Brannon: Skinny bundles offer hope for pay-TV, but Disney-Verizon suit remains pivotal to the strategy

Erik Brannon

Pay TV operators have become savvier in recent years, acknowledging that consumer desire for lower priced packages can be a route back into the living room for some customers. So far, Comcast, Time Warner Cable, Dish Network, DirecTV, Cox and Verizon have all offered some form of skinny bundle in order to entice customers back to video products. 

To a certain degree this has been an effective strategy, as both Comcast and Time Warner Cable have shown improvements in quarterly video subscriber losses. Comcast, Time Warner Cable, and Mediacom have even pulled off a few positive quarters of video subscriber growth--something unheard of just a few years ago.

Dish has launched Sling TV, a pure-play OTT pay TV service, with the help of its existing programming partners. Verizon has gone the opposite direction, offering a skinny bundle of channels to subscribers without the consent of its programming partners.

The route to true skinny bundles isn't as simple as offering subscribers more choice. Existing programming contracts need to be taken into consideration. In the case of all of the aforementioned companies, except Verizon, this has been the case. Verizon has notably excluded ESPN and ESPN2 from its most basic skinny bundle, a move that has provoked the ire of the network and its parent company, Disney.

Taking a step back, it's important to compare existing skinny bundles with Verizon's offering. Time Warner Cable and Comcast share four common features: 25 megabit to 30 megabit high-speed data or faster, local broadcast channels, and access to HBO. Comcast includes StreamPix (i.e., library title subscription video-on-demand).

At minimum, both Comcast and TWC are matching Netflix on a like-for-like, price-to-content offering, when considering HSD and HBO, versus HSD and Netflix/Hulu Plus. The addition of local broadcast channels, as well as subscription video on demand (SVoD) in the case of Comcast, are signals that cable is not going to give up the fight.

Sling TV opts to carry the most popular channels, including ESPN and other sports channels, in its most basic tier, anticipating that the company will be able to offer top-up packages of low-priced channels. What's interesting about Sling TV is that the margin on the basic package is barely positive. Where they strike gold is by selling theme packs with average margins better than 60 percent. Working with existing content providers, the company has found a legal route to give a certain segment of the cord-never population what they desire. However in a bid to prevent cannibalization, the company is likely to have conceded to cap its total subscriber base at no more than two million people.

Verizon versus Disney

By provoking the ire of its existing programming partners, Verizon is establishing an important precedent for the industry. Where Verizon differs from Dish is that the company believes that its new bundles are within the scope of existing affiliation agreements. Several cable network owners have publicly disagreed, with Disney/ESPN going so far as to file a lawsuit to remove the new "Custom TV" package.

The ESPN/Verizon suit is important, because if the decision sways in favor of Verizon, there is going to be nothing stopping other pay-TV operators from following Verizon's lead. If Verizon were victorious, it could represent a significant win for consumers; however, it would come at a cost. It is likely that if the industry is given free reign to institute skinny bundles in a Verizon-like fashion the overall number of cable networks will likely decline, as smaller networks struggle for viability. 

Often overlooked is the fact that macro bundles do provide a certain amount of cost cushioning for subscribers. Consumers may find the idea of skinny bundles more appealing than the reality, as they may be forced to sign up for many thematic bundles to cover all the channels that they're interested in.

By partnering with existing distributors, Dish ensures that the service won't face litigation, and will have the ability to grow to its fullest potential. On the other hand, if Disney's interpretation is valid, Verizon's move outside of its existing programming agreements puts undue strain on the existing business model.

The success of Sling TV, while significant in the larger scope of the business, won't have the same ramifications as the success or failure of Disney's lawsuit. If the decision were to swing in favor of Disney, then the traditional model will be validated, and rising ARPU would likely drive away a certain amount of customers from pay TV. On the other hand, if Verizon is successful, then other pay TV operators will be free under the new precedent to disregard the mainstream interpretations of their carriage agreements.

Erik Brannon serves as a senior analyst/researcher and consultant for IHS Technology, specializing in television media. He has more than 10 years of experience in tracking, modeling and forecasting the US pay TV landscape. Brannon has been responsible for the development and maintenance of key databases that make up the core of the U.S. television products for IHS. In addition, he has led and assisted with many high-visibility consulting projects. His contributions include the development and maintenance of advanced pay-TV provider models and the development and maintenance of cable network revenue and profit models.