Can OTT Video Accounts be as Lucrative as Linear Accounts?

Logic would suggest an over the top video account, with gross revenue of $20 to $30 a month, is not going to be as profitable as a linear video account with gross revenue of $50 to $100 a month.

That might not necessarily be the case, some would suggest. On a net basis, after including subscriber acquistion costs that factor in the cost of discounts, the gap might be narrower than most would tend to believe.

That said, linear video providers continue to struggle to retain their current linear video subscribers. And some, including Dish Network, now make no distinction between an OTT and a linear account.

In the third quarter of 2015, DISH activated approximately 751,000 gross new subscribers, compared to approximately 691,000 gross new subscribers in the prior year's third quarter.

Net subscribers declined approximately 23,000 in the third quarter, compared to a loss of approximately 12,000 in the third quarter 2014.

The company closed the third quarter with 13.909 million subscribers, compared to 14.041 million subscribers at the end of third quarter 2014. That represents a loss of 132,000 accounts.

In the second quarter, Dish lost about 83,000 net accounts. If one assumes the second quarter is seasonally the toughest quarter for any linear video supplier, then Dish Network’s third quarter performance indicates a sharp acceleration of churn trends.

Dish executives might say more-stringent credit policies and a willingness to lose some “lower-quality” customers contribute to the apparent churn. In other words, Dish was willing to lose some “unprofitable” customers.

“One of the other things that we're looking at is that we do have customers that are unprofitable for us today, and they're unprofitable because they call multiple times during the month, they are always asking for discounts,” said Charlie Ergen, Dish Network CEO. “And I think it's just smart business that over time that we wean those customers off of our service.”

“Sometimes the best return you get is to let a customer go,” said Ergen.

Average revenue per user in the third quarter totaled $86.33, compared to the year-ago period's ARPU of $84.39. The churn rate was 1.86 percent compared to 1.67 percent for third quarter of 2014. In the past, churn would have fallen between the second and third quarters.

For the three and nine months ended Sept. 30, 2015, Dish has included all of its Sling TV live, linear streaming over-the-top Internet-based television services in the company's total subscriber metrics.

And observers will likely have to readjust their thinking on average revenue per account, as well as marketing cost, as more accounts migrate to over the top packages with different (lower) price points.

Though the new metrics yet are developing, some might make the argument that, in principle, OTT accounts of smaller gross revenue might yet supply net revenue equal to, or higher than, linear accounts.

That argument hinges on different costs to acquire an account. And some would claim that the discounts required to get a new linear video account represent marketing costs that now are higher than ever. Where new customer costs had been $300 per addition a couple of decades ago, they now are about $700 per new account in a strict sense, but more like $1,000 per new account if one counts the value of discounts, according to Roger Lynch,  Sling TV CEO and Dish EVP, Advanced Technologies.

Also, customer lifecycles arguably are lower than in the past, because of all the competition.

“So I think, logically, the lifecycle of a customer today in linear is less than it was three years ago or four years ago or five years ago,” said Lynch.

The notion is that an OTT subscriber might be just as profitable as a linear account, when all marketing costs are included, compared to a linear account.

The largest U.S. linear video suppliers lost about 471,000 net accounts in the second quarter of 2015. Those service providers serve about 95 percent of total U.S. accounts.

Dish reported revenue totaling $3.73 billion for the quarter ending Sept. 30, 2015, compared to $3.68 billion for the corresponding period in 2014. Subscriber-related revenue increased to $3.7 billion from $3.65 billion in the year-ago period.

Net income attributable to Dish Network totaled $196 million for the quarter ending Sept. 30, 2015, compared to net income of $146 million from the year-ago quarter.