Finance

Thin Is In, But the Jury’s Still Out

Skinny-Bundle Strategy May Not Stanch Pay TV Losses 8/10/2015 8:00 AM Eastern
TakeAway

Some evidence has emerged that the so-called skinny bundle isn’t enough to stem pay TV sub losses.

Getting skinny is the latest fashion trend in the media business, and the prospect of smaller video packages was on the minds of practically every major video executive in the past few weeks.

 

But while there seems to be a distinct line between distribution and content players on this issue — distributors want skinnier bundles, but content companies are reluctant to break up existing packages — some proof is emerging that just offering smaller, cheaper programming packages won’t necessarily solve all the ills plaguing the industry.

 

Case in point: Dish Network’s second-quarter results that included subscribers from its pioneering over-the-top service, Sling TV. Though it didn’t break out the figures, the inclusion wasn’t enough to stem net subscriber losses at the second-largest satellite-TV company. Dish actually lost about 81,000 net subscribers in the period, almost twice the 44,000 it lost in the same period in 2014.

 

According to some analysts, Sling TV has between 250,000 and 275,000 customers, so the losses at Dish could have been materially larger.

 

LOSSES COULD BE ‘HORRIFIC’

 

Dish had announced it had about 169,000 Sling TV subscribers in the first quarter, but gave no estimate for the second quarter. MoffettNathanson principal and senior analyst Craig Moffett estimated in a research note that, based on trends, Sling TV could have ended the second quarter with about 275,000 customers.

 

If that is correct, and Moffett said the numbers are not carved in stone, then Dish itself could have lost a “horrific” 187,000 net subscribers in the second quarter.

 

Sling TV is technically an OTT service, but one of its most hyped selling points is its flexible packaging — for $20 a month, customers can get 20 core channels (including ESPN, TBS and TNT) and pay an extra $5 per month for mini packages based on genres like sports, news & entertainment and movies.

 

Granted, the inclusion of the Sling TV numbers helped make a horrific quarter simply horrible on the subscriber front. But they didn’t take up all of the slack.

 

Dish chairman and CEO Charlie Ergen said skinny bundles make more sense with OTT services than traditional pay TV, mainly because of lower subscriber acquisition costs (SAC). Ergen said SAC could be as high as $1,000 for a typical satellite-TV subscriber, which would make it uneconomical to offer a $20 per month programming package to that customer.

 

“But it does make sense for an OTT customer where the SAC is less than $100,” he said.

 

Charter Communications CEO Tom Rutledge may have said it best when, on Charter’s earnings call, he said skinny bundles are still bundles, they just cost less. And given the choice, customers would rather take the larger bundle over the small, because there is still value there. What is driving some people toward skinnier packages is cost and a changing lifestyle.

 

“People don’t have houses, don’t have big screen TVs, don’t have money, and you put all that together and the only way to get access to video is through over-the-top or small screen kinds of video services,” Rutledge said. “That doesn’t mean that the big products aren’t desirable. It just means that they’re very expensive and that people’s lifestyles are putting them in a situation where they don’t have access to them.”

 

Rutledge said he would love to buy all of his programming a la carte and make up his own bundles to sell to consumers.

 

“That’s not the way the world works,” he said, adding that he doesn’t expect things to change anytime soon. “My sense is that it isn’t all about to fall apart and that we’ll be having this conversation three years from now, because I think there is nothing to incent anyone to pull it apart.”

 

He also had words for programmers that think the answer is to sell their shows direct to the consumer. “They’ve devalued their core product and they may or may not be carried in the future as a result of that,” Rutledge said. “And so, I think like all things, no trend goes unchecked forever.”

 

Nobody seems to be more torn over the issue than The Walt Disney Co. chairman and CEO Bob Iger. Iger spent the better part of Disney’s recent fiscal third-quarter conference call defending ESPN, claiming skinny packages aren’t cutting into the sub base and reassuring investors that the Worldwide Leader in Sports won’t go direct-to-consumer anytime soon.

 

IGER DOWNPLAYS SUB DROPS

 

The Wall Street Journal had reported that ESPN was in a major cost-cutting mode after shedding about 3.2 million subscribers in a little more than 12 months, citing Nielsen figures. It partly attributed those losses to ESPN’s inclusion in skinny packages and an overall pay TV decline.

 

On the call, Iger admitted that ESPN has had some “modest” subscriber losses and that the vast majority (80%) were due to an overall drop in pay TV customers, with a small percentage due to skinny packages. He added that the subscriber loss was less dramatic than had been depicted by Nielsen and in reports and said the company still believes in traditional distribution.

 

ESPN is still in demand, he added — he said that in the first calendar quarter this year 83% of multichannel households turned on the channel at some point.

 

Iger said last month that for ESPN, going direct-to-consumer like HBO Now and others was probably “inevitable,” but wouldn’t happen for at least five years. On the conference call, he reiterated that timeframe.

 

“We are not taking what I would call radical steps to move our products into over-the-top businesses to disrupt that business because we don’t think right now that is necessarily the greatest opportunity,” Iger said, adding that the programmer would keep its options open with other platforms.

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