TV providers and industry analysts have woken up to the viability of vMVPDs. However, the business model for vMVPDs is fundamentally different from traditional pay TV, and programmers cannot expect to treat them the same.
Analysts optimistic for the future of vMVPDs
ABI research says that services that deliver packages of live linear channels over the Internet, such as Sling TV in the US and TVPlayer in the UK, have a bright future. The company estimates that by the end of 2018 as many as 400 million people could be using vMVPD services.~
In markets such as the US, the consumer proposition for vMVPDs can be compelling. For $20 a month, Sling TV provides many popular cable channels that typically require $60 or $80 a month to obtain from traditional pay TV. Of course, the consumer must be willing to live without some channels they may currently use. However, with potential savings of $500 or more a year, that’s a trade many are prepared to make.
vMVPD business constraints not the same as traditional pay TV
Though the business looks essentially the same as pay TV to a consumer, vMVPDs operate under a very different set of business constraints. Content license fees are the biggest cost faced by any TV provider, whether traditional or virtual. However, they constrain a vMVPD far more than a traditional operator.
Traditional pay TV operators like Comcast and DirecTV have been facing escalating license fee costs for years. Comcast, for example, has seen the cost of content as a percentage of average revenue per subscriber increase from 47% in 2014 to 58% today.
According to nScreenMedia estimates, the cost of content license fees for one of the most popular vMVPD services in the US, YouTube TV, equals or even exceeds the $40 monthly subscription cost.
Another difference between pay TV and vMVPDs is the length of the consumer contract. Pay TV operators typically get consumers to sign up to multi-year agreements. Most vMVPDs can’t do that and must live with just 1-month commitment.
vMVPDs can’t absorb content fee increases
As programmers have demanded huge license fee increases for their content, traditional pay TV providers have absorbed some of that increase. For example, between 2013 and 2017, license fees paid by Comcast increased an average of 9% a year while ARPU increased only 3%. That is why their margins have eroded so quickly.
With no margin and no long-term customer commitments, YouTube TV and Sling TV are in no position to absorb big increases in content license fees.* They would be forced to increase subscription fees the full amount to cover the increased costs, or cut channels provided by the service to save money. Both courses of action will result in a reduction in subscribers.
In other words, demanding big increases in fees from vMVPDs could result in less license fee revenue for some, and possibly for all.
Tricky situation for programmers
Pay TV subscribers that have jumped to vMVPD services have already resolved to live without some channels to save money. They can likely do this because they have been spending more time with services like Netflix and less with pay TV. If vMVPDs start to increase prices or cut channels, some customers could decide they can live without their TV channels completely and become TV cutters, not just cord-cutters.
Simply put, TV programmers cannot expect to continue to raise prices on vMVPDs as they have done with traditional pay TV operators. If they do, they could end up with less revenue, not more.
Why it matters
TV programmers have been able to win large license fee increases from traditional pay TV operators.
Operators have absorbed some of the increase and accepted lower margins, to cushion the blow to subscribers.
vMVPD operators have no margins to absorb any increase and will raise prices or cut channels to compensate.
Programmer fee increases to vMVPDs could result in less revenue, not more.
~It is not clear to me how ABI thinks there will be 400M subscribers to vMVPDs by the end of this year. The US is the region with the most deployments, and there are currently no more than 6 million subscribers.