The Crowded MVPD Market

The virtual MVPD (Multichannel Video Programming Distributor) market is already full of providers and is going to become even more crowded this year. Already today there is a marketing war developing between DirecTV Now, Playstation Vue, Sling TV, Hulu Live, YouTube TV, CBS All Access, fuboTV and Layer3 TV. There are also now a lot of ad-supported networks offering free movies and programming such as Crackle and TubiTV. All of these services tout themselves as an alternative to traditional cable TV.

This year will see some new competitors in the market. ESPN is getting ready to launch its sports-oriented MVPD offering. The network has been steadily losing subscribers from cord cutting and cord shaving. While the company is gaining some customers from other MVPD platforms they believe they have a strong enough brand name to go it alone.

The ESPN offering is likely to eventually be augmented by the announcement that Disney, the ESPN parent company, is buying 21st Century Fox programming assets, including 22 regional sports networks. But this purchase won’t be implemented in time to influence the initial ESPN launch.

Another big player entering the game this year is Verizon which is going to launch a service to compete with the offerings of competitors like DirecTV Now and Sling TV. This product launch has been rumored since 2015 but the company now seems poised to finally launch. Speculation is the company will use the platform much like AT&T uses DirecTV Now – as an alternative to customers who want to cut the cord as well as a way to add new customers outside the traditional footprint.

There was also announcement last quarter by T-Mobile CEO John Legere that the company will be launching an MVPD product in early 2018. While aimed at video customers the product will be also marketed to cord cutters. The T-Mobile announcement has puzzled many industry analysts who are wondering if there is any room for a new provider in the now-crowded MVPD market. The MVPD market as a whole added almost a million customers in the third quarter of 2017. But the majority of those new customers went to a few of the largest providers and the big question now is if this market is already oversaturated.

On top of the proliferation of MVPD providers there are the other big players in the online industry to consider. Netflix has announced it is spending an astronomical $8 billion on new programming during the next year. While Amazon doesn’t announce their specific plans they are also spending a few billion dollars per year. Netflix alone now has more customers than the entire traditional US cable industry.

I would imagine that we haven’t seen the end of new entrants. Now that the programmers have accepted the idea of streaming their content online, anybody with deep enough pockets to work through the launch can become an MVPD. There have already been a few early failures in the field and we’ve seen Seeso and Fullscreen bow out of the market. The big question now is if all of the players in the crowded field can survive the competition. Everything I’ve read suggests that margins are tight for this sector as the providers hold down prices to build market share.

I have already tried a number of the services including Sling TV, fuboTV, DirecTV Now and Playstation Vue. There honestly is not that much noticeable difference between the platforms. None of them have yet developed an easy-to-use channel guide and they feel like the way cable felt a decade ago. But each keeps adding features that is making them easier to use over time. While each has a slightly different channel line-up, there are many common networks carried on most of the platforms. I’m likely to try the other platforms during the coming year and it will be interesting to see if one of them finds a way to distinguish themselves from the pack.

This proliferation of online options spells increased pressure for traditional cable providers. With the normal January price increases now hitting there will be millions of homes considering the shift to online.


The Rush to vMVPDs

To those of you not familiar with the industry lingo, a vMVPD is a virtual multichannel video programming distributor, or virtual cable company. This term is being used to describe OTT providers that offer a version of the same channels offered by cable companies. This sector includes Sling TV, DirecTV Now, Playstation Vue, Hulu Live, YouTube TV and a few others. These providers stream networks on the same linear schedule as is shown on cable TV. Providers of alternate programming like Netflix or Amazon Prime are not considered as vMVPDs.

Industry analysts say that the vMVPDs as a group gained over 900,000 customers in the recently ended third quarter. That is a startling number and represents almost one percent of the whole traditional cable TV market, all captured in just one quarter. We’ll have to wait a bit to see how the whole cable market performed. But we already know that Comcast lost over 150,000 cable customers for the quarter. Since they had been hanging onto cable customers better than the other cable companies I think we can expect a bloodbath.

This kind of explosive growth is perhaps the best harbinger for the slow death knell for traditional cable TV. This new industry is still less than three years old with Sling TV having launched in February 2015. The industry started slowly and had only a few hundred thousand customers at most by the end of 2015.

But it’s now obvious that a lot of people are deciding that they don’t want to pay the big monthly bill for the giant channel line-up. The analysis from Nielsen shows that most households only watch a handful of channels. While no vMVPD is probably going to give households exactly the channels they most want to watch, they are obviously providing enough channel choices to lure people away from the cable companies.

It’s an interesting transition to watch. To some degree the programmers are contributing to their own demise. When people leave a cable line-up of 200 channels to instead watch an vMVPD line-up of less than 50 channels there are obviously a lot of networks that are no longer collecting customer fees. Practically every network is bleeding customers and this shift to OTT viewing is going to kill off a lot of network channels. I read an interview a few months ago with the head of programming at Fox who believed that his company would shut down the majority of their cable networks within a few years.

Another thing I find interesting about this shift is that the vMVPDs are not particularly easy to use. I’ve now tried four of them – Sling TV, DirecTV Now, Playstation Vue and Fubo TV, and I will get around to trying them all eventually. None of them have the ease of use of a cable settop box. You can’t just surf through channels easily to see what’s on and you have to instead navigate through menus that take several steps compared to a simple ‘channel up’ command on a cable remote.

These four services also have channel guides of a sort, but they are also cumbersome to use. I’ve found that it can easily take three or four minutes to change between two shows, and that’s when you know what you want to watch. The guides on these services are not yet friendly for looking hours or days ahead to see what you might want to watch later. And at least one of the services, Playstation Vue, is so confusing that I often get lost in its menus.

And yet nearly a million people changed to one of these services in the last quarter. The biggest appeal for these services is price along with a total ease to subscribe or unsubscribe. After years of dealing with big cable companies I was apprehensive the first time I tried to unsubscribe to Sling TV – but it took less than a minute to do on-line and was not a hassle. The services differ in features like the number of people who can watch different programming at the same time on an account, but they are all becoming more people friendly over time.

At this point AT&T might be the only company that is getting this right. The company lost 385,000 customers in the third quarter between DirecTV satellite service and U-verse. But they gained 296,000 DirecTV Now customers to make up for a lot of those losses. At this point nobody is talking about the margins on vMVPD service, but it can’t be a whole lot worse than the shrinking margins on traditional cable TV.

I believe we are seeing the future of TV in the vMVPD product. We’ll probably look back five years from now and laugh at these hard-to-use first generation services. I’m sure that over time they will get far easier to use and I’m getting ready to experiment using my Amazon Echo to navigate through Playstation Vue. When it becomes simple to use vMVPDs, then  traditional cable TV might have become passe.

Why Isn’t Everybody Cutting the Cord?

Last year at least two million households cut the cord. I’ve seen headlines predicting that as many as 5 million more this year, although that seems too high to me. But both of these numbers are a lot lower than the number of people who say they are going to cut the cord in the coming year. For several years running various national surveys show that 15 million or more households say they want to cut the cord. But year after year they don’t and today’s blog looks at some of the reasons why.

I think one of the primary reasons people keep traditional cable is that they figure out that they won’t save as money with cord cutting as they had hoped. The majority of cord cutters say that saving money is their primary motivation for cutting the cord, and once they look hard at the actual savings they decide it’s not worth the change.

One issue that surprises a lot of potential cord cutters is the impact of losing their bundling discount if they are buying programming from a cable company. Big cable companies penalize customers who break the bundle. As an example, consider a customer who has a $50 broadband product and a $50 cable product, but for which the cable company charges $80. When a customer drops one of the two products the cable company will charge them $50 for the remaining one. That means there is a $20 penalty for cutting the cord and thus not much savings from cutting the cord.

Households also quickly realize that they need to subscribe to a number of OTT services if they want a wide array of programming choices. If you want to watch the most popular OTT shows that means a $10 subscription to Netflix, an $8.25 per month subscription to Amazon and a Hulu package that starts at $8. If you want to watch Game of Thrones you’ll spend $15 for HBO. And while these packages carry a lot of movies, if you really love movies you’ll find yourself buying them on an a la carte basis.

And OTT options are quickly proliferating. If you want to see the new Star Trek series that means another $5.99 per month for CBS All Access. If your household likes Disney programming that new service is rumored to cost at least another $5 per month.

And none of these options bring you all of the shows you might be used to watching on cable TV. One option to get many of these same networks is by subscribing to Sling TV or PlayStation Vue, with packages that start at $20 per month, but which can cost a lot more. If you don’t want to subscribe to these services, then buying whole season of one specific show can easily cost $100.

And then there is sports. PlayStation Vue looks to have the best basic sports package, but that means buying the service plus add-on packages. A serious sports fan is also going to consider buying Fubo. And fans of specific sports can buy subscriptions to Major League baseball, NBA basketball or NHL hockey.

Then there are the other 100 OTT options. There is a whole range of specialty programmers that carry programming like foreign films, horror movies, British comedies and a wide range of other programming. Most of these range from $3 to $7 per month.

There are also hardware costs to consider. Most people who watch a range of OTT programming get a media streaming device like Roku, Amazon Fire, or Apple TV. Customers that want to record shows shell out a few hundred dollars for an OTT VCR. A good antenna to get local programming costs between $30 and $100.

The other reason that I think people don’t cut the cord is that it’s not easy to navigate between the many OTT options. They all have different menus and log-ins and it can be a pain to navigate between platforms. And it’s not easy to find what you want to watch, particularly if you don’t have a specific show in mind. It’s hard to think that it’s going to get any easier to use the many OTT services since they are in competition with each other. It’s hard to ever see them agreeing on a common interface or easy navigation since each platform wants viewers to stay on their platform once logged in.

Finally, none of these combinations gets you everything that’s on cable TV today. For many people cutting the cord means giving up a favorite show or favorite network.

If anything, OTT watching is getting more complicated over time. And if a household isn’t careful they might spend more than their old cable subscription. I’m a cord cutter and I’m happy with the OTT services I buy. But I can see how this option is not for everybody.


The End of Satellite TV?

Randall Stephenson, the CEO of AT&T, recently announced that the company will be working to replace their satellite TV (DirecTV) with an OTT offering over the web. The company plans to launch the first beta trials by the end of this year. The ultimate goal will be for the online offering to eventually replace the satellite offering.

He didn’t provide any specific details of the planned offering other than comparing it to the current DirecTV Now offering that carries about 100 channels and is a direct competitor to landline cable TV.

Obviously the company has a lot of details to work out. DirecTV currently has over 20 million customers and along with Comcast is the only other cable provider that added customers over the last year ending in the second quarter. The biggest online live broadcast offering today is Dish Network’s Sling TV with around 2 million customers. AT&T faces numerous technical challenges if they want to transfer their huge customer base onto the web.

People always speculate why AT&T bought DirecTV and perhaps now we finally have the answer. The product will be marketed nationwide, not just in the AT&T footprint. The big advantage for AT&T is that they are not saddled with FCC rules that create the large cable bundles of 200 channels, and so perhaps they have found a way to make online bundles of cable channels profitable again. It seems that there are probably more profits in a 100-channel line-up than in traditional cable offerings. The same may not be true for skinny bundles and there is a lot of speculation that low-price OTT offerings like Sling TV at $20 don’t make any money.

This move would enable AT&T to leap forward and to easily keep up with the latest video technology. Almost all legacy video is using dated technology like the satellite DBS, the QAM on cable networks and even AT&T’s own first-generation IPTV headends. With an online product the company can get completely out of the settop box and the installation business for TV. They can also easily keep up with new formats and standards, such as the ability to immediately be able to offer 4K video everywhere. Going online makes it a lot easier to meet future customer demands as the industry continues to change rapidly.

But this has to be scary news for rural America. AT&T and Verizon have both made it clear they would like to tear down legacy copper networks, which will make it hard or impossible for some parts of rural America to make voice calls. If copper wires disappear then Cable TV over satellite is the only other modern telecom product available in a lot of rural America. If it’s phased out then much of rural America falls off the telecom map entirely.

While we have no idea if Dish Networks has similar plans, but the fact that they are migrating customers to Sling TV indicates that they might. This could turn ugly for rural America.

Obviously a quality OTT video product requires a quality broadband connection – something that is not available in millions of rural homes. It’s not hard to envision a future in which a home without good broadband might be isolated from the outside world.

It’s clear that the big companies like AT&T are focused only on bottom-line, and perhaps they should be. But one of the primary benefits of having incumbent regulated providers was that everybody in the country was offered the same choice of products. But unfortunately, the never-ending growth of broadband demand has broken the old legacy system. It was one thing to make sure that everybody was connected to the low-bandwidth voice network, but it’s something altogether different to make sure that rural America gets the same broadband as everybody else.

I can remember a time when I was a kid that a lot of rural homes didn’t have cable TV. Some rural homes were lucky enough to get a few TV stations over the air if they had a tall antenna. But many homes had no TV options due to the happenstance of their location. Satellite TV came along and fixed this issue and one expects when visiting a farm today to see a satellite dish in the yard or on the roof. This might become soon another of those quaint memories that are a thing of the past. But in doing so it will add to the political pressure to find a workable rural broadband solution.

Two Views on Skinny Bundles

The industry is abuzz this year with talk about skinny bundles. But there is a lot of disagreement about whether skinny bundles are really going to be effective and if they will put a serious dent in the pay-TV market. Today I look at opposing views from two major players in the industry.

First are the recent statements by David Zaslav, the CEO of Discovery Communications. He says the skinny bundles we see in the US are not really ‘skinny’ and are instead just another way to package traditional programming. He says that Discovery sells programming around the world and that in almost 200 other worldwide cable markets there are true skinny bundles that cost between $8 and $12 per month. He says these bundles are popular and give people a real alternative to the big cable bundles.

By contrast all of the major bundles on the market today in the US are priced at $30 to $60 and just provide a different alternative to the cable companies. The current US bundles are expensive because they include high-cost programming like sports, movie channels and major cable networks.

Zaslav’s statements are somewhat ironic since his company is one of the major programmers that drives up the size and the cost of traditional cable TV big channel line-ups. Discovery today includes a suite of 13 channels such as the Discovery Channel, TLC, Animal Planet, Science, and a host of other Discovery channels. Many of my clients are required to carry all of these channels if they want to carry any of them, and at least eight of these channels are required to be in the lower expanded basic tier where most customers have to pay for them. It’s also interesting that most of the current on-line skinny bundles in the US are not carrying the Discovery networks.

An interesting contrast to this comes from Charlie Ergen, Chairman and CEO of Dish Networks. He is wildly enthusiastic about the current US skinny bundles, including his own Sling TV. He says the company first launched Sling TV to try to lure cord cutters back to a paid subscription. But the company found out that they were instead taking customers away from pay-TV including his own satellite customers from Dish networks.

He believes that the public perceives the current US skinny bundles as a real alternative to the traditional pay-TV bundle. Sling TV has done better in the market than original projections. At the end of the 1st quarter of 2017 the company had 1.3 million customers, about double where they sat just last June. The other similar subscription services from Hulu and YouTube are also doing quite well and together are carving off a noticeable slice of the traditional TV market.

But Ergen admits that his Sling TV is a replacement for traditional TV, not a wildly different alternative. A lot of customers like on-line services because they offer the the ability to start and stop service at will or to add or subtract additional small packages of channels to the line-up as their interests change. It’s certainly possible that much of the success of these new bundles comes from consumers who are fed up with the big cable companies.

It’s also debatable if people who move from traditional cable to Sling TV or similar services can be classified as cord cutters. They are cord cutters in that they got rid of coaxial cable feed from the cable company, but they are still subscribing to a lot of the same channels as before and which are still broadcast at set times on a line-up.

For now it looks like the current skinny bundles are meeting moderate success and are attracting a few million customers. They haven’t been around very long and I suspect that a lot of consumers have either never heard of them or haven’t given them any serious consideration. But you can save money with these packages while gaining the flexibility to connect and disconnect on-line at any time – avoiding those dreadful call to cable customer service.

I know I would love to see the skinny bundles that David Zaslav describes. I imagine that each $8 – $12 bundle contains a limited number of channels. At a small size these are probably as close as anybody can get to a la carte programming. And at the end of the day that’s what a lot of cord cutters really want.

Can a Small Cable Company Succeed?

Today I ask the question of whether anybody small can really succeed with a cable TV product. This was prompted by the news that Cable One, one of the mid-sized cable companies, is bleeding cable customers. For those not familiar with the company they are headquartered in Phoenix, AZ and operate cable systems in 19 states with the biggest pockets of customers in Idaho, Mississippi and Texas.

The company just reported that for the 12 months ending on March 31 that they had lost 12.7% of their cable customers and dropped below 300,000 total cable customers. Most of my clients would consider anybody of this size to be a large cable company. But their struggles beg the question of anybody smaller than the really giant cable companies can seriously maintain a profitable and viable cable product in today’s environment.

The drop in their cable customers was precipitated by a number of factors. One that is very familiar to small cable operators is that Cable One decided in 2015 to drop the Viacom suite of channels from their system. We all remember that in that year Viacom announced huge and unprecedented rate increases of over 60% for the suite of channels that include MTV, Comedy Central, BET and a number of other channels. A number of my clients also decided to drop Viacom rather than pay for the huge increases in programming.

Cable One also shares another characteristic with smaller companies in that they are too small to unilaterally negotiate alternate piles of programming to sell as skinny bundles. So they and other small companies are likely to see customers abandoning them for smaller line-ups from Sling TV and other purveyors of smaller on-line line-ups – including Hulu which just announced entry into this quickly growing market.

And finally, Cable One and most other cable companies are now starting to feel the impact of cord cutting. While only a fraction of their customer losses can be blamed on cord cutting, it is now a real phenomenon and all cable companies can expect to lose a few percent of customers every year to Netflix and others.

The really large cable companies are not immune to these same market influences. The giants like Comcast and Charter / Spectrum are going to continue to see big increases in programming costs. Recent Comcast financials show that the company saw a 13% increase in programming cost over the last year (although some of that increase was paid to their own subsidiaries of programmers).

But the handful of giant cable companies are so big that they look like they are going to be able to offset losses in cable revenues in margins with new sources of revenues. For example, Comcast and Charter announced recently that they will be launching a jointly-provisioned cellular business that will help them grow revenues significantly instead of just treading water like smaller cable revenues. And I’ve recently written in here of all of the other ways that Comcast is still growing their business, which smaller companies are unable to duplicate.

The biggest dilemma for small cable companies is that the TV product still drives positive margin for them. While every small cable provider I know moans that they lose money on the cable product, the revenues generated from cable TV are still in excess of programming costs and almost every company I know would suffer at the bottom line if they kill the TV product line.

It has to be troubling for programmers to see cable companies struggling this hard. If somebody the size of Cable One is in crisis then the market for the programmers is quickly shrinking to only serving the handful of giant cable companies. The consolidation of cable providers might mean that the huge cable companies might finally be able to band together to fight back against the big rate increases. Just last week Charter announced that they were demoting a number of Viacom channels to higher tiers (meaning that the channels would not automatically be included in the packages that all customers get).

It’s hard to think of another industry that is trying so hard to collectively drive away their customer base. But all of the big companies – cable providers and programmers – are all publicly traded companies that have huge pressure to keep increasing earnings. As customers continue to drop the programmers raise rates higher, which then further drives more customers to drop out of the cable market. It doesn’t take sophisticated trending to foresee a day within the next decade where cable products could become too expensive for most homes. We are all watching a slow train wreck which the industry seems to have no will or ability to stop.

The Future of OTT

Level3 Just released their third annual report titled OTT Video Services, where they asked a wide array of industry experts about the future of OTT. The report posed a variety of questions about the OTT industry to 486 ‘media industry professionals,’ who were 70% from the US with the rest scattered in the rest of the world. These kind of exercises are not surveys and you can’t attach any statistical significance to the results. But since the respondents are in the industry I don’t know if there is any better way to understand where the industry thinks OTT is headed.

The most interesting finding (and the one that spawned a few headlines) is that 70% of the respondents think that OTT viewership will bypass traditional television viewership no later than 2022. That is an amazing prediction considering the huge difference today between TV and OTT viewing. While this year it’s expected that about two-thirds of US homes will watch at least one OTT broadcast per month, total OTT usage this year is expected to deliver only about 20% of the total hours spent by adults watching video content.

I can understand why Level3 would sponsor this report each year. The bandwidth required to support an OTT industry that grows from 20% of all of the hours spent watching video up to 50% is going to stress networks everywhere. About a quarter of respondents thought that OTT content would grow year-over-year as much as 25%, with almost half of the respondents thinking that growth rate would be between 30% and 50% per year.

This growth represents huge bandwidth growth on the backbone networks that Level3 operates as well as on all of the local networks that ISPs use to support residential customers. If you think your broadband slows down now in the evening, wait just a few years where there will be a lot more video on your local network.

The experts did foresee some major challenges for the OTT industry. Their biggest concern was the ability of local ISP networks to deliver a high-quality signal to customers. This concern was partially due to a concern that customers would not have enough bandwidth, but also represented concerns about the backbone networks and the interface between OTT providers and ISPs. It was disagreements between OTT players and the ISPs that prompted the last FCC to get serious about network neutrality. And since it looks like network neutrality will be scrapped that concern is back on the burner.

They are also concerned that the OTT industry might try to follow the path of traditional TV and begin inserting too many ads. The experts see ads as one of the major factors today driving people from traditional programming to OTT programming.

Another concern of the OTT industry is the ability of OTT companies to acquire desired programming. There are still some popular cable networks that none of the OTT providers have been able to purchase. There is particular concern about the ability to acquire regional sports networks, something that is a major draw for a significant proportion of customers. And there is concern about acquiring local network feeds and today the few OTT providers largely show content from a few major urban markets.

In looking towards the future, there are a number of OTT providers keeping an eye on acquiring virtual reality content, although none of the OTT services carries such content yet today. Of a higher priority to most OTT providers was the ability to beef up their networks in order to support both higher frame rates (HFR) and high-dynamic ranges (HDR) and most providers are working towards supporting both options. These technologies can improve delivery of sports content today and will situate OTT providers to offer VR content in the future.

There is also a lot of interest in OTT providers to be able to carry more live events other than sports content. They know that there is high customer demand for watching live events like the Emmys and other award shows, live concerts and other live content.

There is also a lot of interest from OTT providers that carry live network feeds (traditional cable channels shown linearly) to also be able to offer a library of video-on-demand content, in the same manner as Netflix. I’ve been a subscriber to Sling TV for a while and some of their network now offers a lot of VOD content on the service.

It’s going to be an interesting industry to watch. There are around 100 OTT services available in the US today, but only about half a dozen of them have any significant number of customers. I note that even though industry insiders foresee huge growth for the sector, that’s only going to happen if the OTT providers can find a way to offer what people want to watch.

Why Isn’t Cord Cutting Going Faster?

If cord cutting is such a big deal, then why aren’t more people leaving traditional television? That’s a question I’ve been asked several times lately and it’s a good one.

Cord cutting is definitely real. Numerous articles make cord cutting seem like an imminent disaster for the cable industry. But industry estimates are that between 1.7 million and 2.5 million people walked away from traditional cable TV in 2016. The lower number is the net drop in national cable subscribers while the higher number takes into account the fact that there were over a million new housing units built in the country – and I think the higher number is closer to correct.

And while losses of that many customers hurts the cable industry, it’s hard to yet call it a flood. If annual losses stay at this level the cable industry will still have over 50 million customers twenty years from now. The real story might be that most people aren’t yet cutting the cord. There are a lot of reasons for this, but I think the most important ones are:

People Still Like Cable. Total pay television subscribers just fell to under 100 million sometime last year. There are a lot of households that still like the variety of channels that come with the big packages. While a lot customers are now time shifting by the use of DVRs and TV everywhere, they still like what they are buying.

Bundling Discount. It’s really easy to forget that the big cable companies have priced their bundles in such a way as to penalize customers for leaving just one service. Cord cutters generally want to retain their broadband while dropping cable – and when they go to do this they find that the savings is not as large as they thought. Interestingly, if you want to keep cable and drop broadband the same thing is true. The big cable companies apply the ‘bundling’ discount to whatever product you want to drop – meaning that you then revert to paying full market price for whatever product is kept. People that want to save $20 per month by switching to an OTT service like Sling TV quickly find out that they actually won’t save much.

Cord Shaving Instead. There is a whole lot of cord shaving going on – that is, people migrating to smaller cable packages. Cord shaving lets people who mostly like Netflix to keep local network stations and a few other things they like about traditional TV, without fully cutting the cord. This is best evidenced by looking at the subscriber numbers to the various cable networks, which are losing subscriptions at a much faster pace than total pay TV subscribership. For example, ESPN has lost around 12 million subscribers since their peak in 2013, and the majority of other cable networks are also seeing large subscriber losses. Since the total net subscribers to pay television are dropping more slowly, the only explanation is that customers are opting out of the big cable packages for smaller ones. The cable companies don’t release statistics on cord shaving, and so we can only guess at the magnitude of the changes by seeing what is happening to ESPN and other networks.

The Alternatives are not that Different. Over half of the homes in the country now subscribe to at least one of the OTT services like Netflix. But it appears that most homes are viewing this content as alternate content and not a straight replacement for traditional cable.

There are a lot of new alternatives to traditional cable such as Sling TV or Playstation Vue – but I don’t think most customers are seeing them as significantly different than traditional cable content. I’ve been trying some of these services and they honestly still feel like cable. The content is mostly streamed at fixed times and even with smaller line-ups I find I’m not interested in most of the channels they carry. While these alternatives can save money, they often don’t have the same reliability or quality of picture as a cable system. The bottom line, at least to me, is that services like Sling TV still feel like cable offerings to me.

It’s Not Easy for Some. It’s not easy for the technically unsophisticated to totally cut the cord. Unless you live in a major metropolitan market you’re going to want to somehow tie in your local network stations with other online programming, and that is still not that easy. You can get an antenna to pick up off-the-air content, but that is not easily integrated into any easy-to-use program guide or search engine.

It’s also not always easy to drop the cable company. People get tied up in contracts that are expensive to break. There is a whole gauntlet of steps needed to get away from the cable company from listening to retention specialists to returning settop boxes that make leaving a hassle – and the cable companies know that these tactics work.

We may get to a time when cord cutting accelerates more quickly, as happened with landline telephones. But before that happens there needs to be easier to use and more satisfying alternatives to draw most people away from traditional cable altogether. If there is any one issue that might push more households over the edge it’s the price of cable packages – but the big cable providers are now introducing skinny bundles to try to retain the budget minded customers. I’m looking at the numbers and thinking we are going to have traditional cable around a lot longer than many people predict.

The Valuation of a Cable Customer


Craig Moffett of MoffettNathanson recently set a valuation of an OTT customer from Sling TV at a quarter of the level of a normal Dish Networks customer. Since almost every small cable provider in the industry is interested in their valuation, I thought I’d talk today about Moffett’s numbers and how they might relate to cable valuation for small cable operators.

First the numbers. Moffett said that a normal Dish Networks cable customer is worth $1,100. That valuation reflects both the operating margin on Dish’s cable business as well as the average expected time that a cable customer stays with the company. Valuation in the industry in general is based on a multiple of operating margin – revenues less operating expenses. I don’t know what Moffett used as a multiple in this case since the valuation of Dish is muddled by the fact that they also own a mountain of spectrum.

Moffett set the value of a Sling TV customer (also operated by Dish Networks) at only $274. This low valuation tells us several things. First, the margins on Sling TV has to be significantly less. The company is obviously setting a low price to attract customers. And while Sling TV has a much smaller channel line-up than the big bundles at Dish Networks, Sling TV includes a lot of the most popular (and expensive) channels such as ESPN and Disney. I would also think that the valuation reflects a much higher churn for Sling TV. Customers are free to come and go easily and can buy service one month at a time. This contrasts to many Dish customers who get low prices by signing up for 1-year or longer contracts.

There are also other cost characteristics that are different for a satellite customer compared to on online customer. For instance, for a satellite customer Dish has to cover the cost of the satellite networks, the cost of the receivers used by customers. Sling TV has to instead just pay for transport of programming through Internet. Both parts of the business have to cover advertising and the cost of billing and back office. But it seems like Sling TV would have lower costs since customers must prepay by credit card. It’s hard to know which has a cost advantage, but I would guess it’s Sling TV. But Dish has millions of customers and would have some significant economy of scale.  

How do these valuations compare to the valuations of small cable providers? The big difference between terrestrial cable providers and Dish is having to provide a fleet of technicians in trucks and maintaining a landline network of some sort. Small cable operators also have to operate a headend and always face upgrades to keep up with the latest innovations in the industry. These costs are far more costly per customer for a small cable operator than what Dish is paying. I would think that due to economy of scale that Dish also has an advantage on costs like customer service, billing, etc. The equipment costs for customers are probably similar for Dish and terrestrial cable operators.

I have analyzed the books of a number of small triple play providers in recent years and if costs are allocated properly to products I haven’t seen one that has a positive margin on the cable TV product. While small cable systems generally charge more than Dish Networks they also pay more for programming. But the main reason that small terrestrial cable operators lose money is the work load associated with supporting cable TV. I’ve done detailed time studies at clients and have seen that in a triple play company that way more than half of the calls to customer service and the truck rolls are due to cable issues. If a small company allocates expenses properly between products, then cable is almost guaranteed to be a loser.

What does that mean for valuation? It’s probably obvious that if one of the major product lines of a company is losing money that the negative earnings pulls down the overall valuation of the business. Said more plainly, if the cable business at a small company is losing money, then that part of the business has no value or even a negative value. This is a conversation I have with clients all of the time, and most small cable providers have at least thought about the ramifications of dropping their cable product.

It’s not quite as easy as it sounds, because if somebody drops cable then they need to also pare expenses that were used to support cable. For a small company that means cutting back on customer service and field technician positions – something that small companies are loathe to do. Small carriers also worry that cutting cable will cost them overall customers, particularly if they are competing against somebody else that offers the triple play. It’s definitely a tough decision, but I’ve heard that as many as fifty small telcos have ditched traditional cable.

I’m also seeing for the first time that many new network operators are launching new markets without cable TV. Or they are instead looking at models where some external vendor like Skitter TV sells cable to customers.

Unfortunately, the cost of programming is still climbing fast and the margins on cable keep worsening for small cable operators. I expect that some time within the next five years or so we will reach a flash point where the collective wisdom of the industry will say that it’s time to ditch cable – and at that point we might see a flood of small companies exiting the business. But I don’t know of a harder decision to make for a small triple play provider.

OTT News, March 2017

There is a lot of activity going on with web-based video. There are offerings that are starting to look like serious contenders to traditional cable packages.

Comcast Integrates YouTube. Comcast has made a deal with Google to integrate YouTube into the Comcast X1 settop box. This follows last year’s announcement that Comcast is also integrating Netflix. Comcast also says they are working to integrate other SVOD platforms.

Comcast is making a lot of moves to keep themselves relevant for customers and to make the X1 box a key piece of electronics in the home. The box also acts as the hub for their smart home product, Xfinity Home.

One has to think that Comcast has worked out some sort of revenue sharing arrangements with Google and Netflix, although all details of these arrangements have not been reported. The most customer-friendly aspect of these integrations is that the Comcast X1 box is now voice-activated and customers can surf Netflix and YouTube by talking to the box.

Sling TV Adds More Sports. Sling TV has made another move that will make it attractive to more customers by adding the Comcast regional sports networks (RSNs) to their line-up. This includes CSN California, CSN Bay Area, CSN Chicago and CSN Mid-Atlantic. These networks carry a lot of unique sports content that is not easily available anywhere else on-line today. The networks carry pro basketball, pro baseball and a number of college sports. For example, CSN Bay Area is the home station for the popular Golden state Warriors. CSN Mid-Atlantic is the home station for the Baltimore Orioles.

I know in talking to my sports-centric friends that the narrow sports content on-line is the number one issue holding them back from switching to an OTT package. There are still other networks that Sling TV would need to add, like the Big Ten Network and the NFL Channel, to be a totally rounded sports provider. But they have already added a credible sports line-up that includes all the ESPN channels, the SEC Network, the ACC Network, NBA TV, the NHL Channel, the PAC12 Network and a few other sports networks like Univision TDN.

YouTube Launching an OTT Line-up. Cable TV just got another new OTT competitor. The new service is called YouTube TV and brings a fourth major OTT competitor along with Sling TV, PlayStation Vue, and DirecTV Now. The platform is going to launch sometime in the next few months, with no firm release date yet. The basic product will be $35 per month and allows customers to turn the service off and on at will.

YouTube TV will carry the typical network channels as well as ESPN, Disney, Bravo and Fox News – a line-up that sounds similar to its competition. The service will come with unlimited cloud DVR storage. It will allow 3 simultaneous streams per account and 6 user profiles per account. They will first launch in a few major urban markets (probably due to the availability of the local channels for various network channels).

If YouTube has any advantage in the marketplace it’s that they are becoming the preferred content choice for a lot of millennials. The company says they now are delivering over a billion hours per day of content. Millennials are leading the trend of cord cutters (and even more so of cord nevers), and if YouTube can tap that market they should do great.

Dish Network Predicts OTT will Replace Traditional TV. For the first time, Dish Networks Chairman and CEO said he thought that OTT programming is the real future of video. Until now the company, which owns Sling TV, has said that their product was aimed at bringing video to cord cutters.

But Sling TV and the other OTT products are getting a lot better. Sling TV now has over 100 channels that provide a wide set of options for customers. And these channels are not packed into a giant must-take line-up like traditional cable packages, and instead provide a number of smaller packages that a customer can add to the Sling TV base package. Sling TV and the other providers also make it easy for customers to add or subtract packages or come and go from the whole platform at will – something that can’t be done with cable companies.

Certainly Sling TV has made a difference for Dish. The company has been bleeding satellite customers and had customer losses for the last ten quarters. But the company had a small customer gain of 28,000 customers in the fourth quarter due to the popularity of Sling TV. The company does not report customers by satellite and OTT, so we don’t know the specific numbers.