Disney CEO Bob Iger is downright optimistic about the future of skinny bundles for pay TV content, despite the lukewarm reception these bundles have received from analysts and consumers alike.
Content owners have been eager to get their channels on over the top skinny bundles as a way to combat the erosion of ratings and ad revenue. ESPN, for example, continues to see its income fall on the pay TV side, and it’s clear from Iger’s comments that Disney is placing a lot of hope on the eventual success of skinny bundles.
“My confidence in ESPN is due to a number of things, but clearly the deals that we have done with new platform owners, mostly over-the-top, have already yielded some nice gains from those services in subs,” Iger said during the company’s recent earnings call.
The ESPN channel is part of the Sling TV package, AT&T’s DirecTV Now, and PlayStation Vue. ESPN will also be part of Hulu’s soon-to-be-launched Internet TV package, and Iger noted another unnamed OTT player that Disney has done a deal with for carrying ESPN. “So it seems like we’re on the cusp of some significant growth for new entrants in the multi-channel marketplace,” Iger said.
There appears to be growing rationale among pay TV networks and content owners that skinny bundles will serve as distribution life boats as the pay TV ship continues to take on water. Iger echoed this reasoning during the recent earnings call when he said skinny bundles give ESPN 100% penetration rate among skinny bundle subscribers.
“What’s really important is the deals that we’ve negotiated for distribution, particularly for ESPN, are to be in all subs or all households launched. And so these are light packages that offer us 100% penetration from those packages,” he said. “We think that this wave that we’re seeing is really a signal of what is to come and what the future will be.”
Clearly a lot of fuss has been made over the past few years about ESPN being bundled into every basic cable subscription, with many operators wishing to challenge that rule. These operators may perhaps see this trend of bundling EPSN into a skinny bundle more of what the past is, rather than the future. When there are similar skinny bundles with no ESPN, which are cheaper, the we will find out of this “new” – “same old, same old” approach really works.
Other content owners are doing similar math. Scripps Interactive Networks’ US distribution revenue was down 3% in Q4 2016, but the company said that decline was partially offset by new OTT distribution deals. And Viacom’s Bob Bakish said he’s planning to “make big moves in the digital world” in the coming year, and added “we do want to support the success of virtual MVPDs.”
Time Warner’s Jeff Bewkes has a similar hope. “What virtual MVPDs are going to help do is invigorate consumer interest everywhere in watching networks on demand, watching them on-the-go in mobile devices, and a whole range of offerings, which is what I think we’d all like to see,” he said on a recent earnings call.
Meanwhile, a slate of reports out in the past two weeks point to growing weakness in the traditional pay TV market in the US. There are a few trends revealed in these reports that help to explain pay TV’s new interest in seeing virtual MVPDs succeed.
A report from The Diffusion Group (TDG) found the number of broadband-only homes has jumped from eight million in 2011 to 20 million in 2016 – a 144% increase over five years. That means about 22% of US broadband homes do not subscribe to pay TV.
Another report out last week from the Consumer Technology Association (CTA) found that the percentage of streamers in the US now equals the percentage of pay TV subscribers. CTA’s “The Changing Landscape for Video and Content” report pegs 67% of US consumers subscribe to pay TV, and 68% subscribe to streaming video services, whether paid or free. The CTA report also noted that US consumers are now watching nearly as much video online as they are watching on the old TV set.
“More and more consumers are embracing the freedom of connectivity – in this case, the anytime/anywhere access to video content,” said Steve Koenig, senior director of market research, CTA. “And we expect streaming subscribers to surpass paid TV services – and by a fair margin – in the next year or so.”
TiVo’s recent pay TV report nearly corroborates CTA’s numbers. It found 64% of its respondents use an SVoD service. TiVo’s report also highlights two important trends: consumers are growing more uncomfortable with the high cost of legacy pay TV bundles, and the footprint of skinny bundles – pay TV’s response to that pricing pressure – is small but growing.
TiVo’s respondents said they were willing to pay, on average, $28.87 per month for a lineup of their top 20 channels. That price point is 12% lower than respondents’ average price reported in the Q3 2016 version of the report – and is much more aligned with the skinny bundle model than the legacy big bundle model. TiVo’s research also indicates at least some consumers are beginning to recognize that value: it found 2.8% of respondents subscribe to DirecTV Now, 2.1% subscribe to Sling TV, and 1.8% subscribe to Sony’s PlayStation Vue.
Despite content owners’ optimism in skinny bundles, success is still unproven for the new distribution model, particularly because the virtual MVPD offerings vary greatly from provider to provider in terms of content. Skinny bundle providers are now trying to find the right mix of content to attract subscribers while staying within the “skinny” – and low cost – parameters of the model, while navigating content owners’ channel-stable approach to programming negotiations.
In other words, we’re still in the experimental phase of the skinny bundle. But there’s room for growth. BMO Capital Markets estimates virtual MVPD services revenue will grow 276% over the next five years to reach $11.6 billion. Traditional pay TV revenue will grow 1% over the same period to reach $116.8 billion in 2020. Those numbers, if they are anything like right, put the whole thing in perspective.