Is Online Programming Too Expensive?

I’ve read several articles recently that conjecture that online programming services that mimic cable company TV are in trouble because they are too expensive. This matters when trying to understand the cord-cutting trend because homes are less likely to bolt traditional cable if they have to spend as much elsewhere to get the networks they still want to watch. I haven’t looked a while, so I thought I’d make a new comparison. My local cable company is Charter Spectrum, so I compared the price of Charter cable TV to the online alternatives.

Charter’s base TV plan is called TV Select, and a new Charter subscriber gets a 12-month special price as follows:

$49.99 – 12-month advertised promotional price

$16.45 – Broadcast TV charge

$  6.99 – Settop box

$73.43 – 12-month promotion total price

After 12 months the base price for Select TV goes from $49.99 to $73.99, a $24 increase – and the full monthly fee jumps to $97.43 after the end of the one-year promotion. I’m a sports fan, and to get all of the channels I want I’d have to subscribe to Charter’s TV Silver plan. That package is $20 more expensive than the select plan, or $93.43 for 12 months, and then $117.43 after the end of the promotion period.

Charter’s Broadcast TV Charge has been widely labeled as a hidden fee in that Charter never mentions the fee in any advertising about the cable product. Charter just raised the fee to $16.45 in August, up from $13.50, making it the highest such fee among the big cable companies. But Comcast is not far behind at $14.95 per month and that fee is likely to increase soon. This fee is where the big cable companies are aggregating the charges for local programming from network affiliates of ABC, CBS, FOX, and NBC.

Comcast, AT&T, and some other big cable companies also charge a Regional Sports Fee, but so far Charter is covering this in their base cable costs. The bottom line is that for a Charter customer, my cheapest alternative that includes a full array of network cable channels will cost $73.43 for a year and then go up by $24.

How does this compare with the online alternatives?

  • The cheapest online alternative might be Sling TV. They have two basic small packages that cost $25 each or both for $45. Sling TV has a balanced number of sports and non-sports channels, but in my case doesn’t carry every sports network I want to see. There are also $5 add-on packages that can drive the cost up to $60 to see the network channels most homes probably want to watch. Sling TV doesn’t carry a full array of local network affiliates.
  • Next up in price is Fubo TV, priced at $54.99 per month. This is a sports-centric network that is especially attractive to soccer fans since the network carries a wide array of international sports. Strangely, Fubo TV doesn’t carry ESPN (meaning they also don’t carry ABC or Disney).
  • At the same price of $54.99 is Hulu + Live TV. They carry all of the sports networks I am looking for and a wide array of other network channels. They also carry the local network affiliate channels for most major markets. For $60.99 you can get this service without commercials, which requires downloading shows to watch the commercial-free versions. Hulu + Live TV also lets families and friends network together to watch shows at the same time.
  • YouTube TV is perhaps the closest online product to compare to Charters cable TV plans. This is priced at $64.99 per month. As a sports fan, the YouTube TV lineup provides all of the channels I want to follow my Maryland Terrapins. YouTube TV carries the same local network affiliates for my market that are available on Charter.

All of the online TV options allow subscribers to drop or add the service easily at any time, although none of them give a refund for time already paid. This means no contracts and no term commitment.

It’s easy to see why homes think that online program is too expensive, particularly since Charter falsely advertises their cable product at $49.99. But it costs almost $20 per month more to buy TV from Charter, even with the 12-month promotional price, and then $42 more poor month at the end of the promotion period. It still mystifies me why homes with decent broadband don’t do the math and leave Charter for Hulu or YouTube TV.

Windstream Adding YouTube TV

Windstream announced earlier this year that it is now offering YouTube TV to customers as an alternative to its traditional cable TV offering. The company has not yet fully ditched its traditional Kinetic TV offering, but this is a first step towards doing so. As more small cable operators look at the math of staying in the TV business, I’m expecting we’ll see a lot more ISPs considering the same transition. There are a lot of implications for converting traditional cable TV to a streaming service.

Regulatory. While regulation of traditional cable TV isn’t a massive burden, all regulatory requirements disappear with a conversion to a streaming service like YouTube TV. There are a several annual FCC filings required by cable operators that would disappear. If a cable operator is paying local franchise fees, they can avoid the monthly reporting of customers and revenues to local tax authorities.

Taxation. The biggest external change from such a conversion would be that the cable operator no longer has to collect and remit local franchise fees assessed on cable service which vary across the country between 3% and 6%. The cost of collecting taxes and fees and of dealing with tax authorities disappears for the cable operator.

The biggest implication of this change is that local communities could see franchise fees dry up overnight. I would expect a cable provider like Windstream to withdraw and cancel their franchise agreements if they fully adopt YouTube TV. If the primary cable provider in a town makes this conversion, then franchise fee payments dry up immediately. Franchise fees are an important part of balancing local government budgets, particularly in smaller towns.

Cancelling franchise agreements also means that all of the local obligations that come with a cable franchise disappear. The cable provider would no longer provide a PEG channel to show local government meetings and other local content. Any subsidies for local government iNets for bringing connectivity to city halls and schools would disappear.

Operational. There are huge operational savings for ISPs that make this conversion. Most of my clients that offer cable TV tell me that 60% or more of calls to customer service are about the cable product. Eliminating traditional cable means reducing customer service calls and reducing truck rolls.

Getting out of the traditional cable business also means getting out of the settop box business. There is a huge operational savings from not having to keep a settop box inventory and keeping boxes operational. Installations get much easier when there is no settop box to connect.

Broadcast Fees. There are also implications for the larger cable market. Online services like YouTube TV are not required to comply with FCC channel lineups and they can offer whatever packages they negotiate with programmers. This means many networks will no longer be carried and will lose the revenue for every customer that makes this conversion. This becomes cord cutting at the corporate level and as 200-channel lineups get shrunk to 70 channels, a lot of monthly fees to programmers evaporate.

If you look at the YouTube TV line-up, you’ll see the most popular networks. For example, the service includes the primary Discovery channel, but not all of the ancillary Discovery channels that come with a traditional TV subscription. This is true throughout the line-up as the service concentrates on the most-popular channels only.

Profitability. The biggest change is to profitability. I expect that if Windstream fully calculated the cost of being in the cable business that they would show no margin or a negative margin. All of the ancillary costs of extra truck rolls, dealing with settop boxes, tracking and reporting franchise fees and taxes, etc. can add up.

I don’t know what YouTube TV will pay to a cable provider like Windstream, but it can’t be much – no more than a few pennies on the dollar. Nobody would make this transition to get rich from the commission fees, but rather to avoid the costs and the hassles of remaining in the traditional cable business.

Will Costly Alternatives Slow Cord Cutting?

The primary reason that households claim they cut the cord is due to price. Surveys have shown that most households regularly watch around a dozen cable channels, and cord cutters still want to see their favorite channels. Not all cord cutters are willing to go cold turkey on the traditional cable networks and so they seek out an online alternative that carries the networks they want to watch.

For the last few years, there have been online alternatives that carry the most popular cable networks for prices between $35 and $45 per month. However, during the last year, the cost of these alternatives has risen significantly. I doubt that the price increases will drive people back to the cable companies where they had to pay for hidden fees and a settop box, but the higher prices might make more households hesitate to make the switch. Following are the current prices of the major online alternatives to traditional cable TV:

Hulu Live TV. This service is owned 2/3 by Disney and 1/3 by Comcast. They recently announced a price increase effective December 18 to move the package from $44.99 to $54.99. Customers can also select an add-free version for $60.99. At the beginning of 2019, the service was priced at $39.99, so the price increased by 36% during the year.

AT&T TV Now (was called DirecTV Now) raised the price of the service earlier this year from $50 to $65. The company also raised the prices significantly for DirecTV over satellite and lost millions of customers between the two services.

YouTube TV raised prices in May from $40 to $50. This service is owned by Google. Along with the price increase, the service added the Discovery Channel.

Sling TV is owned by Dish Networks. They still have the lowest prices for somebody looking for a true skinny package. They offer two line-ups, called Blue or Orange that each cost $25 per month, or both for $40 per month. There are also add-ons packages for $5 per month for Kids (Nick channels, Disney Jr), Lifestyle (VH-1, BET, diy, Hallmark), Heartland (outdoor channels), Hollywood (TCM, Sundance, Reelz), along with News, Spanish and International packages. One of the big things missing from Sling TV is local network channels and they provide an HD antenna with a subscription. Sling TV has spread the most popular channels in such a way that customers can easily spend $50 to $60 monthly to get their favorite channels.

Fubo TV is independent and not associated with another big media company. They offer 179 channels, including local network channels for $54.99 per month. The network started with sports coverage including an emphasis on soccer.

TVision Home is owned by T-Mobile. This was formerly known as Layer3 TV. The company has never tried to make this a low-cost alternative and it’s the closest online service to mimic traditional cable TV. The service is only available today in a few major markets. Customers can get an introductory price of $90 per month (goes up to $100 after a year). They charge $10 per extra TV and also bill taxes that range from 4% to 20% depending upon the market. This is cable TV delivered over broadband.

Playstation Vue. The service is owned by Sony and has announced that it will cease service at the end of January 2020. The service is no longer taking new customers. The price of the core packages is $55 per month, which increased by $5 in July.  The service carries more sports channels than most of the other services.

The channels offered by each service differ, so customers need to shop carefully and compare lineups. For example, I’m a sports fan and Sling TV and Fubo TV don’t carry the BigTen Network. There are similar gaps throughout the lineups of all of the providers.

All of these alternatives, except perhaps TVision Home, are still less expensive than most traditional cable TV packages. However, it looks like all of these services are going to routinely increase rates to cover increased programming fees. Couple that with the fact that customers dropping cable TV probably lose their bunding discounts, and a lot of houses are probably still on the fence about cord cutting.

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.

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.