Don’t worry about the virtual MVPD revolution shaking up the pay TV industry — it already has

Traditional pay TV providers — cable operators, satellite and telco TV purveyors and the like — can stop worrying about the coming over-the-top video revolution, for one simple reason: It’s already here.

Nothing in the past 20 years has transformed the pay TV paradigm more quickly and more completely than offering consumers more choices in virtually every aspect of the business, whether it be selecting the number of channels they want to watch and pay for (and, more importantly, those they don’t) or simply untethering them from the living-room TV set, allowing them to watch what they want, when and where they want to watch it.

It is for that reason that Multichannel News has made a bit of a departure in naming its 2018 Distributor of the Year. This year, instead of naming a single operator that has made the biggest impact on the business, we have selected an industry segment — virtual multichannel video programming distributors — consisting of seven separate companies: Sling TV, DirecTV Now, Hulu With Live TV, YouTube TV, Sony PlayStation Vue, Fubo TV and Philo TV.

The idea that consumers would spend hours each day watching video on tiny cellphone screens was laughed at five years ago, but today, every programmer and every distributor has some kind of OTT strategy in practice or in the works.

And though the total number of OTT service providers is still small compared to entrenched pay TV services from Comcast, Charter, DirecTV and Dish Network, they are growing at a much-faster rate. According to Strategy Analytics, there were about 46.3 million traditional cable subscribers, 30.6 million satellite TV customers and 10.1 million telco TV households in the second quarter, compared to about 6.7 million vMVPD service customers. Some analysts predict that the number of vMVPD subscribers will balloon to 20 million to 25 million in the next five years.

“When people look at the market and don’t count these subscribers, they are not looking at the market correctly,” Leichtman Research Group president Bruce Leichtman said in an interview. “They are absolutely part of the market today, and not counting them is like not counting satellite in the early 1990s or telcos in the early 2000s.”

Leichtman is a little more conservative in his predictions for vMVPDs — he thinks they will have about 15 million customers by 2022.

“We know that this market share is going to increase — at the end of 2017, these vMVPDs had about 5% market share; that is going to grow to about 15% in 2022,” Leichtman said. “The question is just how the traditional providers maintain their base.”

Jimshade Chaudhari, vice president of product marketing and management at OTT pioneer Sling TV, put it a little more succinctly: “OTT is here to stay.”

Streaming video has revolutionized the pay TV business and consumers are using the technology more and more to access content. According to comScore, about 5% of U.S. households with WiFi internet access (4.9 million homes) streamed a pure play vMVPD on their TV screens in April 2018. That’s up 58% from the prior year.

In that same month, the measurement company continued, vMVPD views accounted for 10% of all time spent on OTT streaming, a 53% increase from the prior year.

In a research note in August, ComScore senior director, emerging products Susan Engleson said the rise of streaming video highlights the convergence of digital and linear TV.

“The behavior of MVPDs in regard to digital is a prime example of the industry trying to stay ahead of the curve,” Engleson said in her report.

Broadband Surge

The handwriting has been on the wall at least since 2015, the first year that big operators like Comcast showed that broadband customers have exceeded video subscribers. And that gap is widening.

For example, in 2015 Comcast had 22.3 million video customers and 23.3 million broadband customers. In the second quarter of 2018, it had 22.1 million video customers and 26.5 million broadband customers.

Granted, not all of those broadband-only subscribers are paying OTT customers. Some have cut the cable cord for subscription video-on-demand services such as Netflix (which has 56 million U.S. customers and 124 million subscribers worldwide) or are doing fine without pay TV service at all.

But as cable subscriber rolls have dwindled — the industry peaked in 2001, with 66.9 million subscribers — OTT services have been adding customers at a triple-digit rate since 2015, just months after Sony launched PlayStation Vue in November 2014 and the year Dish Network unveiled Sling TV at CES in Las Vegas.

Since then, AT&T has launched DirecTV Now, its OTT offering that is growing at an exponential rate, followed by smaller offerings from Hulu (Hulu With Live TV) and even niche services like sports-centric fuboTV and Philo TV. And more are likely on the way: most likely from T-Mobile, which purchased high-end distributor Layer3 TV last year.

Although much smaller in total numbers, OTT providers have dwarfed their traditional TV competitors in terms of growth. According to Strategy Analytics, vMVPD providers have grown at a 119.3% clip since Q2 2017, while traditional pay TV (cable, satellite and telco) has fallen 3.6% to 87.1 million customers.

OTT growth seemed to slow a bit in the second quarter — Sling TV added 41,000 customers (compared to 91,000 in Q1) and DirecTV Now added 325,000 subscribers, compared to 338,000 in Q1.

But some analysts attributed that slowdown to the seasonally weak period (when college students go home for the summer) and noted that for some services, it was close to their best quarter ever. That could signal that virtual MVPDs are opening up a whole new market for video, Leichtman said.

“The second quarter was always slow because of college students and snowbirds,” Leichtman said. “Well, maybe now college students can get a service. This second quarter was the best second quarter for the pay TV business since 2014, and it was all because of the vMVPD business.”

Virtual MVPDs added about 868,000 subscribers in Q2 combined, nearly offsetting losses of 973,000 customers in the cable, satellite and telco TV segments in the period, according to Strategy Analytics.

While vMVPDs are becoming a formidable force, Leichtman added, it should be noted that the biggest players in the space also have a stake in the traditional pay TV business. Sling TV is owned by satellite TV company Dish Network and No. 2 DirecTV Now is owned by AT&T.

“What we’re seeing is share-shifting, but it’s also share-shifting within the No. 1 pay TV company in America, AT&T, and the No. 4 pay TV company in America, Dish,” Leichtman said. “So a lot of what we’re seeing is strategic decisions by those two operators in how they are using their multiple brands to target the market. At its core that is one of the key reasons why this category will continue to grow.”

At Hulu, which is owned by a mix of major programmers and distributors — The Walt Disney Co., 21st Century Fox, Comcast’s NBCUniversal and AT&T’s WarnerMedia — CEO Randy Freer told CNBC in May that the Hulu With Live TV service had about 800,000 customers, a huge bump from the 165,000 subscribers predicted by some analysts in Q2 2017. While Hulu hasn’t updated its subscriber numbers since — Strategy Analytics estimated it had 955,000 customers in Q2 2018 — the company is confident in its growth opportunities.

Hulu is continuing to grow across both its subscription VOD and Live TV segments, head of media and subscriber growth Patrizio Spagnoletto said, driven by its ability to offer live TV and SVOD in one place, its growing roster of content, including original programming, and partnerships with Spotify and Sprint.

Hulu With Live TV also has a huge untapped reservoir of 20 million customers for its SVOD service, which could potentially become Live customers. But its growth will likely come from elsewhere, Spagnoletto said.

“Yes, there are current Hulu SVOD subscribers who may be well-served by our complete Hulu With Live TV package, but we also know that there are likely just as many who feel our Limited Commercial or No Commercial SVOD plans are the right fit for them,” Spagnoletto said. “When we look at acquiring live TV subs, we think the biggest potential is with people who have recently fallen out of — or plan to leave — the pay TV ecosystem. People who are looking for alternative ways to enjoy their TV, through an experience they’re not getting with their cable or satellite provider.”

Flanker Play

Leichtman characterized the vMVPD surge to a decision by the larger operators to create “flanker brands” to attract a different audience segment.

“In the same way that Cricket is a flanker brand for AT&T Wireless and addresses a different segment of the market, so too is DirecTV Now a flanker brand for DirecTV and for U-verse and addresses a different segment of the market,” Leichtman said. “With customer acquisition costs of $800 to $1,000 [each], they are going to be more selective in who they go after. Unlike two to 20 years ago, they are not just going to go willy-nilly in acquiring new satellite customers.”

Other factors will play a role in whether companies continue to go all in with vMVPDs, he added.

“The growth of these services will be determined as much by corporate strategy as they will by consumer demand,” Leichtman said.

Sony Interactive Entertainment vice president and head of PlayStation Vue Dwayne Benefield said he wouldn’t call his service a flanker brand, but said the service was created to serve what Sony saw as a need in the gaming community.

“The PlayStation base are not just gamers, they consume a tremendous amount of other media, including music and video,” Benefield said. “As Sony Interactive Entertainment, our ambition is to deliver a true whole-home interactive experience, including video and music, which we do.

“It’s not a flanker, but it’s definitely complements the game sites in that the users can remain on their consoles and consume not just the games, but the video they really want and in an interactive fashion that’s much better than what they were used to traditionally,” he added.

But despite their rapid customer growth, vMVPDs don’t appear to be making money yet. Sanford Bernstein media analyst Todd Juenger has estimated that one of the newest entrants — YouTube TV — loses about $5 per subscriber per month on its service, and has no clear path toward profitability. With an estimated 410,000 subscribers — YouTube TV does not officially release customer tallies — that works out to a loss of nearly $25 million per year.

Other analysts have noted that prices for vMVPD service in many cases barely cover the cost of programming. And that gap will narrow as content costs rise.

“For all of these companies in your Distributor of the Year, the revenue models for each of them aren’t that inviting as standalone services,” Leichtman said. “But none of them are really standalone services. Whether it’s Sling TV or DirecTV Now, PS Vue or YouTube or Hulu, they are serving a strategic position for their [parent] companies, not as standalone businesses. None of them are reporting the individual economics for these services. They are all there for larger more strategic purposes.”

But perhaps greater than their subscriber growth is the influence these companies are having on their much larger competitors. Last month, in a conference call with analysts to discuss Q2 results, Comcast chairman and CEO Brian Roberts said the largest cable operator in the country, which has had a laser focus on video for more than five decades, was now a “connectivity” company.

A ‘Post-Bundle’ World

Morgan Stanley media analyst Ben Swinburne added that instead of lamenting over-the-top and SVOD competitors, every pay TV company spent its Q2 earnings calls talking up connectivity and integrating SVOD services like Netflix and Hulu into their set-tops.

“Cord-cutting concerns felt passe in 2Q, with the focus on earnings calls entirely on a post-video business model,” Swinburne said in a research note. “It’s clear cable and satellite operators are actively looking to leverage their position as aggregators and providers of IP-based connectivity into a ‘post-bundle’ world.”

Virtual MVPDs aren’t sleeping on the job, either. While some critics have harped on the transient nature of many vMVPD subscribers — churn is high with the services — Sling TV’s Chaudhari said his company has come up with a solution it hopes will address the problem in a less traditional way.

Starting in June, Sling TV began allowing customers who regularly churned out of the service around seasonal content, such as pro football games, to remain Sling TV customers without having to pay for it. Those customers would get access to free, mostly ad-supported programming — including VOD and some live content — as well as the ability to pay for and watch pay-per-view events. When those customers want to restart their subscriptions, they can do so by simply clicking a banner on the Sling TV app or website. “For us, it’s about embracing the nature of consumer behavior around OTT,” Chaudhari said. “People want to come in and out of these services. Ideally, we would like for everyone to stay in the service for 12 months out of the year, but we know it’s content-driven. We’re embracing that.

“We want to make it easy for customers to enjoy their entertainment,” he added. “Whether they’re actively paying us or not actively paying us, we want to be top of mind. So, when they think about where they want to watch that pay-per-view fight, it’s Sling.”

Here’s a snapshot of Sling TV and the other distributors making waves in the vMVPD space.

Sling TV: Launched on Jan. 5, 2015 at CES in Las Vegas, Sling TV officially ushered in the new era of tightly-packaged skinny bundles. Originally priced at $20 per month for about 20 channels that included AMC Networks, Turner networks and others (but no broadcasters), Sling TV offered expansion packages based on genres like Sports, News and Entertainment for an extra $4.99 per month. In 2016, Sling TV introduced Sling Blue, its multistream package with about 40 channels (including broadcast networks and regional sports channels) for $25 per month. The original 20-channel Sling TV package was renamed Sling Orange and kept its $20-permonth price tag. Dish kept its Sling TV subscriber numbers under wraps for its first two years, but began making its results public in February, for year-end 2017. Sling TV added about 1 million customers in its first full year, ending the second quarter of this year with 2.3 million paying subscribers.

The success of the service has helped lessen the blow of heavy subscriber losses in Dish’s core satellite-TV business, which has been in steady decline.

DirecTV Now: Satellite-TV provider DirecTV launched its OTT offspring, DirecTV Now, in November 2016, offering a quartet of channel packages with names like Live a Little (65 channels for $35 per month); Just Right (85 channels for $50/month), Go Big (105 channels for $60/month); and Gotta Have It (125 channels for $70/month).

Those packages each rose by $5 per month by last quarter, but even with the higher pricing, analysts have wondered aloud how the service is able to make money. The answer, at least so far, is it hasn’t, especially when heavy discounting (AT&T has made its $35 monthly DirecTV Now starter package available for $10 per month for new customers) is taken into account.

Parent AT&T does not discuss individual financial figures for DirecTV Now, but the company has high hopes for advanced advertising opportunities at its distribution and content businesses, with a spokesman adding that advertising yields improve three-to-five times when it uses its data insights to deliver ads on DirecTV.

“Now Turner has an ad inventory that’s three times the size of our DirecTV inventory and we intend to apply the same data to that inventory,” the spokesman added.

The aggressive discounting has translated into strong customer growth — DirecTV Now had 1.8 million subscribers in Q2, and was heading toward 2.5 million by the end of the year, according to some analyst predictions. The path toward No. 1 is likely to be paved with even heavier discounting, although a company spokesman preferred to characterize DirecTV Now’s content mix and price point “very competitive, encouraging customers to continue using the service.”

Hulu With Live TV: Hulu With Live TV launched in May 2017 amid fears that its heavy-hitting backers — The Walt Disney Co., 21st Century Fox, Comcast and Time Warner — would crush the competition with exclusive content at low prices. That didn’t quite happen: Hulu With Live TV offers 50 channels for $39.99 per month, similar to other OTT services, but also includes access to the Hulu ad-supported SVOD channel with exclusive programming like The Handmaid’s Tale. CEO Randy Freer told CNBC in May that the service had about 800,000 subscribers in its first year. Couple that with the 20 million viewers for the $7.99 per month ad-supported Hulu streaming service — all potential Hulu With Live TV customers — and prospects for the service look good, with most analysts predicting 1 million or more Hulu With Live TV customers by year-end.

Hulu has recently undergone a bit of a shakeup. CEO Michael Hopkins left the company in October 2017 to become chairman of Sony Pictures Television and was replaced by Freer, a former Fox executive. And Disney’s $71.3 billion purchase of Fox’s studio and cable-network assets, expected to close in the first quarter of next year, will give the service a dominant shareholder (post-deal, Disney will have a 60% stake). Disney, which has its own direct-to-consumer plans (it launched ESPN+ in April and plans to offer an entertainment streaming service in 2019), has already pledged not to interfere with Hulu or Hulu With Live TV.

Sony PlayStation Vue: Sony Entertainment debuted its PlayStation Vue subscription television service nationwide in 2016 (after a beta launch in November 2014 and a limited rollout in five cities in March 2015), but the product has been a bit of an enigma to analysts and industry observers.

Unlike its OTT counterparts, PS Vue is not an ultra-low-cost alternative — packages range from $44.99 per month for Access (50 channels, including ESPN, TBS, TNT and broadcast networks) to $79.99 for Ultra (a package of 85-plus channels including HBO and Showtime) — nor a “skinny” bundle. And despite its name, PlayStation Vue isn’t geared toward gamers. You don’t even need to own a PlayStation video console to get the service, which is available to stream on Apple TV, Amazon Fire TV, Roku, Android devices and mobile devices, in addition to PlayStation 3 and PlayStation 4 consoles.

Sony has focused mostly on the consumer experience, eschewing pricing competition and unnecessary bells and whistles for more streams (five) and greater flexibility.

fuboTV: Competing as a startup in a vMVPD forest full of tall tech and telecom giants, fuboTV has worked hard to carve out a niche in sports programming — which is notable, given that the live-streaming service doesn’t have a carriage deal with Disney/ESPN.

Having received more than $151 million in private funding to date — $75 million coming in the latest round in April, led by AMC Networks — fuboTV is about to embark a major advertising push that will include national advertising this fall during National Football League, National Basketball Association and Major League Baseball games. Under the direction of co-founder and CEO David Gandler, a former Warner Bros. programmatic advertising executive, fuboTV hasn’t released subscriber numbers recently, but Strategy Analytics recently pegged the service’s base at around 325,000 users.

The virtual service has also carved out a revenue-share distribution deal through the National Cable Television Cooperative. fuboTV offers a base package of around 85 channels, including major broadcast affiliates in most markets, for $45 a month. Notably, regional sports channels, including Pac-12 Networks, as well as league-specific national channels like NBA TV, can be added either through the $50-per-month “Extra” tier or the “Sports Plus” add-on package. And fuboTV just signed a deal with Turner Networks, adding NBA games on TNT and MLB games on TBS to the mix.

Meanwhile, in an attempt to differentiate itself from the pack, fuboTV launched a 4K HDR beta over the summer, showing events including World Cup soccer and college football in the pixel-packed format.

YouTube TV: Now in the market for about 15 months, Google’s virtual pay TV service has attracted around 410,000 subscribers, according to Strategy Analytics. The service has prioritized access to local broadcast affiliates, slowly rolling into markets only when the Big Four local stations have been signed to retransmisson-consent deals. For $40 a month, YouTube TV users are also able to enjoy a robust collection of major cable networks, including ESPN, FX, TNT and AMC.

There are a few things missing. Users will note the absence of Viacom networks. Also, the Google-owned platform won’t play on Amazon’s Fire TV devices, a major accessibility hole within the OTT ecosystem. There are some notable enticements, including a standard first-month-free promotion and a cloud DVR that stores an unlimited amount of HD programming.

But launching around the same time as Hulu with Live TV, YouTube TV seems to have been left in the dust a little by a competitor with vast knowledge of streaming video. For its part, Hulu has combined aggressive promotion with a superior pitch, packaging its already popular SVOD platform with the newer vMVPD component, all for $40 a month. Hulu Live is now closing in on 1 million users, according to Strategy Analytics, making its base more than twice as big as YouTube TV. For YouTube, however, partnerships might win the day. For example, Verizon recently announced that it will package YouTube TV in its upcoming 5G fixed wireless rollout.

Philo TV: As the least-expensive virtual pay TV service, Philo has carved a unique niche among light TV users who don’t need access to live sports. The San Francisco-based startup operates under the direction of CEO Andrew McCollum, a Facebook co-founder, and is funded to the tune of $83.2 million.

Philo offers a collection of around 40 channels, including Viacom networks, AMC, IFC, A&E and History, but no local broadcasters, for $16 a month. That beats Sling TV’s base price offering of $20 a month. Philo hasn’t disclosed an official subscriber number. According to Strategy Analytics, the service has around 150,000 users. Like fuboTV and Sony’s PlayStation Vue, Philo has a revenue share agreement with the NCTC, which allows members to package the vMVPD with broadband offerings.

But in the MVPD game — virtual and otherwise — the name of the game is getting to scale and driving down content costs. Philo faces a tough challenge to keep its base price low, and grow its subscriber base, without the benefit of live sports or news.

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