Programmers set to trim down network portfolios in skinny bundle era

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Editor's Corner Dan Frankel

Everybody had been thinking about it. During Comcast’s second-quarter earnings call in late-July, NBCUniversal CEO Steve Burke just came right out and said it.

"You'll see us and others trimming channels," Burke said, noting that NBCU had already cut video-game-focused G4 and fashion-minded Style several years ago. "We will continue to invest what we need to invest into our bigger channels, and we'll continue to trim the smaller ones.”

We’ve yet to see wholesale extinction of smaller, niche-targeted, not fully distributed cable channels. But Burke’s declaration — that the check is already in the mail — makes sense in a pay-TV business quickly shifting to IP-delivered bundles of finite networks.  

Indeed, the bundles won’t get skinny without losing a few Pivots. That, of course, is a reference to Participant Media’s well-funded channel aimed at millennial-aged viewers. Despite a reported investment of $200 million from Canadian billionaire Jeff Skoll, Pivot was shuttered in August, unable to find enough distribution and advertising reach to stay in business. 

With Scripps Networks Interactive just having signed a new distribution deal with AT&T to include networks such as HGTV, Food Network, Travel Channel, DIY Network, Cooking Channel and Great American Country in the operator’s upcoming virtual MVPD service, I asked Scripps rep Lee Hall if trimming back on networks is a thing. 

“I know of no plans or conversations along those lines," he said. “We’re pretty fortunate in that we’ve built strong audience affinity on our networks. I think that presents us a distinct advantage.”

The smartest minds analyzing pay-TV seem to agree the business is headed toward the V-MVPD model. UBS just released a study predicting that IP-based pay-TV services will be in 15 million homes by 2020. AT&T executives, meanwhile, are quietly predicting that DirecTV Now will be their dominant video platform by that time. 

But it’s questionable as to how many of these services will launch with bundles the size of DirecTV Now, which has already amassed more than 100 channels, and still has to do deals with CBS Corp., 21st Century Fox and AMC Networks to consider itself a full-fledged traditional pay-TV replacement service. 

Notably, MoffettNathanson just conducted a consumer survey suggesting that the majority of consumers expect to pay under $30 a month for a V-MVPD service. 

Given that, I asked MoffettNathanson analyst Michael Nathanson if he had any recent research indicating what channels might survive and what networks might fall by the wayside. I asked the same thing of Bernstein Research’s Todd Juenger. 

Interestingly, they both had a very similar response — they each sent me their analysis of Hulu’s upcoming V-MPVD service, set to launch next year. 

“So, is your take that if your channel can’t make it into Hulu’s bundle, chances are it’s endangered?”

“YES. That’s our view,” Nathanson responded. 

Using SNL Kagan figures for average carriage fee, Nathanson found that if Hulu V-MVPD signs carriage agreements with Fox, NBCU and Disney for their full networks portfolios, plus manage to sign a deal with CBS Corp. just to license the CBS Broadcast Network, the monthly programming nut would come to $28.38. 

That leaves little room to add networks from conglomerates like Viacom, Time Warner Inc., Discovery Communications, Scripps Networks Interactive and AMC Networks.

As Juenger noted in his report, one of numerous bundle iterations Hulu is/was considering is a $35 package that includes Time Warner’s Turner Networks and Viacom channels, but doesn’t include Scripps and Discovery programming.

For all of these conglomerates, the small networks with limited distribution depend, to an extent, and their larger, fully distributed sibling channels.

If, for example, Scripps — which draws two-thirds of its revenue from advertising — were to have its big channels left out of a widely distributed skinny bundle, its smaller channels like Great American Country might suffer first.

“Scripps Networks is highly dependent on the performance of Food and HGTV,” Nathanson said. “Ratings struggles in these networks could adversely impact results and cause volatility in the advertising results.

Likewise, Nathanson added, “Discovery’s results are dependent on the performance of its three core networks: Discovery Channel, TLC and Animal Planet. Therefore, a significant ratings decline at any of these networks would affect future profitability.”

Indeed, Discovery Channel was distributed into 79 percent of U.S. homes as of August, according to Nielsen. If that number drops significantly, carriage fees and advertising revenue decline precipitously for Discovery’s biggest profit driver. At that point, one has to imagine that lesser distributed channels in the Discovery portfolio, such as Discovery Life Channel (40 percent penetration) become vulnerable.

Of course, being part of a larger, diversified conglomerate is one thing, but operating an independent channel in the skinny bundle era is an entirely different challenge.

“Distribution has always been challenging for independent channels,” Scripps’ Lee noted.

As smaller niche channels face attrition, media companies who once plied their novel audience development concepts to new cable channels are looking for other outlets, such as direct-to-consumer OTT plays. 

Time Inc., for example, just launched OTT channels branded around print magazines Sports Illustrated, InStyle and People

“I think 15 years ago, People and SI and InStyle should have launched cable channels, because that’s when the land grab was,” said Jess Cagle, editorial director of People and Entertainment Weekly, speaking to Variety. “Now is not the time to launch a cable channel.”--Daniel