New over-the-top services need to be priced carefully or they could lose their target audience, or worse, cannibalize existing pay TV customers, according to new MoffettNathanson research.
In a report issued Thursday, MoffettNathanson principal and senior analyst Craig Moffett wrote that pricing will be the main component of success for OTT services like Hulu’s pending live TV package. Using data from Altman Vilandrie & Co.’s annual Consumer Video Survey , the analyst shows that penetration rates for OTT services fall sharply as their monthly prices rise.
“Perhaps the clearest takeaway from our work with AV&Co.’s Consumer Video Survey data is this: the demand curve for OTT video is rather steep,” Moffett wrote. “Or to put it more colloquially … people aren’t inclined to spend much on OTT video.”
According to the research, the biggest demand for the upcoming Hulu services seems to be around the $20 per month price point, where about 16% of the 5,000 respondents to the survey said they would take the service. At $40 per month, the level that several reports have said is Hulu’s target price, just 6.5% said they would take the service. At $55 per month, even fewer – about 2% -- would subscribe.
The problem with the lower prices is that Moffett estimates that Hulu’s programming costs will be about $39.70 per month per subscriber. And to make money on the service, even at the $40 price point, Moffett says that the target market – cord cutters and cord-nevers – will have to shift from non-pay TV customers looking to spend more to current subscribers looking to pay less.
For AT&T’s DirecTV Now service scheduled for a fourth-quarter launch, pricing could be a huge issue. While AT&T hasn’t said how much it will charge for the OTT service, it plans to have more than 100 channels of live and on-demand programming, implying a “fat bundle” of services instead of a skinny bundle. Moffett wrote that because of the volume of programming DirecTV Now is likely to be priced high, possibly around $70 per month, where according to the CVS research, only about 0.9% of respondents would take it. Also troubling is who would take it.
“…the customer who is most likely to find a $70 per month package of programming appealing is not one who is currently paying $0 or $10,” Moffett wrote. “It is someone who is currently paying over $100. And for DirecTV, it is someone who already has DirecTV’s legacy service.”
While a new OTT launch with about 10 million subscribers -- or 9% of 110 million U.S. TV homes – sounds like a winner, Moffett noted, “that success is cold comfort if it’s achieved only by accelerating traditional pay TV subscriber losses by 7.3 million.”
This story was edited on Oct. 25 to correct the 9% figure in the last paragraph.