In a video market where customer acquisition and programming expenses are considerable and subscriber losses continue to mount, online players persist at trying to build a customer base. At the Pay TV Show in Denver May 14-16, virtual service providers and over-the-top service firms debated and explained the many challenges in the marketplace.
High content costs are widespread among not only pay TV operators but also for online players. The problem starts at the production level, according to Tim Connolly, senior vice president, head of distribution and partnerships at Hulu LLC. He said that the cost of producing a show has moved from $1 million to $2 million several years ago to a cost of $5 million to $7 million today.
However, Connolly emphasized that original programming is very important. He likened Hulu's content plan to following in Time Warner Inc.'s HBO's originals path, starting with "The Sopranos." Originals help to build the brand and keep subscriber interest. Connolly also pointed out that 70% of usage on HBO comes from acquired programming, but it only markets originals to help define the brand. By establishing originals, Hulu’s "The Handmaid’s Tale" helped substantially drive sub growth, which moved from 17 million at year-end 2017 to 20 million in first quarter 2018.
For the pay TV operators, subscriber acquisition costs, valued up to $1,000 per home, are another issue, according to Connolly. That is a cost VSPs lack since they don't require a truck roll or expensive set-top box equipment.
Dwayne Benefield, vice president and head of Playstation Vue at Sony Interactive Entertainment LLC, pointed out that from a consumer perspective, the cost to switch TV services is also high. VSPs tend to have fewer costs and smaller or no contracts that consumers must initially sign, making a switch easier but costly to quit a pay TV service at the same time.
While the VSPs may be inclined to have lower costs, they also tend to have lower average revenue per user. Andrew McCollum, CEO of Philo, said that the company is trying to keep its margins incredibly thin in order to charge as little as possible. He suggested that the price of pay TV has been increasing at a rate greater than most other industries. Philo is a low-cost VSP service with no sports and a basic package costing $16 per month.
Pluto TV, another VSP, has a different business model: free online service including 75+ live channels. Jeff Shultz, chief business officer, claimed that his company never proposed to squeeze out all of the value in subscription services. For consumers with pay TV, he said that their service would fall into three categories: substitution, complementary or not good enough.
Some free services have done well, including Molotov, based in France. Founder and Chief Executive Officer Jean-David Blanc reported that the company now has 5 million users. Its service has been successful because it can be used on mobile devices and laptops, which make up the primary viewing for Molotov.
Lastly, the question remained as to whether these services are complementary to or a replacement for traditional pay TV services. Connolly indicated that for the SVOD component of Hulu, about 75% to 80% of its subs also have Netflix Inc. The company feels it competes more for acquisition and original content than on a subscriber level.
McCollum suggested that the VSPs are more competition and are really in a race to see who can dominate. He said that cable has been a de facto monopoly, so cable providers have had no incentive to evolve and improve the customer experience.
Economics of Internet is a regular feature from Kagan, a group within S&P Global Market Intelligence's TMT offering, providing exclusive research and commentary.