Tony Goncalves, the senior VP of strategy and business development for AT&T said last week that he thinks that pay-TV’s experiment with skinny bundles can’t last. He said that the economics are not there for it today and that his expectation is that over time that there will be pressure on skinny bundles to grow back into fat bundles. What if Gonzales is right and skinny bundles don’t work?
It’s clear that the traditional cable TV model is broken. Programmers seem to have lost their collective minds and are raising the cost of programming more each year to the point where many of my clients have seen several years in a row with programming cost increases over 10%.
And those big cost increases for programming turn directly into big rate increases on their cable products. For most cable companies it takes a 6% to 7% overall annual rate increase on cable just to cover the increased cost of programming. One doesn’t have to do much math to see that cable rates will be over $100 per month in just a few more years of continual rate increases.
Meanwhile customers cite the cost of a cable subscription as the number biggest factor that makes them consider alternatives. A lot of households are attracted to the idea of downsizing to a skinny bundle and adding Netflix or Amazon to reduce overall spending while still providing decent viewing options.
You can look at the early skinny bundles like Sling TV to see what Gonzales is talking about. They started with a small line-up of some of the most popular channels, but since then have added more and more options. It’s now possible to spend almost as much with Sling TV as with a traditional cable subscription, but getting a lot less channels. But a lot of customers seem to be finding the skinniest Sling TV options to be good enough. It includes ESPN and some of the more popular channels like the Food Network.
I know a lot of small telcos and cable companies are really hoping that customers like skinny bundles. Their biggest fear is that they continue to lose voice customers and that as customers continue to drop traditional cable that they will be left with only broadband as a product. I advise companies to do a simple test – look to see what your existing data rates would be if your only product was data. Most of them don’t like the answer, which often shows that data rates might have to climb to over $100 per month to keep companies whole.
And so the hope in the industry is that there will be some decent margin on skinny bundles. Selling skinny bundles would basically recalibrate cable TV as a product. While the costs for providing skinny bundles might grow quickly, starting over with a base rate of $25 or $30 can mean many years of providing affordable options for customers.
I’ve heard that the NCTC is negotiating skinny bundles for the small cable providers. Everybody is hoping there will be several options and that cable operators can make some decent margin on the skinny bundles. If so, I have a number of clients who will be aggressive in moving people from today’s giant packages down to the skinny bundles.
But if Gonzales is right and the math doesn’t work then I think we can all just watch cable start fading away over the next five years. We are starting to see the same kind of changes in the marketplace with cable that we saw for many years with telephone service. Consumer advocates are not advising people to drop traditional cable. Even Walmart has come out with a package that is inviting people to drop cable. As more outside forces tell your customers that the big cable packages are a bad idea the cord cutting movement will gain momentum if there isn’t an alternative product to offer to customers.