It's well known that cable and satellite TV services have been hit hard by cord-cutting over the last decade. With Netflix (NASDAQ: NFLX) and the rest of the on-demand streaming services outperforming reruns and movie channels, pay-TV bundles are becoming increasingly reliant on a select group of sports channels, local news stations, and networks with new episodes of must-see, spoil-able TV.
But legacy pay TV won't always be the only way to get live TV channels. In fact, it's already not. Streaming multichannel services like Dish's (NASDAQ: DISH) Sling TV and Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) YouTube TV now operate and are helping expand the cord-cutting phenomenon.
But these high-tech alternatives still have an old-school snag -- bundled channels. No matter how "skinny" bundles from these new services claim to be, they upset customers whose problems with cable include that same bundling tendency. This customer aversion for bundles is part of why these services are having trouble finding profits and convincing customers to make the switch.
More appealing to customers is the "direct-to-consumer" option, in which each network would offer a cheap subscription to just its content, streaming live on its own app. Customers tend to imagine that their own favorite channels would make a fortune doing this, although in reality, only a few networks and entertainment genres would potentially flourish in this model. But "skinny" bundles seem to grow ever-larger, while individual networks -- even powerful ones, like Disney's (NYSE: DIS) ESPN -- have been reluctant to go truly direct-to-consumer (DTC) with their flagship offerings. Why not? And if these networks ever did go DTC, what would that look like?
The problems with direct-to-consumer channels
There are a few issues with DTC channels that viewers may not fully appreciate. First, viewers have a habit of overestimating the importance of the channels they like. When Comcast (NASDAQ: CMCSA) bundled AT&T's (NYSE: T) TCM with ESPN, for example, some fans of TCM were convinced it was a way to support "failing" ESPN -- despite the fact that ESPN is far more vital to cable's financial health than TCM is. Fans of TCM would like to imagine that busting up the cable bundle would benefit TCM, but that's probably not so. It's true that there would be some significant differences in underlying costs in a potential DTC future (TCM's old films don't cost anything near what ESPN pays for the rights to broadcast live sports), but other costs associated with distribution are static, and ESPN could cover those via subscription fees far more easily than TCM could.
Another related issue is the fact that many networks are owned by the same media companies. A DTC solution from ViacomCBS (NASDAQ: VIA) -- already taking shape, to a limited degree, following the company's acquisition of Pluto TV -- would look something like a bundle anyway, unless ViacomCBS were to split off each network into its own version of CBS All Access.
On top of everything else, there are legal hurdles. These networks have contracts upon contracts with different pay-TV providers. In Europe, AT&T had issues with getting its HBO Max streaming service up and running because of existing deals related to HBO (the TV channel) and HBO content (some original series air on other, non-HBO networks in Europe, meaning that HBO doesn't necessarily have clearance to air its own shows in those nations). These networks have relationships with distributors and content partners; if ESPN were to start simulcasting all of its live content online without requiring a cable login, cable and satellite companies, advertisers, and other stakeholders would have something to say about it.
Bundles aren't cutting it
So there must be bundling, at least for now. But in the future? Well, that's less clear. "Skinny bundles" were supposed to be the wave of the future, but they've met with problems. As it turns out, cutting out the sketchy things that people hate about legacy pay TV makes the whole proposition a lot less profitable -- perhaps even unsustainably so. Cutting out long-term contracts is great for the consumer, but it allows consumers to hop from free trial to free trial, or to subscribe in time for a big finale or playoff game, binge watch what they want from the service, and then simply cancel the service after a single month (or the free trial period). And then there are the new costs associated with competing in a fairly open market, rather than in the old legacy pay TV one that provided infrastructure advantages.
It's telling that so much open competition in the streaming multichannel space has somehow led to consistently increasing prices. YouTube TV, Sling TV, and the rest of the game would presumably prefer to undercut one another -- but nobody seems to be able to keep operating without regularly increasing prices.
Meanwhile, a few mega-popular channels -- ESPN chief among them -- are looking more and more like they might be giving more to the bundles than they're getting back. Cable company payments to ESPN account for north of $9 within the average monthly cable bill, but (at one point) it was included in a Sling TV bundle being offered for $20 per month. That's obviously more than ESPN was worth on its own, but it's close enough that ESPN execs might wonder why they shouldn't just strike out on their own.
What would it look like?
ESPN did eventually strike out on its own -- sort of. ESPN+ disappointed some consumers because it is explicitly not a DTC version of the ESPN pay-TV network. Instead, it's an add-on of sorts -- a subscription service that offers sports that don't make the cut on ESPN's big networks. The service also includes on-demand content, though that's less central to our focus here.
But ESPN+ does something important: It gives ESPN a blueprint for how it might operate in the future. ESPN has shown a willingness to cut deals with a focus on benefitting ESPN+, as it did with its big UFC contract. And ESPN now has the ability to develop new shows for ESPN+, or perhaps even shift hit programming from ESPN and ESPN 2 to ESPN+ when those programs' contracts are up. In other words, ESPN+ could be a life raft for escaping ESPN's network contracts -- though it's very important to note that ESPN isn't really using it that way yet.
What other networks could do this? AMC, owned by AMC Networks (NASDAQ: AMCX), is a possibility. AMC Premiere, the network's premium subscription service, is an on-demand streaming effort that is available separately from AMC and from legacy pay TV in general. AMC Premiere is something that subscribers can grab on Amazon's Amazon Channels or as an add-on to a skinny bundle like Sling TV (in other words, it works a bit like HBO). And in AMC Premiere, AMC now has something similar to what Disney has in ESPN+ -- an escape hatch that it can build on should it decide that striking out away from the bundle is the way to go.
Can live TV networks outlive the bundle? It's unlikely that all of them will. Some are too small to get by as DTC options. Others form natural bundles around shared brands and ownership even in a more splintered live TV future. But some networks may well strike out as stand-alone channel/service hybrids, becoming more HBO-like in their approach to customers.
If channels do this, they'll probably start with services like ESPN+ and AMC Premiere -- services that work as proofs of concept and begin with relatively meager live content compared to their network television cousins. And if things keep going this way, the next step would be a slow reversal in the flow of hits, until the old network is the farm team and the new streaming alternative is the major-league contender.
10 stocks we like better than Walt Disney
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the ten best stocks for investors to buy right now… and Walt Disney wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of June 2, 2020
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Stephen Lovely owns shares of AT&T and Netflix. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Netflix, and Walt Disney. The Motley Fool recommends AMC Networks and Comcast and recommends the following options: long January 2021 $60 calls on Walt Disney and short October 2020 $125 calls on Walt Disney. The Motley Fool has a disclosure policy.