When virtual multichannel video programming distributors entered the scene with sub-$40 monthly price points years ago, it was abundantly clear there was healthy consumer demand for slimmed-down packages at prices that undercut the traditional cable and satellite pay-TV players.
But even as those OTT-TV services gained subs early on, the business model was questionable as they operated at razor-thin profit margins or even at a loss. Amid a wave of price increases coupled by fatter, more diverse channel packages from vMVPDs such as YouTube TV, Hulu and fuboTV, those pricing and packaging advantages have been all but wiped away as OTT players attempt to improve the economics of their underlying pay-TV businesses.
"Putting it altogether, we believe the ramping retail pricing of vMVPD bundles will harm new consumer adoption of these packages and will not adequately stem the loss of traditional satellite and cable cord-cutting," Michael Nathanson, analyst with MoffenNathanson, explained in a new report on the vMVPD market distributed on Monday.
He noted that consumer research and initial consumer adoption of virtual MVPD services indicated there was "real demand at sub-$40 prices." However, the consolidation of the media sector, the re-creation of big TV bundles and accelerating programming costs have conspired to "create a massively unprofitable business with increasingly limited consumer demand," Nathanson added.
Relatively low-priced virtual MVPD services had helped to slow the speed of pay-TV losses from 2015 to 2019. But that picture is changing in the face of elevated prices among some of the top OTT-TV service providers. That's contributed to the acceleration of overall US pay-TV sub losses to more than 5% in Q1 2020, compared to a much smaller annual decline of about 2% back in Q1 2019, according to MoffettNathanson estimates.
The big, recent shock in the vMVPD realm was YouTube TV's decision to jack up its monthly price by $15 to $64.99, as it added several channels from Viacom. That increase followed a $10 increase last March with the addition of channels from Discovery.
Nathanson said it was purely a business decision. "YouTube TV finally realized that this vMVPD model was a path to a profitless future," he wrote. He estimates that YouTubeTV's wholesale costs are about $61 per month, meaning it might be squeaking out just $4 in gross profit per sub.
YouTube TV's decision, Nathanson points out, "is emblematic of a much deeper and more pernicious issue," as most vMVPDs are now unable to deliver on the sub-$40 pricing that many consumers want as those service providers try to manage an already-challenged business that's also been hit by media consolidation and rising programming costs. Those are among the main reasons why Sony shut down PlayStation Vue earlier this year.
Those issues are also present in the financials of fuboTV, the virtual MVPD acquired by FaceBank Group in April. MoffettNathanson estimates that fuboTV lost about $200 per sub on a gross margin basis in 2019, along with steep total operating costs of $172 million.
And low prices aren't a guaranteed path to success. Sling TV, the Dish-owned OTT-TV service, continues to sell smaller pay-TV packages for less than $40 per month but is also weathering subscriber losses. Sling TV is a representative of the balancing act that vMVPDs are trying to achieve – they need to keep packages small enough to keep prices palatable but still need to provide channel packages that are broad and diverse enough to gain and keep subscribers.
Pressure from OTT alternatives
Virtual MVPDs are also facing another battle – with subscription and free, ad-supported VoD services – that go well beyond their ability to convert customers who have cut the cord on traditional pay-TV. Those conversation rates are falling fast – from about 77% in 2018 when prices were much lower, to below 40% in 2019. Nathanson expects that conversion rate to normalize below 30% following a tough 2020 for pay-TV that's seen higher prices being amplified by the temporary loss of live televised sports.
"The continual price hikes by the virtual MVPDs will likely only accentuate the shift to alternative OTT offerings," Nathanson notes.
He believes a path forward for vMVPDs with slender margins is to concentrate on advertising growth aided by ad targeting and more advanced, data-driven ad-tech systems. He estimates that most cable companies generate monthly advertising revenues per user in the $8 to $9 range.
- YouTube TV hikes price by $15 per month
- AT&T, fuboTV join the pay-TV price hike party
- fuboTV sees subs and revenues climb in Q1
- fuboTV gets the urge to merge with FaceBank Group
- US pay-TV losses rocket to 2.15M subs in Q1 as virtual MVPD market unraveled
- RIP PlayStation Vue
- Schlichting out, Schwimmer in as Sling TV's top boss
- Pandemic just one of big problems plaguing pay-TV, Dish's Ergen says
— Jeff Baumgartner, Senior Editor, Light Reading