, Amazon and Hulu.

“Consumers are interested in VOD, they just don’t want to pay more for more content,” says Tubi TV CEO Farhad Massoudi, whose company instead bets on ad-supported viewing of movies and TV shows. Massoudi is a firm believer that ads are the way to go to grow next to giants like Netflix, and he also thinks that many of the new players are underestimating the challenges. “Subscription VOD services are going to be expensive,” he argues, with licensing, technology development and customer acquisition costs quickly adding up. “They’re going to have trouble scaling.”

Ellation’s Pickett actually agrees with part of that premise. Technology development and marketing can be challenging for newcomers, he admits. That’s why Ellation unveiled its own video platform play last summer. VRV, as the platform is being called, promises subscribers easy access to content they may like for a low monthly fee — a kind of new bundle, if you will. Currently, VRV sells access to Crunchyroll, Rooster Teeth, Funimation, Nerdist, Cartoon Hangover and a handful of other channels for a total of $10 per month.

Subscribers can then add other channels, including NBC’s Seeso comedy channel, on an a la carte basis and watch all of the programming through a single app. Ellation hasn’t given any official subscriber numbers yet, and App Annie numbers don’t exactly suggest a huge mobile audience — but Pickett remains optimistic: “We are very happy with the launch.”

Asked how VRV can sell ten channels for just $3 more than Crunchyroll charges its own subscribers on a standalone basis, he quipped: “It’s all about scale. The goal is to get to a much bigger scale together.”

VRV isn’t the only one looking to grow the niche through aggregation. Amazon is reselling a number of niche video services via its channels program, which allows consumers to subscribe to the likes of Shudder and Fullscreen with just a few clicks from Amaon’s Fire TV devices. Amazon has not released any sales numbers for individual channels, but a spokesperson told Variety that the program has “millions of subscriptions” in aggregate to the roughly 100 services offered through Channels.

Still, some of the services are wary of handing over the keys to their kingdom to Amazon. That’s in part because a program like Channels provides Amazon with a lot of actionable intelligence — data the company could use at any point to cut out niche players.

That fear isn’t unfounded. Not only is Amazon continuously looking for new content to license for Prime Video, the company also launched its own standalone anime video service in January. There’s little to stop the company from doing the same for other popular niche genres.

Netflix poses similar dangers for niche players, believes Massoudi. “Giants like Netflix will eventually make deals to buy up their rights.” That’s why some of the more successful niche services are now starting to move upstream. Crunchyroll, DramaFever and Acorn TV all have begun to produce their own originals, and licensing deals are increasingly on an exclusive basis.

The next step for the niche players may just be to embrace traditional television, but with an internet twist, believes Opeka. His company has been talking to some of the new internet TV services, which offer consumers skinny bundles of TV networks for $20 to $35 per month. For these services, partnering with an online niche player can be a win-win scenario, especially as they’re looking to shore up their on-demand libraries. “We are providing thousands of hours of content per channel,” Opeka argues — programming that comes at a fraction of the cost of a Viacom channel.

In other words: Some of the more successful niche services could just move full circle — and become part of good old TV again.

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