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Can NBCU Crack the Economics of OTT?

Jeff Baumgartner

Comcast has long held that the economics of an OTT-TV service don't add up. But its big programming and studio unit, NBCUniversal, is going to tackle the challenge in 2020 using a mix of free- and fee-based options that, it hopes, will appease cord-cutters as well as people who still get regular pay-TV services. (See NBCU Sets Plan for Standalone Streaming Service .)

NBCUniversal LLC will attempt to crack that economic nut using a set of models:

  • A free, ad-supported service for NBCU's pay-TV subs in the US (provided it can get all of those deals done with the MVPDs) and "major" international markets. Comcast Corp. (Nasdaq: CMCSA, CMCSK) and newly acquired UK-based Sky are, naturally, already on board to deliver this to their combined 52 million subs. (See Will Comcast's Pricey Play for Sky Pay Off?)
  • An advertising-free version for pay-TV subs that will be available for a fee that's yet to be announced.
  • A subscription OTT service for non-pay TV consumers/cord-cutters. Again, no price point has been announced.

More details will be announced later, but the general plan is to draw on NBCU's content library, which includes titles from Universal Studios and DreamWorks Animation, the broadcast network and its cable nets.

Oh, and NBCU plans to continue licensing its content to other studios and platforms such as Netflix, which currently has rights to The Office and some other NBC shows. But NBCU also clearly understands the obvious need to set aside some exclusive fare to make its OTT services enticing, as it plans to retain rights to "certain titles" for its new service.

Hedging its bets
This multi-pronged, somewhat confusing approach indicates that NBCU is spreading its bets a bit using a blend of advertising and subscriptions to make a major OTT play work and not tick off its still-important pay-TV distributors. And that goes for other programmers – after all, Sky still needs to be in position to secure sports rights and other programming to make its service go. It's a tricky balance.

NBCU had already tried the subscription VoD route with Seeso, a comedy-focused streaming service. Seeso launched in January 2016 for $3.99 per month, and was shut down in late 2017. Sources told me at the time that NBCU thought the sub growth was fine, but that the return on investment on Seeso was happening at a pace slower than the company was willing to stomach.

"Perhaps the biggest takeaway from Comcast's announcement of its OTT video plans is…this is hard," Craig Moffett, analyst at MoffettNathanson LLC , noted in a blog post in response to NBCU's announcement. "There are no easy answers."

He said NBCU's approach with "incrementalism" in the model is there because it really had no other choice. "Comcast, after all, has many masters to serve. They don’t want to blow up their traditional Cable TV business by giving their customers one more reason to jump ship."

Moffett surmises that NBCU's hedge-betting shows that they believe that OTT and direct-to-consumer are going to happen, only slowly, while he still wonders whetyher Comcast has the "stomach for the kind of investments that will be required" to build the enormous scale needed to survive in the D2C media business.

Meanwhile, other broadcasters have been forcing NBCU's hand to at least explore the D2C model. CBS has CBS All Access, and Walt Disney Co. (NYSE: DIS) will no doubt figure out a way to weave some content from ABC and what it's acquiring from Fox to help fuel the Disney+ OTT service it will launch later this year. AT&T Inc. (NYSE: T)'s WarnerMedia, meanwhile, is also jumping into the D2C fray. (See Disney Dispenses Details About Its New Streaming Service and AT&T CEO: Our SVoD Service Won't Be 'Another Netflix'.)

"The hope is that these new options will be the right recipe" for NBCU, Brett Sappington, senior director of research at Parks Associates , said.

He said including a free, ad-based streaming option could help NBCU, given that there's a limit to how many Internet video services a customer is willing to pay for. Even among the pay-TV homes Parks Associates has studied, about one-third of them take three or more OTT services, while about half subscribe to two or more.

According to Parks Associates research, consumers are spending, on average, $9 per month on OTT video services.

"I don't think we've seen the top yet" with respect to the number of OTT services consumers will be willing to pay for, "but there's anxiety that the top is coming at some point," Sappington said.

— Jeff Baumgartner, Senior Editor, Light Reading

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