The future of paid-for television is often characterised as a face off between high-priced big bundle PayTV providers (typically US$60 to US$100 per month) and low-priced internet-enabled SVOD services like Netflix (circa US$6 to US$10 per month). But, writes Andy Fry, the reality is that the market is far more subtle and sophisticated than this.
For a start, OTT services like Netflix are generally bought as adjuncts to PayTV rather than cheap alternatives. While a small percentage of the population in developed markets is ditching multichannel PayTV and making SVOD their primary entertainment purchase, a growing number of households are willing to buy multiple SVOD services in addition to their main PayTV subscription.
Research from Park Associates, for example, suggests that one-third of US broadband households now subscribe to multiple OTT services – ranging from general entertainment services like Netflix, Amazon and Hulu through to highly-targeted niche services such as WWE and Crunchyroll.
When you reflect on why this is so, you reach the inevitable conclusion that neither camp is providing the majority of consumers with exactly what they want. Netflix et al are clearly offering people something that has been missing from PayTV. But equally there are things about PayTV that SVOD in isolation can’t satisfy - such as live, watercooler experiences and the ability to randomly channel hop in search of new content.
Traditional PayTV providers have responded to the Netflix threat by trying to co-opt it or kill it off. So in the case of Liberty Global-owned cable TV services, Netflix is now offered within the framework of their PayTV ecosystem – so you can have your cake and eat it. In the context of Sky, by contrast, the emphasis has been on creating a hybrid linear/SVOD service that renders the need for Netflix redundant. So you can access all kinds of box set, catch up and on-demand content – but you won't see the word Netflix anywhere on the Sky platform.
All of the above begs an obvious question: if Netflix is not regarded by most end-users as a low-cost alternative to PayTV, is there some other kind of service that could be? Which brings us to SLIN, shorthand for subscription linear services via OTT.
“The skinny bundle is all about offering a smaller number of channels via broadband at a lower price point than traditional PayTV providers”
Tony Gunnarsson, senior analyst at Ovum, has been doing a deep dive into SLIN and identifies four main sub-categories – the most significant of which is the so-called skinny bundle. “The skinny bundle is all about offering a smaller number of channels via broadband at a lower price point than traditional PayTV providers,” he explains. A classic example is Hulu’s new skinny bundle, which launched in the US this summer with 50 channels for $40 per month – compared to the US$80-100 that the US subscribers typically pay for big bundle PayTV.
Unveiling the bundle, Hulu CEO Mike Hopkins said: “Hulu can now be a viewer’s primary source of television”. But just how far does it represent an existential threat to orthodox PayTV?
“The pricing is clearly attractive,” says Gunnarsson, “but what’s also important for skinny bundles is that they must offer the kind of channels that consumers really want to pay for.”
This is a key observation, because many of the PayTV industry’s most popular channel brands have deep-rooted relationships with traditional platform owners that they are reluctant to jeopardise. At the same time, however, they are well aware of the need to get their channels out via new outlets – a pressure exacerbated when they see their rivals doing just that.
At present, the evidence from the US suggests that the latter argument is winning – with many of the leading skinny bundles securing key channels. In the case of Hulu, for example, ABC, CBS, Fox, NBC, ESPN, CNN, TBS, TNT and Disney Channel are all on board. Premium channel Showtime is also available for $9 extra a month – demonstrating that price tiering is not seen as incompatible with the offer of skinny channel bundles. Likewise, Sling TV’s offering starts at $20 per month for a bundle including A&E, AMC, ESPN, History and Disney Channel.
Gunnarsson expects the pressure for channels to join new internet-enabled platforms to build in 2018: “Next year, I’d expect to see some of the US skinny bundles start to announce meaningful subscriber numbers – maybe as high as five million. And that may prove very persuasive for those channels that have so far been reluctant to join these new services.”
"Despite the fees they are charged to include US networks in streaming packages, vMSOs (virtual PayTV operators) have made a better job of reconciling the carriage fees versus revenues per channel equation"
This argument would also appear to be reinforced by recent research from Ampere Analysis which suggests channels will be able to generate more revenue from the new OTT platforms: “Despite the fees they are charged to include US networks in streaming packages, vMSOs (virtual PayTV operators) have made a better job of reconciling the carriage fees versus revenues per channel equation. Taking out the fees associated with the networks, they are still left with revenues of almost double that of traditional PayTV operators. For channels, the shift to streaming and rise of vMSOs looks like a strong plus – providing they have strong enough brands to make the cut.”
While the prospects look good for this new mode of PayTV delivery, it doesn’t necessarily mean that traditional players are going to be the losers, says Gunnarsson, because often they are well-positioned to launch their own skinny bundles. Examples in the US are Dish’s Sling Television and DirecTV’s DirecTV Now. And it’s important not to forget that Hulu, despite its exotic next-generation name, belongs to a combination of shareholders that includes NBC Universal, Fox Entertainment, Disney-ABC and Turner. In other words, he concludes, established players will seek to limit the threat of skinny bundles by operating their own. This may dent revenues in the short term, but it should ensure their long term survival.
Take this debate out into the international market and you don’t see as much activity around the skinny bundle space as in the US. Gunnarsson cites several reasons for this. The first is that the price differential between SVOD and PayTV is not quite so great – thus limiting the SLIN opportunity. Secondly, and more importantly, incumbent PayTV operators were quicker to react to the threat of new skinny bundle operators than their US counterparts. Sky’s Now TV and Viasat’s Viaplay, for example, have both done a decent job of occupying the space that might otherwise be a beachhead for would be rivals.
Thirdly, he says, channels in Europe have not been quite as willing to work with new platforms as their US counterparts – because of their existing carriage relationships: “I often warn clients not to assume that what happens in the US will happen in other regions. For example, Amazon has established a pretty compelling subscription channels offering in the US – but has found it more difficult to sign up big thematic channels to its new Amazon Channels service in the UK and Germany.”
This is not, of course, to suggest that they won't make headway – but it could be over an extended timeframe: “They signed up Discovery – which was a coup,” says Gunnarsson, “so if the skinny bundle model starts to take off in the US and Europe we might see other channels join the platform. Alternatively, we might find that Amazon starts to build up stronger momentum in territories like India, Mexico or Southern Europe first, because the UK and Germany are tougher to penetrate.”
If not Amazon, then Google-owned YouTube is another that may prove capable of mounting an attack on the international market because of its well-established links to consumers. Although YouTube is yet to launch its skinny bundle outside the US, its decision to gear the service towards a mobile-first younger audience may make it a threat to more established players. That said, the difficulty that the company had has in attracting people to its subscription service YouTube Red suggests there is a job to be done in persuading people to take paid for services from a company until now perceived as ‘free’.
History, says Gunnarsson, suggests that the first disruptors to gain traction in Europe might not be US companies at all: “With previous innovations, we’ve often seen a European copycat get into the market before the leading US players (QXL, LoveFilm and Freeserve might all be considered examples of this). I’d expect something similar this time – though couldn't suggest who might be the first to step into that position in the market.”
One way in which internet-delivered skinny bundles might play a key role, says Gunnarsson, is in situations where strong established PayTV players seek to use them as a way of expanding into neighbouring markets. Sky, for example, is well-established in the UK, Ireland, Germany, Austria and Italy but has never entertained the notion of setting up an old school PayTV business in France or Spain.
Now, however, it is using its learnings from Now TV as a way of moving into both markets in a relatively inexpensive way (in France via its investment in Molotov, in Spain via its own streaming service). “In some ways, I’m surprised they haven't done this before now,” says Gunnarsson. “Compared to traditional PayTV, setting up on OTT-based subscription channel business is not that costly.”
Another interesting addition to the debate has been the recent comments of Discovery Communications CEO David Zaslav, who has made no secret of his ambition to take content out to market via new channels – notably direct-to-consumer.
Asked about skinny bundles in a recent conference call, he took the view that the current crop of US examples are actually “overstuffed turkeys” that are still charging too much money and offering too many channels. “Ultimately, there should be a bundle that’s $8, $10, $12 and I believe that will happen. I think these overstuffed turkeys are going to end up being a challenge from a consumer perspective. We as an industry need to complement (Netflix and Amazon) with a quality offering that is a true skinny bundle - but it is just a question of when.”
This comment seems to take aim at services like AT&T-owned DirecTV Now, with its 100 channels for $35 per month offering. But it’s not really clear what an $8-$12 skinny bundle would look like, unless Zaslav is imagining a Discovery-centric service that draws on the best content from across his company’s ever-expanding channel portfolio and tops it up with originals.
All of the above only really refers to Ovum’s first SLIN bucket – ie skinny bundles that could, in theory, be alternatives to established PayTV players. But as Gunnarsson points out there are other forms of SLIN that may impact the market. “We identify three other areas: rights owner direct-to-consumer services (eg from bodies like MLB); broadcaster direct-to-consumer (eg from HBO); and games streamers like Twitch.”
In themselves, these services don't offer the range and depth to threaten established PayTV operators, but combined with Netflix and each other could they represent a viable alternative to big bundle PayTV for some consumers?
“It’s possible,” says Gunnarsson, “but it’s pretty complicated to build that kind of portfolio and could quickly end up costing almost as much as a standard PayTV package.” Most likely, these niche services are going to find themselves involved in some kind of aggregation scenario involving the likes of Amazon, YouTube or Apple.
Overall, Gunnarsson’s view is that there is some scope for disruptors to gain a foothold in the market – but that the established players are probably best-placed to take advantage of the changes currently taking place: “There is a sense in which the new TV is starting to look like the old TV. What we are really seeing with SLIN is something that people have talked about for years, which is the migration of PayTV to internet-based delivery. That opens up opportunities for some new players, but the PayTV platforms are still in a strong position, especially as they are generally offering TV and data bundles.”