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26 November 2015

OTT customers will become more valuable as linear TV declines

By Charles Hall

Internet TV services like the one Dish Network offers are the best way to get Millennial viewers in the pay TV ecosystem, according to Roger Lynch, CEO of Sling TV and EVP of advanced technologies at Dish.

“Don’t let the Millennials and the next generation not get involved in pay TV,” Lynch said, speaking at the company’s recent quarterly earnings call. “Let’s give them a skinnier bundle of channels, but let’s make sure it’s attractive channels and the right price for them.”

Lynch described the traditional linear pay TV business as a “mature to declining” business. “And that ARPU just goes down,” he said, as consumers continue to shift away from linear TV. Dish Networked reported losing 23,000 pay TV subscribers during the last quarter. According to estimates from MoffettNathanson, Dish likely lost 178,000 pay TV subscribers, but gained 155,000 new subscribers for Sling TV. The firm estimates Sling TV has 394,000 subscribers in total. “We hope that an OTT customer today is as valuable or more than a linear TV subscriber we would get today, because the linear model is challenged,” Lynch said

“We realize that, all things being equal, we’ll probably lose subscribers in linear TV,” Lynch said. “We hope we’d gain subscribers in OTT and Sling TV. And when we put those two together, we hope that our subscriber count grows positive in the future as opposed to negative.”

By the same token, pay TV networks are losing subscribers and viewers. Lynch said these content owners are now more open to the idea of distributing content online and in skinny bundles. “We think Sling TV offers a pretty attractive alternative to our content providers for them to get incremental subscribers and get involved in an advertising model that’s more lucrative than linear TV,” Lynch said. “They’re pretty much all interested in that.”

With almost 400,000 subscribers, and the growing popularity of streaming TV services, Lynch seemed optimistic about Sling TV’s growth potential. “I would expect that like any industry, as long as you don’t have those externalities I talked about like with broadband caps, that you will see a traditional S-curve adoption, and we are not even to the first kink of that yet because it’s just too new,” he said.

The trend lines indicate consumers are consuming more and more video on OTT platforms, but there is still a quality gap in terms of image quality between specifically live streaming video over the Internet and watching live video on the TV set.

Sling TV has experienced a number of outages during its nine-month lifespan, though all of those outages affected only a small number of subscribers. The outages occur during the most high-profile TV events, such as NBA games or “Game of Thrones” premiere, when the service is unable to handle the concurrent user load. And live streaming events can also suffer bouts of buffering that tend to irritate viewers. In terms of video quality, there is still a significant gap between live streaming video and live broadcast video.

“Since we have launched, month-over-month, we’ve closed the gap on that, but there is still a gap,” Lynch said. “That’s something that we always have to continue to improve on.”

All streaming platforms are plagued with outages once in a while. Even on-demand services such as Netflix can suffer from things such as poor Wi-Fi, which affects the viewer’s experience. But live video presents its own set of problems, which no OTT platform or service has yet perfected. Even during the recent live streamed NFL game on Yahoo – which the NFL deemed a great success – viewers were hit with a stuttering image and bouts of buffering, not to mention a tangible delay between the live streamed video feed and the game-related Twitter feed.

“Anyone who comes after us will have to go through their lumps and learning curve like we have,” Lynch said. “Streaming live television is a lot more difficult than doing VoD. You have much less margin of error when you’re streaming live television.”

One large difference between traditional pay TV business and the nascent Internet TV business is that OTT subscribers expect a degree of flexibility in service terms that is virtually unheard of in the pay TV environment. Subscribers expect to be able to sign up for a free trial and they expect the sign-up process to be straight forward and simple; on the other hand, they also expect to be able to cancel the service whenever they want. This “easy in, easy out” scenario is completely foreign to traditional pay TV providers like Dish Network, and one that the company is struggling to measure success against.

“OTT is a little different,” said Charles Ergen, Dish Network CEO. “People can move in and out of it pretty easily because you do it all on the Internet. And there’s also probably seasonality to OTT that’s maybe a little bit different than what we see in linear TV.”

Churn for an OTT service isn’t nearly as frightening as it is for a pay TV service, in part because the cost to acquire a subscriber is very little compared to pay TV, which typically involves a truck roll and installing new equipment at the consumer’s house. Dish Network’s cost to acquire a new subscriber is to the tune of $800 for its satellite pay TV business; for Sling TV, it’s the cost of the one month free trial.

Dish didn’t say what its trial conversion rate looks like for viewers who sign up for Sling TV, but Lynch did mention that even if they don’t sign up in the first month, those trials may eventually convert down the road. “There’s a couple of ways that we measure that [trial conversion], Lynch said. “We are seeing numbers in line with our expectations with the conversion for OTT.”

In subscription OTT services, month three is the critical threshold for subscribers, after which the churn rate resembles that of traditional pay TV.

Lynch also wouldn’t give any details on how many subscribers are taking the genre packs that Sling TV offers to complement its core programming package. “You can imagine right now sports being in particular popular with college football,” he said. “Strategically what we see is people come in and try the service, they try out on packs. Those who stay, we do see people who throughout their tenure with us will increase the add-on packs. Some will decrease it, but we do see a net increase over time in how people take those services as their tenure increases.”

“We’re far enough along to know that for certain customers – particularly Millennials and particularly to people who are not in the pay TV universe today or not in the pay TV universe in a big way – we know that it’s a pretty attractive product for them,” Ergen said. “We know that we’re bringing our content partners new incremental subs that they’re not able to get at any other way. So I think the future is probably pretty bright for OTT in general and hopefully for Sling.”