The circle of life for TV networks has always been carriage deal ends, rates go up.
It may seem strange that this has remained the same during the continued decline of pay TV subscriptions — as of July, down by -4.3% (or -3.4 million subscribers) across MVPDs and VMVPDs — yet in the last 12 months, TV networks have performed the equivalent of the magician pulling a rabbit from an empty hat and increased affiliate fee revenues by 6.3%, or $805.5 million.
This is at the heart of the current standoff between NBCUniversal and VMVPD service YouTube TV. NBCU is looking for the customary increase for a new deal, as well as reportedly initially demanding Peacock be bundled with its channels, and YouTube is saying no.
A main reason behind this is that the VMVPD market is slowing down. The first two quarters of 2021 posted two of the three lowest quarterly growth rates since the beginning of 2016.
Alphabet last released a YouTube TV subscriber count in October 2020, with 3.25 million subscribers noted as of Q3 2020. The conspicuous lack of announcements in the three quarters reported since then suggests YouTube TV is experiencing the slowdown in growth impacting the overall market.
A key reason for slowing growth is that the average price of VMVPDs keeps increasing. When the cost of VMVPD service and broadband is almost, if not equal to, the cost of cable TV and broadband, barriers to switching increase. Given YouTube TV is more expensive than the average VMVPD package at $65 a month, execs will be desperate to avoid going even further over.
Hulu’s VMVPD service provides a cautionary tale. The service has kept adding networks and has had to raise prices several times since the beginning of 2019. The most recent hike, up $10 to $65 in December 2020, has seen subscribers fall every quarter since.
It is not just the wish to avoid a price hike that’s driving YouTube TV’s rejection of NBCU’s planned carriage increase. Like many traditional media companies late to the streaming game, NBCU has been devaluing its linear TV business by diverting resources to new streaming services. This has the knock-on effect of making its networks less essential to consumers and on the negotiating table.
NBCU hasn’t helped by making its crown jewel, NFL "Sunday Night Football," available on Peacock for $5 a month (or free to Xfinity broadband subscribers). By robbing network TV of exclusive content in order to try to drive subscribers for a streaming service, the networks become less valuable, which is sure to be part of YouTube TV’s counterargument.
Add in the wrinkle that NBCU was trying to boost Peacock's user numbers by including paid carriage of the service, and you can see why YouTube TV balked, lest it be subjected to every other media-owned SVOD being carried in future negotiations. It also is an admission on NBCU's part that the full NBCU experience is no longer available via TV alone, but viewers should still pay more for the diminishing returns available to them.
It’s hard to see an easy compromise being reached. YouTube TV has already gone on record to say it will lower the monthly subscription by $10 should NBCU’s networks be blacked out, suggesting it expects this outcome. Neither will want to back down: NBCU for the precedent being set to other pay TV providers and YouTube for fear of driving up subscriber losses.
It is due time for media companies to realize they can’t have their cake and eat it too in a world with shrinking customers yet increased revenues. YouTube TV is just the beginning, with this pattern set to continue with every round of negotiations. The sooner TV networks come to terms with the reality they’ve been staring at for years, the better it will be for consumers. The question is, how long will they be able to drag out this charade.
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