"Skinny Bundles" Illustrate Growing Revenue Instability in Linear Video Entertainment

Smaller bundles of channels increasingly are seen as one way for linear video providers to provide consumers with more-affordable bundles of channels, while giving distributors more leverage in negotiations with program suppliers.

In the U.S. market, service providers are looking at smaller bundles of perhaps 20 channels, offered as a “streaming only” package. Dish Network and Verizon are the foremost proponents of such offers, at the moment.

Whether “skinny basic” packages can be created for linear video packages is the issue. Current programming contracts make that difficult, as standard contracts typically require that channels be included in whatever tiers are most popular with consumers (measured by number of subscribers taking each bundle).

In Canada, the Canadian Radio-television and Telecommunications Commission is considering mandating offering of lean programming packages that cost less, possibly by stripping out U.S. channels from the low-cost bundles, or even making channels available on a full “a la carte” basis.

Such discussions have been active in Canada since at least 2012, when the CRTC issued rulings related to bundling rules.

Since then, the CRTC has a number of options for containing consumer costs, including full a la carte offers, a move with unsettling implications for service providers and customers.

Nobody knows precisely how pricing might change in an environment where consumers can buy any single channel, on a stand-alone basis. That would create huge instability for service providers, who would likely lose the ability to predict future revenues.

On the other hand, consumer impact might be highly disparate. Some consumers could save money, while others find they wind up paying the same. And some consumers might even pay more. Everything hinges on which channels consumers really want, how those channels can be sold, and what rules might be created pertaining to bundling.

The present proposed changes in CRTC rules illustrate the amount of instability that now seems to be growing in traditional service provider businesses. Nobody really knows how distributor revenues might change if a la carte rules are imposed, or what consumer reaction might be.

Observers watching for signs of major change also are paying attention to what Time Warner might decide to do with its HBO service.

Some day, it has been reasonable to predict, one content owner would break with precedent and offer it’s content direct to consumers, over the top, without the requirement to buy that same product as part of a linear, bundled video subscription.

Some have predicted HBO would be first to do so, as HBO already does so in the Nordic countries, and has sold its service as an over the top product since 2012.
That logically suggests HBO would be willing to do so elsewhere where such a tack might make HBO’s owner Time Warner, more money than restricting over the top sales.

Time Warner has gradually warmed to the idea of doing so even in big legacy markets such as the United States, juding by public statements over the past few years.

As recently as 2013, though, top HBO executives continued to insist there was no business model in the U.S. market.

But business viability is coming closer, Time Warner CEO Jeff Bewkes indicates.

“Up until now, it looked to us as though the best and main opportunity was to focus on improving the penetration, the offering, the servicing, the interface, the monetization of HBO through the existing affiliate system,” Bewkes said.

“So now the broadband opportunity (over the top delivery) is getting quite a bit bigger, and the ability of the plant to deliver something robust is getting stronger,” said Bewkes.

That doesn’t mean the tipping point has been reached. It hasn’t.

But the new language does suggest the advent of over the top HBO streaming is closer than it has been in the past.

“We’re seriously considering what is the best way to deal with online distribution,” said Bewkes.

HBO is a logical candidate to move first for several reasons. HBO historically has been marketed as a premium add-on to the basic linear video subscription.

In other words, customers had to first buy a basic cable subscription of some sort before they were eligible to buy HBO or other “premium channels.”

In part for that reason, premium channel buy rates always have been a fraction of basic plan purchases, although it can be argued that aggregate purchases of premium channel subscriptions amounts to about 88 percent of basic tier buy rates.

In 2013, about 23 percent of U.S. households purchased Showtime, while about 29 percent of households bought HBO.

Purchases of  Cinemax penetration stood at nearly 14 percent while Starz penetration was 22 percent.

So the challenge for HBO remains: how much incremental purchasing could it gain by offering an over the top product, and how much might it lose in support and revenue from video distributors.

At least so far, the risk has been deemed too high. But thinking is evolving. The big issue is what happens once HBO really does make a change.

At the same time, Canada might be on the cusp of a rather significant change affecting the widely-viewed basic channels. Even if full a la carte does not become law, the way the skinny basic tiers are created could have significant impact on programmers.

If excluded from skinny basic packages, and if those skinny basic packages become popular, some programmers might find they cannot afford to remain in the market. That obviously would reduce programming diversity and end user choice.

Like streaming alternatives, a la carte and skinny basic illustrate the coming challenge for video suppliers and distributors. What are the odds fundamental changes (a la carte or streaming) will enhance revenues for programmers or distributors, rather than leading to lowering revenue?

To be sure, the existing ecosystem participants might prefer a revenue-neutral or revenue-enhancing solution. But it simply remains unclear whether that is a reasonable expectation, if or when unbundling is widespread.
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