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Video companies weigh streaming options as costs pile up for platform operators

TV network and pay TV operators continued to weigh their direct-to-consumer options through the June quarter as cash and profit losses continued to expand at some of the most popular streaming platforms.

Several content companies, including Discovery Inc. and Viacom Inc. discussed options ranging from launching their own direct-to-consumer platforms or continuing to license content to existing platforms. For instance, Discovery President and CEO David Zaslav during a recent conference reportedly said the company is considering its own streaming service for a subscription price between $5 and $8, but executives were less vocal on the plan during an Aug. 7 earnings conference call. Instead, they said the company was keeping its options open and "having a lot of discussions."

For its part, fellow programmer CBS Corp. recently announced plans to launch a new portfolio of direct-to-consumer streaming services in major U.S. markets starting in the fourth quarter. Called CBSN Local, the services will stream anchored news coverage and live breaking news events from major markets served by stations that are owned by CBS Corp. On the broadcaster's own earnings call, CBS President, Chairman and CEO Les Moonves called the launch "another way to deliver our content directly to consumers how they want it while giving advertisers a new targeted way to reach younger viewers."

Viacom also has discussed its own platform but focused more closely on its partnership arrangements with third parties. Viacom networks, for example, are included on AT&T Inc.'s new skinny bundle AT&T Watch, President and CEO Bob Bakish noted on an Aug. 9 call.

The company has seen "improvement in Viacom pay TV subscriber trends with our sub declines now moderating to the mid-1% range," he said, driven in part by its presence on such virtual multichannel video programming distributors. Viacom now expects domestic affiliate revenue to move about 1% into the black in the fourth quarter, the executive said. The company is also launching studio efforts to create content for third-party digital platforms, such as licensing Nickelodeon show "Pinky Malinky" to Netflix Inc. in a multiyear, 59-episode deal.

The tendency to work with third-party platforms rather than focusing on launching internal direct-to-consumer products could reflect the costs associated with launching stand-alone platforms. For example, Hulu LLC is the third-largest subscription video-on-demand service in the country, according to data from Kagan, a media research group inside S&P Global Market Intelligence, and its losses continue to expand.

For its fiscal year ended June 30, 21st Century Fox Inc., one of Hulu's owners, reported a $445 million loss from the streamer, over double its $215 million loss reported in fiscal year 2017 and almost 3x its $157 million loss reported in 2016. The increase was driven by higher programming costs at the platform. The company also reported net cash used in investing activities from continued operations of $1.18 billion, up from $752 million in the prior fiscal year. It said the increase was largely due to additional investments in Hulu.

Walt Disney Co., another Hulu owner, reported its Hulu impact as equity income of investees. That metric decreased to $122 million for the nine-month period ended June 30, down $205 million year over year, due in part to higher losses at Hulu. Those losses were also attributed to higher programming costs, partially offset by higher subscription and advertising revenues. Those losses for Disney will likely expand as it plans to purchase various Fox assets and to assume a 60% stake in Hulu. Notably, Disney plans to launch its own Disney-branded streaming service at the end of 2019.

Comcast Corp., which also owns a 30% stake in Hulu, for the quarter ended June 30 recognized its share of Hulu losses at $107 million, or $238 million for the six-month period ended on the same date, compared to $52 million and $106 million for the respective 2017 periods.

On its July 26 earnings call, Comcast Chairman, President and CEO Brian Roberts said the company is focused on linear television viewing, as "the vast majority of television viewing is not streaming. ... Our future, I think, is selling wherever consumers are." However, reports recently surfaced that NBCUniversal Media LLC plans to launch a streaming service called WatchBack that compensates viewers with redeemable points and gift certificates for watching specific content.

The losses at Hulu continue to illustrate the challenges with going direct to consumer. Even Netflix continues to run deeply in negative cash flow territory, and as AT&T positions its DIRECTV NOW platform to be a leading virtual MVPD service, many analysts estimate the company is running significant losses on the platform as it builds subscribers. However, AT&T Chairman, President and CEO Randall Stephenson said that video providers have to follow viewing trends.

"Just owning great content is no longer sufficient," he said. "The modern media company must develop extensive direct-to-consumer relationships."