By Daniel Frankel
As he recently discussed his network's participation in Dish Network's (NASDAQ: DISH) upcoming virtual MVPD launch, ESPN president John Skipper didn't sound necessarily excited.
In fact, speaking in a one-on-one session at a Re/code conference event in New York in early September, Skipper sounded like a man making the best bad choice amid an overall tough situation.
After all, what is good about, in Skipper's words, having ESPN "trade down" from being in a $75-a-month pay-TV service to one distributed over-the-top (OTT) that only brings in around $35?
The answer: when you're watching a whole new generation forsake your distribution scheme, and you're seeing your advertising dollars slip away to digital platforms, you do what you have to do to survive.
"The good news is we're in [Dish's new service]," Skipper explained. "And that's the good news. That's as far as I want to go with this."
A new paradigm for pay-TV
While this way of thinking by programmers isn't terribly sunny and optimistic, it represents a new paradigm in which networks are now, more than ever, open to experimenting with OTT distribution alongside pay-TV partners.
"I don't think you'll see programmers cutting prices on their networks," said media analyst Craig Moffett. "But you will see them becoming more and more flexible about terms. The days of the take-or-leave-it bloated bundle are coming to an end."
Welcome to the OTT era, pay-TV style: an emerging, slimmed-down, lower-cost, digitally focused set of alternatives that operators hope will bring a legion of millennial-generation pay-TV holdouts into the fold.
Dish ignited the trend in February, after it signed a landmark content renewal deal with Disney that included all sorts of previously undreamed of digital distribution rights. Dish is now prepping to launch a $30-a-month-or-thereabouts service, targeted to young adults, that will let a single user stream a finite set of channels, including ESPN, to mobile IP devices.
"I think our vision is to try to get incremental customers who aren't pay-TV customers today," Ergen told investors in August. "I'd like to get them at a young age--those kids who probably didn't pay for TV in college except for Netflix (NASDAQ: NFLX). We'd like to get them started on pay-TV. We'd like to get them started on ESPN. My concern is that we're missing a whole generation of customers."
Sony, meanwhile, confirmed similar plans to also launch a virtual MVPD service by the end of 2014, when announced a deal in September to include 22 Viacom channels on the platform.
"Given our young, tech-savvy audiences, our networks are essential for any new distribution platform, and we're excited to be among the many programmers that will help power Sony's new service and advance a new era for television," said Viacom president and CEO Philippe Dauman, while helping trumpet the deal.
For its part, Comcast (NASDAQ: CMCSA) is slowly rolling out IP-only programming services to college campuses.
And AT&T (NYSE: T) is also onboard, also announcing in September a $40-a-month OTT package that includes premium network streaming service HBO Go, SVOD service Amazon (NASDAQ: AMZN) Prime Instant Video and an undefined package of basic cable channels.
Observers who were wondering how you fit all that into $40-a-month and still make a profit quickly realized you can't--after one year, AT&T bumps the price to an undisclosed amount.
And of course, Dish isn't going to make any kind of notable profit by bundling the priciest channel in the pay-TV universe, ESPN, alongside channels from A&E and Scripps.
"I highly doubt ESPN is reducing their sub fee for this," noted Richard Greenfield, analyst for BTIG Research. And it's hard to tell at this point how flexible networks are being in terms of reducing the size of their channel packaging demands. But there does appear to be some concession being made here.
"From content providers' standpoint, does this mean they're going to stop bundling?" asked Chris Winfrey, CFO of Charter Communications (NASDAQ: CHTR), speaking at a Deutsche Bank event in New York on Sept. 30. "That would be nice. I think we could do a better job packaging content to the subscribers we know well in a way they would actually desire."
Winfrey wondered what the appeal of such an OTT service is, given that Charter already sells a traditional cable package for $30 a month that includes 200 HD channels and TV Everywhere capabilities.
"What I struggle with in terms of the OTT concept is, I haven't seen an equation yet that provides the customer a better product, curated in the way they want, without having to flip into multiple authentications," Winfrey said. "And I haven't seen it delivered in a way that the service provider can deliver that content at lower cost than they can today, while also having the content providers be willing to sell it in a way that they would be willing to have the lower input cost for the service provider."
"Cable" for millennials
Of course, with Charter's low-cost service marketed through a "triple-play" via set-top boxes, it may be the best value in town, but it also comes across, brand-wise, as "cable" to a young generation that's been brainwashed to believe that it's being offered deliverance every time it pays Apple $300 for an iPhone.
For his part, Ergen seems to understand that, in order to market to millennials, you have to combat OTT products with other OTT products.
And with Moffett estimating that 15 percent of Americans are not "participating in the traditional pay-TV ecosystem," the highest level since 2007, operators are happy to see programmers willing to engage head-on with insurgent OTT distributors.
"Programmers are facing real structural problems in their own businesses, and they are therefore becoming much more aggressive about tapping into new digital revenue streams," he told FierceCable.
As Moffett's firm, MoffettNathanson, has pointed out in recent reports, both broadcast and cable networks also have grave concerns about the long-term state of the television advertising market, which appears to be migrating to digital platforms.
Asked if a sense of desperation might not only drive content providers to "play ball" with insurgent OTT platforms but also join their teams, Moffett said, "No programmer is even thinking about ditching the pay-TV model."
But as Greenfield noted, at least in the realm of pay-TV, Sony qualifies as an insurgent presence, so a lot of things are certainly possible.