Online TV: The Future Has Arrived — And It May Be Less Profitable

29 May, 2017 By: Erik Gruenwedel

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When Hulu in early May rolled out Hulu Live TV, it marked a turning point for the nascent online TV market, which really kicked off in 2015 with Dish Network’s Sling TV.

Backed by corporate parents Disney, Fox, Comcast and Time Warner, Hulu Live TV follows launches of AT&T’s DirecTV Now and Google’s YouTube TV — all in response to consumers cutting the traditional pay-TV cord for less-expensive options on the Web.

Other online TV players include Sony’s PlayStation Vue and Charter Communications’ Spectrum TV Plus. Apple is reportedly planning to expand Apple TV beyond its current OTT video platform.

“By bringing together thousands of live, on-demand and library shows and movies — and serving them up in a uniquely personalized way — Hulu can now be a viewer’s primary source of television,” CEO Mike Hopkins said at launch. “It’s a natural extension of our [over-the-top video] business.”

Indeed, Disney, CBS and Time Warner have quietly sought to align their premium TV networks as must-have channels in the online TV space. As a result, most services include ESPN, TNT, TBS, CNN, Fox, NBC and CBS.

“As people shift from one way of watching [TV] to another, we will be there,” CBS boss Les Moonves told analysts in February.

While media giants consider Hulu Live TV complementary to pay-TV, it’s safe to assume online TV is both savior and disruptor to an industry scrambling to find a digital solution. Attempts to retain (and attract) traditional subscribers via TV Everywhere have largely failed. At the same time, online TV — which offers smaller, customized channel bundles with no annual contract — continues to build momentum. The first quarter saw the largest-recorded quarterly drop in pay-TV subs — an estimated 762,000, about five times the loss from the previous-year period, according to analyst firm MoffettNathanson.

“It leaves the pay-TV subscriber universe shrinking at its worst ever annual rate of decline (2.4%),” Craig Moffett and Michael Nathanson wrote in a May 3 note. “The pay-TV industry wasn’t very good at changing … so it resisted change as long as it could.”

And change it has.

The number of domestic households with a broadband Internet connection and no linear pay-TV service grew by 2 million in 2016, according to SNL Kagan, a unit of S&P Global Market Intelligence. Broadband-only households now represent 13% of total U.S. homes. In other words, one out of six broadband homes makes the decision not to take a traditional multichannel TV package. Kagan projects the number of broadband-only homes will reach 28 million by 2021 as the federal government ups efforts to promote high-speed Internet access in rural areas of the country. At the end of last year, nearly 29.5 million U.S. households that do watch TV did not subscribe to high-speed data.

The ESPN Factor

Perhaps no brand rules pay-TV more clearly than sports network ESPN, and its kingdom is under attack. It has lost about 12 million pay-TV subs in the past six years as consumers have cut the cord. The network reportedly charges distributors $7.21 monthly per subscriber — the most expensive in pay-TV. Disney CEO Bob Iger believes that revenue stream can be replicated online. Speaking on Disney’s recent fiscal call, he noted about 80% of ESPN viewers access the network via portable devices. The network’s mobile apps reach a monthly audience of about 23 million unique users, he said.

“Consumer response to these offerings is very encouraging,” Iger said. “From a per-sub pricing standpoint, these new services are just as valuable to us as traditional platforms.”

Double-Edged Sword

Since online TV’s launch two years ago, the market has generated a lot of buzz and little hard data. Corporate backers refuse to divulge actual subscriber data, citing competitive reasons in a fledgling market.

Sling TV has fewer than 1.5 million subs, according to analysts, while AT&T said DirecTV Now sub gains in Q1 weren’t enough to offset slumping U-verse pay-TV subs — reported at 233,000 video subs.

And the hemorrhaging continues.

The Diffusion Group found 22% of broadband homes shunned pay-TV in 2016 — with the number of homes not subscribing to pay-TV exceeding 22 million.

“Wall Street and the media are myopically focused on the quarterly drip of pay-TV subscribers, which unfortunately overlooks a larger and more dangerous trend,” said Michael Greeson, director of research at TDG. “Where broadband [and broadband video] goes, pay-TV subs will increasingly decline. This is indeed what has transpired.”

Michael Pachter, media analyst with Wedbush Securities in Los Angeles, contends unbundling the pay-TV ecosystem is short-sighted.

“I think content owners are making a mistake,” he said. “Giving a customer the option to buy TV programming a-la-carte cuts into the revenue stream from compelled channel bundles. It appears they’re embracing cord-cutting by hoping they can make up [the shortfall] from cord-nevers (consumers who have never paid for TV).”

Meanwhile, Comcast, which co-owns Hulu Live TV and is readying a proprietary online TV service, remains noncommittal about the market’s potential. Speaking May 22 at the 45th J.P. Morgan Global Technology, Media and Telecom confab in Boston, CFO Mike Cavanaugh said industry players offering online TV packages are doing so at unsustainable price points.

“And the [fiscal] losses are going to get bigger, or the prices [to subscribers] are going to go up as programming costs rise,” Cavanaugh said.

It’s a sentiment the company reiterated recently at the fourth annual MoffettNathanson Media & Communications Summit in New York, where Comcast Cable CEO Dave Watson said margins associated with online TV are slim to none.

“Every time we look at the business model outside our [cable TV] footprint, it just doesn’t make sense,” Watson said.

Dish Network CEO Charlie Ergen, whose company launched Sling TV, on the company fiscal call suggested pay-TV operators’ willingness to roll out digital services was a scramble to lose money.

“My belief is that OTT video will take share away from pay-TV,” he said. “So satellite and cable will be smaller five years from now than they are today. You’re already seeing that reduction [in satellite] … and phone companies; you’ve seen reductions really for the last couple of years.”

Indeed, Verizon lost 13,000 FiOS Video subs in the quarter. The telecom added 43,000 video subs in the previous-year period. On the company’s fiscal call, CFO Matt Ellis attributed the video sub decline to ongoing changes in consumer video consumption habits.

“Losses were indicative of softer demand for linear video due to the increase in over-the-top offerings and mobile video consumption,” Ellis said.

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Online TV Tale of the Tape

Regardless of the economic merits, online TV hangs its hat on inexpensive channel bundles without long-term contracts. New upgrades include cloud-based DVR, multi-user streaming options, local broadcast affiliate programing and premium channel offerings, including HBO, Showtime and Starz. Here is a select list of top offerings:

• DirecTV Now (from $35) — 100 Channels (no DVR, VOD functionality, two simultaneous streams, pause-only function, three-day replay, search function, no parental control)
The service added an electronic sellthrough option for movies and TV shows. Purchased content is accessible only with valid DirecTV Now subscription. Special promotion includes The Lego Batman Movie for $7.99, or free when applying $10 credit for first-time EST purchase.

• PlayStation Vue (from $40) — 45 channels (DVR storage for 28 days; pause, rewind and fast-forward function; five simultaneous streams; search function; access to local ABC, CBS, Fox and NBC channels in select cities)
Includes multi-view functionality, “channel favoriting,” which allows users to see their favorite channels upfront when signing on; and access to more than 50 TV Everywhere apps. 

• Sling TV (from $20) — 30 channels, (DVR in beta, parental control, one or three simultaneous streams, seven TV Everywhere apps, search function with guide, filters and personalized recommendations)
Sling TV subscribers can choose their favorite premium and “extras” channels from genres such as sports, comedy, kids, news and movies, among others. Dubbed “a-la-carte-TV,” the concept applies to Sling Orange (single-stream) and Blue (multi-stream) subscribers as well as Spanish-language and international platforms. Users must subscribe to a core Sling plan to personalize additional premium and extras channel selections.
“Today, four-out-of-five pay-TV subs want [more personal choice],” said Sling TV CEO Roger Lynch. “It may be a different class of customers coming into the market, spurred by big TV bundles that have launched [online]. We’re definitely seeing customers who are taking more add-on packs that are certainly correlated with that.”

• YouTube TV (from $35) — 45 channels (DVR storage, access to YouTube Red OTT service, six accounts per household)
Currently available in New York, Los Angeles, the San Francisco Bay Area, Chicago and Philadelphia. Upgrades include app enabling support of Apple AirPlay, and streaming content from an iPhone or iPad to Apple TV.

• Hulu Live TV (from $40) — 50 channels (DVR storage, access to Hulu OTT)
Features include an app notifying viewers whether they are caught up or if there is an unwatched episode of a particular show. “New episode badging” notifies viewers regarding programming updates in their favorite list and browsed collections. “Disable autoplay” enables viewers to stop a series from automatically streaming the next episode.
Hulu Live TV is available on iPhone, iPad, Android devices, Xbox One, Apple TV (4th generation) and Google Chromecast. It is slated to be available on Amazon Fire TV, Roku, Samsung TVs and Blu-ray Disc players, Macs and PCs.

• Charter Spectrum TV Plus ($20) — 20 channels (no DVR and limited to Charter broadband-only subscribers, includes free Roku 3 player)
Limited to Charter broadband-only subs and not widely marketed.
 

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