A comment about 'content costs' on AT&T's earnings call should scare some TV networks
- AT&T has become a big player in the TV business, both as a distributor with DirecTV and as a content creator with the acquisition of Time Warner.
- On AT&T's earnings call Wednesday, its CFO made comments about evaluating its DirecTV Now channel lineups to "align content costs with the price."
- These comments echo an industry sentiment that the bad margins of new digital TV bundles (VMVPDs) are not sustainable in the long term, which could lead to pain for TV networks which get cut out of packages in the name of cost control.
- Viacom's recent actions show a way forward for cable channels in a world in which virtual pay-TV bundles slim down and streaming services like Netflix rule entertainment programming.
AT&T has gone full throttle into the TV business, acquiring the likes of DirecTV and Time Warner, but on the telco's earnings call Wednesday, its CFO said something that should scare some TV networks.
In recent months, subscribers have continued to flee traditional pay-TV bundles. For instance, AT&T reported Wednesday that DirecTV lost 359,000 satellite TV subscribers this quarter. That's more than the 245,000 Wall Street expected.
Since TV distributors (like DirecTV) pay TV networks a carriage fee for including channels in their bundles, when DirecTV loses subscribers, that hurts networks. Luckily, new digital TV packages (VMVPDs) have stepped in to pick up some of the customers lost by cable and satellite. These packages - from companies ranging from Hulu to YouTube to DirecTV itself (with DirecTV Now) - work much like a regular pay-TV bundles, but are delivered via data to your smart TV, laptop, and so on. Crucially, they also pay similar carriage fees to networks.
But though these new packages have racked up customers (DirecTV Now has 1.86 million), there is a big problem with them: their margins are terrible. Networks are making great money from them, but the distributors are not.
Analysts at Morgan Stanley recently broke down the math on Hulu's live TV product and estimated that it didn't break even on a per-subscriber basis.
"We estimate monthly programming costs per subscriber are in the $55-60 range in 2019 (including recently announced coverage of flagship Discovery networks), reflecting a premium paid for network carriage based on its new entrant scale," Morgan Stanley wrote. "Based on core subscription ARPU of $32/month (excluding the $8 for the On-Demand product) and $10-15/month per subscriber generated through advertising and Live add-on features (expanded DVR, unlimited screens), we estimate Hulu Live currently does not break-even on a gross profit basis."
That bad math is similar for all these bundles, and there have been several indications that distributors are going to re-think the numbers.
On AT&T's earnings call Wednesday, CFO John Stephens said the company was "evaluating our channel lineups" for DirecTV Now to "align content costs with the price." That certainly sounds like some channels could be on the chopping block.
Hulu's CEO made similar comments to The Information in a recent interview, speaking about potential skinnier bundles and saying the company wanted to "create packages that have a positive margin."
Translation: The size of these bundles might start to shrink, and that could mean major pain for some networks who get chopped out.
So what will happen?
One theory, espoused by Netflix on in its last earnings letter, is that live TV will start to resemble New Fox: news and sports. Everything else would become on-demand and direct-to-consumer, via a platform like HBO Now, Netflix, Hulu, or Disney's upcoming streaming service.
Where would that leave entertainment-focused TV networks?
Becoming a streaming studio could be a path to survival
One potential path for entertainment-focused cable TV companies is to follow the strategy of Viacom, which owns channels like MTV, Comedy Central, and Nickelodeon.
Viacom CEO Bob Bakish said recently it would be too "capital-intensive" for it to build its own Netflix competitor, according to The Wall Street Journal. But that doesn't mean it can't become a premium supplier to those direct-to-consumer platforms like Netflix that do put in the capital.
"For scripted and animation, we are going to focus that more on an SVOD [streaming video on demand] partner," MTV president Chris McCarthy said of MTV's general strategy this summer. Unscripted, traditionally an MTV strength, will be more balanced between TV and streaming. But still, there's a growing market for unscripted in streaming.
"If we did 'Laguna Beach' today, we would do it on" a streaming service, McCarthy said.
Viacom's Paramount studio will also make the sequel to Netflix's smash hit, "To All the Boys I've Loved Before," according to the Journal.
But some TV companies don't have the deep IP catalogue of Viacom to potentially help them weather the storm and become studios servicing the new streaming giants.
What will they do?
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