The CEO offering a $20 TV bundle explains the tough choices and price structures behind the low-cost TV market

Philo

Andrew McCollum.

• Philo, one of the US's cheapest pay-TV bundles, announced this week that it would soon scrap its $16-per-month package and sell only its $20 plan.
• It's one of tough calls the 18-month-old streaming-TV service has had to make, as it grapples with the challenges of live TV.
• In the past few months, internet-TV bundles from YouTube TV, DirecTV Now, Hulu, and FuboTV have hiked prices. Sling TV and PlayStation Vue also raised the cost of some of their plans last summer.
• "We were really trying to figure out, how can we avoid having to raise our price?" CEO Andrew McCollum told Business Insider.
• Visit Business Insider's homepage for more stories.

When the internet-TV service, Philo, launched in November 2017, it had the cheapest pay-TV bundle on the market in the US. For $16 per month, people could buy a smattering of 45 entertainment TV channels like AMC, HGTV, Food Network, MTV, and Comedy Central, and add on a small collection of other networks for an extra $4 per month.

A year and half later, the streaming-TV company still has one of the most affordable options for live-TV services in the US, but is being forced to scrap its least-expensive offering. Philo announced in a note to customers this week that it will no longer offer the $16-per-month plan. Starting on May 6, Philo will only sell its $20-per-month bundle that includes 58 channels, 13 more than the discontinued offering. (People who sign up before then will be able to hold on to the old plan.)

The move comes as other internet-TV services including YouTube TV, DirecTV Now, Hulu Plus Live TV, and FuboTV have raised prices over the last few months. Last summer, PlayStation Vue and Sling TV also hiked the cost of some plans. Philo opted to nix its cheapest package, rather than raise rates across the board.

"We were really trying to figure out, how can we avoid having to raise our price?" Andrew McCollum, CEO of Philo, told Business Insider in an interview in New York on Tuesday. "We're subject to some of the same forces that some of our competitors are. Our costs do go up. That's a challenge we had to figure it out."

It's one of many tough calls the 35-year-old CEO - who was part of Facebook's founding team - has had to make since joining Philo in 2014.

A sports-free TV bundle

The TV company got its start delivering live TV to college campuses before launching the broader streaming service in 2017. Its aim with the broader platform was to package channels that were popular, but wouldn't break the bank. Philo was going after people, including the young college students its business was built on, who weren't buying bigger cable bundles.

It looked at its viewing data from college campuses, and found that entertainment channels offered the most bang for their buck. It mostly offered entertainment channels from network operators who also became its investors, including A&E, AMC, Discovery, and Viacom (Viacom also recently acquired another streaming-TV company, Pluto TV, which is free with ads). It carried independent networks including the financial-news channel Cheddar and food channel Tastemade, as well.

"Those channels on a pound-for-pound basis were, we felt, a much better value for their price to consumers," McCollum said.

Read more: The CEO of a free TV service that's riding the wave of ad-supported streamers reveals how the company achieved 300% growth in the past year

It avoided the more expensive sports and news networks like ESPN, Fox News, and CNBC.

"Every year, the price of sports content increases and becomes a larger and larger share of the cable package," McCollum said. "The people who don't care about that content shouldn't have to basically subsidize the cost of it for everybody else."

Like other pay-TV services, Philo licenses channels, including those from its investors, usually for a fee. Pay-TV companies typically renegotiate those fees with the networks every year or so, and pass the costs onto customers in the form of higher monthly bills.

In Philo's case, it chose to eliminate the cheaper, $16 offering this time around instead of hiking rates. The margins were worse on the skinnier package. McCollum said Philo's subscriber base was pretty evenly split between the $16 and $20 plans. He declined to share how many subscribers the service has, but said its subscriber base had been growing an average of 30% per month since launch. The company makes money through a combination of subscription and advertising revenue. As of July 2018, Philo had raised about $95 million, according to research firm PitchBook.

Everything comes at a cost

Even licensing entertainment channels, however, proved difficult. Network owners were leery of breaking up their TV bundles. If Philo wanted to add Bravo, McCollum said, using an example he was recently asked about on Reddit, it would also need to license other networks from Comcast's NBCUniversal, such as regional sports networks, the broadcast network, NBC, or the news channels, CNBC and MSNBC.

"The way that TV deals had been done for a long time affects your choices," said McCollum. "You don't actually have the freedom to create whatever packages you want, so you have to look at the trade offs."

There are other trade offs, too. When Philo began selling its subscriptions through Roku's and Amazon Fire TV's billing platforms, for example, it was only able to offer the $20 subscription because there were costs associated with billing through those external platforms, McCollum said. It's similar to how Apple takes cuts of apps and subscriptions sold through its App Store.

One upside to discontinuing the $16 package: "We could also have the same offering across the board and make it really simple for people," McCollum said.

Moving forward, McCollum said the company is happy with its current channel lineup, but will look to add more options when it makes sense. They will likely be add-ons to its base package. One day, the service might even offer sports or news.

"We don't have any real bias against sports or news," said McCollum. "We would love to offer more options if we can find a way to reach that trade off of value and simplicity that we think consumers want."