January 6, 2015

Honey, I Shrunk the Cable Package

As the barrage of announcements that defines the annual Consumer Electronics Show gets underway, Dish Networks trumped the early wave of press with the launch of its new Sling TV service. Despite what you might imagine given the operator and the name, Sling TV is a broadband-only video service – that is, it requires no proprietary hardware (that is, no satellite dish or a company-leased set-top box), only a broadband connection to the viewing device. Such is the nature of so-called ‘virtual’ services.

Regarding the service itself, it is comprised of a ‘skinny’ bundle of TV channels that, at launch, include ESPN, ESPN2, Disney Channel, ABC Family, HGTV, TNT, Food Network, Travel Channel, CNN, TBS, Cartoon Network, Adult Swim, videos produced by Maker Studios, and transactional movie rentals. It does not include the ‘Big Four’ broadcast channels or Millennial favorites like Comedy Central and MTV, but this is only the service’s first incarnation. The price? Only $20 per month, and Dish promises it will support all major connected devices and app platforms.

So what should we take away from this announcement and what does it mean for the future of pay TV? I have two observations.

1. ‘Skinny’ Bundles Mean Only the Fit and Flexible Will Survive
Per Nielsen, the average TV household has access to an average of 189 TV channels, up from 129 channels as recently as 2008. Unfortunately, the number of channels viewed on a regular basis now stands at only 17. So permit me to call this one unequivocally: the ‘more-is-better,’ ‘super-size-me’ era of pay-TV marketing is dead. Its credibility as an overarching strategic imperative is now defunct.

As Netflix and other SVOD providers have proven, consumers appreciate a reasonable balance of value and quality, and this lesson was not lost on Dish. The company began developing its OTT service with an aggressive price point first in mind (i.e., $20 per month), after which it set about determining the minimum bundle of channels it could pack into this price point and still make money. (As TDG Members are aware, our primary research has long supported this price point for a ‘lite’ TV service, as interest in such services falls off dramatically above that price.)

For Dish, the ‘right’ package of content for Sling TV worked out to be 12 channels, and in this case from just three media companies: Disney, Scripps, and Turner (a massive reduction from the number required to support 189 channels). A little back-of-the-envelope math suggests that Dish paid regular pay-TV market rates for these channels. My guess is the total content bill for this lineup is about $14 per sub per month (with around $6/sub for ESPN alone), representing an Apple iTunes-like 70/30-revenue split between the content providers and Dish.

These ‘skinny’ bundles represent a very stark, binary reality for TV content providers and MVPDs alike. For the content provider it is all or nothing. If your content makes it into a new skinny bundle, you get to keep your existing economics. If not, you get nothing. For the MVPD, there are still positive margins in thinner bundles, but not on the same scope or scale as the legacy model (perhaps why Dish’s stock declined 3% on Monday?). If this service is an example of what’s coming, the next couple of years are going to be rough for legacy players of all stripes. Only the strong and adaptable will survive, while the rest could be in for serious trouble.

2. Software is Eating Legacy TV
It is one thing for an OTT provider like Netflix to launch an entirely software-based service. The company had no legacy hardware assets with which to deal and was wise enough to avoid building its own box. It is quite different when a legacy, facility-based provider like Dish with a strong background in consumer boxes (i.e., the Hopper and Sling) does the same. Kudos to Dish for boldly recognizing that a pure cloud-based service was necessary to be relevant in this space. We expect other legacy operators will see the writing on the wall during 2015 and launch their own standalone (i.e., box-less, app-based) OTT services to keep pace.

As this happens, consumer interest and industry innovation will shift to the TV-as-an-app ecosystem, which will in turn fuel a range of new services, thus creating a virtuous (and incredibly disruptive) cycle for years to come. Of course, the demographics of an aging population ensure that legacy pay-TV services (including those from Dish) will live on for years, but let’s be honest: Elvis has left the building, the momentum has shifted to software and apps, and the pay-TV industry will never be the same.

Conclusion
CES (and Las Vegas itself) represents a belief in the future and the ability for people, companies, and even entire industries to reinvent themselves. The television industry is due for reinvention and, if successful, Sling TV and its ilk will put transformative pressure on incumbent content providers and operators to adjust to new modalities.

Stick with TDG and stay ahead of the curve.

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