Pay-TV’s Rising Sea Of Troubles

Change comes slowly, and then all at once. And it’s coming now to the pay-TV business.

For years — even as technology-driven disruption ravaged the music, publishing, and other media industries — the traditional pay-TV bundle largely held together despite a trickling away of subscribers to cord-cutting.

A big reason it hasn’t fallen apart until now is that programmers and operators shared in interest in keeping it together, even as they regularly clashed over carriage renewals. For programmers, bundling channels into a single carriage deal brings in incremental affiliate fees and increases advertising inventory; for operators, the big bundle helps sustain high ARPU rates and long-term subscriber contracts. Neither side had an incentive to fundamentally alter the structure of the business.

Even the emergence of over-the-top “skinny” bundles proved less disruptive than many expected as programmers successfully pushed OTT providers to fatten up their skinny offerings and raise prices to levels nearly comparable to traditional pay-TV subscriptions.

But the trickle of cord-cutting has now become a flood. And as the water rises programmers and operators have begun to turn on each other in earnest.

DirecTV-parent AT&T warned in an SEC filing this week that it lost 390,000 subscribers from its satellite and U-verse fiber-optic TV services in the the third quarter — far more than even the most bearish analysts had expected. While the telco made up some of that ground with the additional of 300,000 subscribers to its DirecTV Now OTT service, that still represents a trading-down in ARPU and exposed a growing rift between programmers and operators over the future of the business.

Viacom this week which is locked in a carriage-renewal standoff with Charter Communications, accused the No. 2 cable operator of trying to prevent Viacom from making deals with over-the-top distributors that compete with Charter.

“Among the issues we face is Charter’s attempt to inhibit the creation of smaller, more innovative and less expensive packages of the networks customers want, by penalizing Viacom if it participates in new skinny bundles or OTT streaming platforms,” CEO Bob Bakish said in a memo to employees obtained by Bloomberg News.

Meanwhile, the American Cable Association, which represents small operators, is accusing Comcast of trying to prevent ACA members from creating their own, sports-free skinny bundles that exclude regional sports networks such as those owned by Comcast in Philadelphia, Boston, Chicago, and other markets.

“Those salad days of fat bundles, automatic carriage renewals and customary affiliate steps ups are long gone,” Citigroup Inc. analyst Jason Bazinet wrote in a note this week. “Today, every media and cable firm is jockeying for self-preservation.”

That’s just what disruption looks like.

Skinny Bundles vs. Set-Top A La Carte

Having resigned themselves to a future defined by cord-cutting, TV programmers are desperately trying to hold the line on bundling. The virtual-MVPD movement started by Dish Network’s Sling TV service began by trying to split the difference between the bloated traditional pay-TV bundle and true a la carte by offering a slimmed down package of channels at a lower price.

Since then, as more vMVPDs have launched to challenge Sling programmers have used their leverage to push up both the heft of the bundles and price tag, to where “skinny” bundles increasingly resemble what they aimed to replace, albeit at a somewhat reduced price.

That strategy isn’t cutting it with many cord-cutters, however. According to MoffettNathanson analyst Craig Moffett, virtual-MVPD subscriptions are so far making up only about 60 percent of the losses from consumers cutting the traditional cord, a trend Barclays analyst Kannan Venkateshwar sees continuing. Over the next decade, Venkateshwar projects, 31 million traditional pay-TV subscribers will cut the cord, but only 17 million will sign up for an internet-delivered bundle.

Assuming internet-delivered bundles are still around in a decade, that is. “Most of these [vMVPD] businesses are at best break-even or money losers,” Moffett told Bloomberg. “This is shaping up to be a truly lousy business.”

The a la carte on-demand subscription business, on the other hand, is shaping up nicely. Set-top streaming box maker Roku this month reported 15 million active monthly accounts, a 43 percent year-over-year increase and more than all virtual-MVPDs combined. The privately held company generated nearly $400 million in revenue in 2016 and reportedly is preparing to file for an initial public offering later this year at a roughly $1 billion valuation.

Notably roughly $100 of that $400 million in revenue last year came not from hardware sales but from its media and licensing business, which includes ad sales on Roku channels and fees it charges networks to be featured on the platform.

Roku isn’t alone on the set-top, either. According to eMarketer, Roku 38.9 million Americans will use Roku at least once a month in 2017 (including multiple users per active account), up 19 percent over last year, followed closely by Google’s Chromecast, at 36.9 million, and Amazon’s Fire TV, at 35.8 million.

One reason for that growth in connected-device usage is the growth in the number of U.S. households subscribing to more than one over-the-top subscription VOD service.

According to a recent study by Hub Entertainment Research 38 percent of U.S. TV households now subscribe to two or more SVOD services such as Netflix, Amazon and Hulu. That’s up from 26 percent last year. Some 14 percent of households subscribe to all three major services, up from 6 percent a year ago.

Not all of those SVOD subscribers have cut the cord, of course, but anyone who is subscribing to all three major services is paying about as much per month for them as they would for a skinny bundle. If consumers can be said to vote with their dollars they’re voting for a future that is on-demand and a la carte, not just over-the-top.