Some vMVPD operators realize their channel bundles are just too big to be profitable. They are cutting channels and creating add-ons to compensate. Will consumers embrace the moves?
In a rush to jump into the vMVPD market, companies like Hulu and AT&T put together channel bundles that were decidedly un-skinny. Base packages included local channels and sports channels, among the most expensive to license in the industry.
The aggressive $40 per month price of the entry-level packages from each company was designed to attract as many subscribers as possible. The approach seems to have worked. DirecTV Now has over 5 million subscribers, and Hulu Live over 1 million.
Unfortunately, the price left no room for profit. In a detailed analysis of YouTube TV’s base package, nScreenMedia found that content licensing costs alone amounted to more than the monthly cost to consumers. Faced with mounting red ink, vMVPDs are looking to make their packages skinnier to boost margins.
AT&T creating skinnier bundles
Some vMVPDs are looking to trim channels in their services to make much skinnier bundles. AT&T Communication’s CEO John Donovan has complained that DirecTV Now is far bigger than it should be. Ideally, he would like to create slimmer, more focused, bundles of channels:
“The way that you build a skinny bundle is you start with enough programming that you have a deal, like you have product, and that gives others the incentive to be on the product.”
Mr. Donovan hasn’t modified the bundles in DirecTV Now yet. However, he has created a much skinnier bundle offer of 30 or so channels called WatchTV. The service provides many Turner channels, which AT&T owns, and omits expensive content like sports and local broadcasters. The $15 a month price should more than cover content costs. However, since the company gives WatchTV away to many wireless customers, it is not clear if it is making money for the company.
Hulu cuts channels, creates add-ons
Hulu seems to be headed down the same path as AT&T. Since the company introduced its vMVPD service Live, it has acquired over a million subscribers. Unfortunately, Hulu’s losses have also grown, to $423 million in Q2 2018. To contain the rising red ink, Randy Freer, Hulu CEO, wants to reduce the number of live channels he provides in the base Live package. In an interview with The Information, he said:
“We have to be able to evolve so we can provide the customers the news and sports and entertainment in a way that makes sense, bundled in a way that allows us to create packages that have a positive margin.”
The process of reducing the number of channels in Live has already begun. In an email to Live subscribers on October 31st, 2018 entitled Live TV Channel Changes, the company said:
“As of October 30, we have moved FYI and Lifetime Movies from the Hulu with Live TV plan into an Entertainment Add-on alongside new channels DIY, the Cooking Channel, and CNBC World.”
Viewers wishing to continue to watch FYI or Lifetime Movies will need to spend $7.99 extra per month to get the Entertainment Add-on. The change makes a modest reduction of a little less than a dollar in the content costs of the base package. However, the $7.99 cost of the Add-on package more than doubles the core cost of licensing the content.
Sling TV the right approach from the start?
Hulu appears to be moving toward the Sling TV skinny bundle model. Sling resisted putting too many channels in its base bundle from the very beginning. It also omitted the very expensive local broadcast channels. Roger Lynch, the former CEO of Sling TV, told nScreenMedia that the entry-level package – called Sling Orange – of 20+ channels was making a small profit at $20 a month. Since then Sling has increased the price to $25 a month. However, even at the new price, it remains the cheapest way to get ESPN online.
Consumers can easily customize the bundle to their liking by adding one or more $5 a month Xtra Packs. These small bundles of a handful of channels are tightly focused around genres like sports, movies, and kid’s content.
Will subscribers stick around?
In a recent survey, 73% of consumers said they wanted to pick the channels in their pay TV packages. However, it is quite a different thing to ask a subscriber to pay extra for a channel they previously got in their base package. It remains to be seen how Hulu’s Live customers will react.
Why it matters
Many vMVPDs launched with so many channels in their base package they were likely loosing money from the start.
They are starting to cut channels to reduce losses.
Will subscribers stick around when they are asked to pay the same for less?