Can Skinny Bundles Remain Viable?

It seems like the industry has accepted the new paradigm that households are cutting the cord and getting programming online. Those going online have a few options. The option that gets the most press are skinny bundles – those online services that offered a smaller version of traditional cable programming. Another alternative is for households to abandon the traditional content found on cable and to seek different content from providers like Netflix and Amazon Prime.

At the end of June there were about 6 million households that have purchased the online skinny bundles. That number is still small compared with the 90 million or so homes that still buy traditional cable programming from cable or satellite providers, but it represents a 75% growth just since October of 2017.

Current estimates of customers of the largest services include Sling TV at 2.3 million, DirecTV Now at 1.5 million, Hulu Live at 1 million, YouTube TV at 800,000 PlayStation View at 500,000.

Skinny bundles providers are attracting customers by offering a suite of the most-watched cable channels at a lower price than the cable company. They also get rid of all of the hassle of dealing with a cable company and customers can come and go easily without having to deal with cable company customer service.

I have to wonder how sustainable these businesses are. Every analyst I’ve been reading speculates that these businesses are all losing money and are using low prices to gain market share. But that means they lose more money with each customer added and it’s hard to see the end game for this industry segment.

One article I read speculated that YouTube TV is paying more for programming than the consumer price being charged. It’s unlikely that anybody but a few insiders really know the cost of programming, but the analyst estimated that YouTube TV was paying $49 per month for content to support its $40 consumer product. They speculated that YouTube might also be making $15 per month from advertising. That would mean only a tiny margin before considering any of the costs of operating the business. Obviously this is a concern for the skinny bundle providers, and YouTube TV and Sling TV each recently raised monthly rates by $5 per month.

The biggest issue for the skinny bundle companies is that they are still operating in a world where the programmers control their costs. Programmers have little incentive to offer big discounts to skinny bundle providers, which would provide incentives for more customers to cut the cord.

The big programmers all have interesting pricing that penalizes skinny bundle providers. They tend to charge a lot for their most popular channels and very little for the many other channels that they provide to cable companies. For the skinny bundle provider this means that they might spend as much to buy the one or two most popular Discovery channels or MTV channels and still pay as much for programming as the cable companies that get a whole large suit of channels for almost the same cost. Programming has been sold that way for years and I always assumed it was so that the programmers could extract full price out of smaller cable systems that can’t physically handle the 200-channel line-ups. But this pricing seems tailored-made as a way for programmers to minimize losses from selling to the skinny bundle providers.

Ultimately something has to give for skinny bundles to become a viable alternative to traditional TV. One alternative is for the prices to rise to be similar to traditional cable with the value proposition being that customers can easily come and go with a provider without the hassle. However, numerous surveys have shown that the primary reason for cutting the cord is to save money, and so skinny bundles likely can never charge as much as traditional cable. In the long-run skinny bundle providers can’t keep losing money, and it’s hard to see this same industry being around five years from now.

Skinny bundle providers share some of the same concerns as traditional cable companies. Many cord cutters seem willing to give up on watching many of the networks they have been accustomed to watching. This is what my household has done. We mostly watch the content on Amazon Prime and Netflix, including buying the occasional seasons of specific shows from other networks. That means that we no longer watch content from Discovery, MTV, the Comedy Channel and the many other traditional cable networks – we’re satisfied with the wide array of alternative programming.

Surveys from Nielsen show that people become loyal to the content they watch, but that means that they are also able to forget about and not care about content that they no longer watch. If price is the main driver for consumers to choose programming, then traditional cable TV and skinny bundles both are battling a losing battle if their must charge a lot to cover the high cost of programming.