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September 15, 2017

Trial by Fire

In a suddenly heated market, more than a dozen virtual pay-TV services are battling for dominance. While analysts question who’ll be cast off the island, some are siding quietly with Hulu Live.

Daniel Frankel
  • Photoillustration by Todd Reublin

Like the wily young attention-seekers nail-biting their way through an elimination round on your favorite reality- competition show, the backers of TV’s new breed of service know they face a tough battle to survive over the next few years.

You may know that new breed as live-streamed, virtual pay-TV providers, also known as skinny bundles. Indeed, skinny bundles of live-streamed cable and broadcast channels are hot, already siphoning thousands of users away from traditional pay-TV services.

And suddenly, the field of competitors has swelled to well over a dozen and counting, with early entries Sling TV and PlayStation Vue now competing with YouTube Unplugged, DirecTV Now and Hulu Live, as well as upstarts like fuboTV and CenturyLink Stream.

With each of these services vying for the same market of around 20 million cord cutters and early adopters, they won’t all make it.

“I think over the next 36 to 48 months, we’re going to see a highly volatile period of entry and exits. People are going to move out, and new people will move in,” Ben Smith says. He’s senior vice-president and head of experience for Hulu, which launched its own virtual pay-TV service, Hulu Live — officially called Hulu with Live TV — in April.

Of course, we’re not seeing a lot of exits yet. But we’re sure seeing a lot of so-called virtual MVPDs, or v-MVPDs, enter the market. An MVPD is a multichannel video programming provider (the official term for cable, satellite and telco TV companies).

The first such services, Dish Networks’ Sling TV and Sony’s PlayStation Vue, debuted as recently as 2015, offering TV without $150 monthly bills, two-year contracts and power-hungry leased set-top boxes — to say nothing of strangers bearing drills and following variable schedules.

These groundbreaking virtual offerings have triggered a bit of a TV technology gold rush. They combine the elements people love about subscription video-on-demand (SVOD) services like Netflix — watch what you want on any device, cancel anytime you want and sign right back up again — with the stuff they still like about cable and satellite: you can watch your favorite channels live, pause and even record them.

Offering ESPN, TNT, AMC and a number of other top cable channels, all for just $20 a month (with no contracts, plus instant Netflix-like cancellation and sign-up), Sling TV grew fast, gathering 2 million subscribers. ComScore says that’s more subs than any other v-MVPD.

Late last year, the market got a bit more crowded when AT&T launched DirecTV Now, which let users tap into more than 60 channels, including ABC, Fox and NBC, for $35 a month. Debuting on November 30, DirecTV gathered nearly 200,000 sign-ups before New Year’s Day.

This past spring, online video stalwarts YouTube and Hulu joined the v-MVPD race. YouTube TV and Hulu Live each combine their parent’s existing on-demand business with more traditional-looking pay-TV bundling.

Cable giants Comcast and Charter, meanwhile, are testing streamed skinny bundles specifically aimed at customers of their broadband services. Notably, Charter’s Spectrum Stream turns ESPN and other pricey sports channels into add-ons, hoping to undercut the market with an entertainment-only skinny bundle priced at less than $20 a month.

And a number of other smaller v-MVPD services have either launched or are about to. For example, the country’s sixth-largest wireless carrier, Mississippi-based C Spire, is marketing within its footprint a streaming bundle of more than 104 channels for $65 a month. That service, a white-label version of MobiTV, will soon support other virtual pay-TV services.

Even in their nascent stages, these services have had a huge impact on the TV ecosystem. According to comScore, DirecTV Now commands more usage per customer than any over-the-top (OTT) service, even Netflix, with users averaging 81 hours of streaming a month. Sling TV comes in second, with users averaging 69 hours per month. (Of course, that’s “per user” — with almost 100 million subscribers, Netflix still has a vastly bigger audience.)

The sudden rise of virtual services has taken plenty of customers away from traditional cable, satellite and telco TV services, which lost more than 760,000 pay-TV customers in the first quarter of this year alone.

Never mind the confusion all of this creates for tv fans, who have to sift through all the virtual services to find the one that suits them best. The media chessboard has become more convoluted as well.

The stakes are huge. Just look at the SVOD market dominated by Netflix, Amazon and Hulu. It’s really only about five years old, but it’s quite saturated, with nearly 100 niche services vying for crumbs.

The market is no longer growing, and it’s somewhat impenetrable to outsiders looking to make a big splash. For example, after kicking the tires on a possible SVOD service that would compete with the Big Three, Vimeo — a well-established online video company owned by Barry Diller’s InterActiveCorp — gave up and walked away.

As for the clear winner of the SVOD race, Netflix is now worth nearly $65 billion on Wall Street. That’s more than CBS Corporation and Viacom combined.

While each v-MVPD approaches the market slightly differently, they all offer pretty much the same thing: the top broadcast and cable channels, give or take a few networks, with a few frills like cloud-based DVR thrown in. Most charge less than $50 a month.

“Over the past year, there has been a frenzied rush to launch virtual MVPDs that would attract incremental subscribers and offset the declines of the pay-TV world,” says Craig Moffett, a senior research analyst at New York–based MoffettNathanson. “However, all these attempts have essentially re-created the same bundle of broadcast networks and their affiliated cable networks at a similar $35 to $40 entry-level price point.”

And the margins are razor-thin compared to traditional pay-TV services — as low as 2 percent for some services, once content licensing and technology costs are factored in, Moffett says. He and other analysts believe the winner of the virtual pay-TV race might not actually be a pay-TV company.

The assets held by the services’ backers make all the difference. That’s why analysts are particularly intrigued by v-MVPD offerings from Hulu.

The company combines the power of a huge library of SVOD TV shows and movies with a substantial investment in original programming and — of course — backing from the leading programmers themselves. That’s how it’s able to deliver a virtual offering that no pay-TV operator ever could: Hulu is jointly owned by 21st Century Fox, Comcast/NBCUniversal, Disney and Time Warner Inc.

“Those who benefit in other ways and have a larger platform where they can make money from other services, products, et cetera,” have a distinct advantage in the v-MVPD race, says Frost & Sullivan analyst Dan Rayburn.

Based on the generally low profitability of v-MVPDs, Moffett wonders why companies like Dish Network and DirecTV are willing to compromise their more profitable satellite TV businesses. But the motivation behind Hulu’s entry into the virtual market is far more obvious, he says.

“If successful, Hulu will accelerate the ‘have’ and ‘have-not’ dichotomy of the industry,” Moffett continues, “accelerate the addressable advertising model and create a competitor to existing MVPDs, which are required to keep paying up for Hulu owners’ content.”

For $39.99 a month, a Hulu Live user can live-stream more than 50 channels, including each of the Big Four broadcast networks in the increasing number of TV markets in which Hulu has carved out a deal with the local stations.

Top cable channels including ESPN, CNN, TNT, FX and USA are included, as is a cloud DVR that lets the user pause and record up to 50 HD hours. HBO and Showtime can be added at the usual premium charge.

And here’s the value-add no other live-streaming service can provide: Hulu includes its SVOD service in the $40-a-month offering. Hulu says its virtual service is still in beta test mode, so for now, it’s not releasing any data on subscribers. But analysts see the combination of live and on-demand as a compelling proposition.

“Hulu is in a very interesting position,” says Brett Sappington, senior director of research for Parks Associates, a Dallas-based research and consulting firm. “For many years, TV network owners were reluctant to launch their own OTT video services due to fears of angering their cash cow, the traditional pay-TV providers.”

Not only does Hulu Live provide its owners with a hedge against cord-cutters, it also gives them leverage in network licensing negotiations with pay-TV operators, Sappington notes.

“Because Hulu is owned by several of the leading U.S. TV networks, pay-TV providers cannot easily threaten to drop their networks without hurting their own base of subscribers. In fact, doing so would drive those subscribers right into the hands of Hulu or other v-MVPDs.”

Hulu’s Smith, meanwhile, concedes that having top executives from networks like Fox and ABC on its board of directors does provide an edge. “I think we are able to start some conversations faster,” he says.

Industry watchers are also closely observing YouTube TV, which has branched out into almost all the major U.S. TV markets with a service that includes most of the same networks as Hulu Live, all for $35 a month. Notably, YouTube TV also lets six members of a subscribing household use the service at the same time. (Most other v-MVPDs allow just two simultaneous users.)

“YouTube itself isn’t going anywhere, but they could easily get bored with the [subscription TV business] and go back to just streaming free stuff,” suggests Joel Espelien, an analyst at The Diffusion Group, a think tank in Plano, Texas.

Amazon, of course, would seem to have many of the same vertically integrated advantages as Hulu and YouTube, but the retail giant has taken an alternate path to channel bundling.

Sappington likes DirecTV Now’s chances, noting that its corporate parent, AT&T, can leverage the power of its landline and mobile internet assets, not to mention its investments in online media companies such as Fullscreen and its parent, Otter Media. And AT&T might soon have the full backing of Time Warner, Inc., if the federal government approves its $84.5 billion bid to acquire the media conglomerate.

After a hot start, DirecTV Now hit the rocks. AT&T executives said the initial rush of subscribers caught them “flat-footed” in terms of dealing with early technical issues. AT&T stopped promoting the service in January to fix the bugs, and the virtual platform’s growth stalled.

AT&T has recently started promoting DirecTV Now again, offering a free Roku box to users who prepay for two months of service. Only time will tell if the platform can recapture its early momentum.

Then there are the early entries, playstation vue and Sling TV. Diffusion Group’s Espelien has been bearish on Vue since it launched in 2014. Vue’s entry-level “Access” tier is priced right at $40 a month and offers the core channels. But more than two years after launch, the Sony service lags far behind Sling TV, which launched at roughly the same time. (Sony hasn’t released an official tally, but most analysts peg the Vue subscriber base at under 1 million.)

As for Sling TV, its flexible, modular format provides a base collection of major cable channels for just $20, with other networks available at incremental additional costs. This approach is still seen as a winning combination.

“Sling provides one of the strongest budget OTT offerings to a budget-conscious marketplace,” says Sappington. “Dish has already iterated its products several times to find the right mix.”

When it comes to this relatively new area of TV tech, a lot of “iteration” lies ahead. “This is probably the most interesting time in the TV business since the rollout of cable and satellite,” Hulu’s Smith says. “There’s a tremendous opportunity right now to build things. I think the world of TV will look very different in 2020 than it does today.”

This article originally appeared in emmy magazine, Issue No. 7, 2017

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