vMVPDs, online pay-TV services that offer bundles of live channels, entered the video services market in 2015 with a promise of lower monthly costs, more customizable channel packages, and no restrictive contracts. The goal was to capture dissatisfied traditional pay-TV subscribers and those interested in a live/linear TV experience over the internet. Through the first phase of their existence, vMVPDs largely delivered on that promise by building a solid base of subscribers across several different providers. However, recent trends, including subscriber losses by major players such as Sling TV and AT&T TV Now, are cause for major concern for vMVPDs.
While overall OTT subscription uptake has seen a significant increase during the early stages of the COVID-19 crisis with roughly six million more US broadband households subscribing to an OTT service in Q1 2020 compared to the previous year, vMVPDs have continued to experience slow growth. While adoption saw a small bump in Q2 2020, service uptake has been at a relatively similar level for the past several years.
Besides a stagnant uptake rate, vMVPDs have also suffered from an issue that plagues all paid video services—customer churn. Due to the higher cost than standalone OTT services, the relative uniformity of offerings across providers, and the lack of contracts, churn among vMVPDs is considerably higher when compared to overall OTT services. While the rate dropped some during Q1 2020 as homebound consumers experienced in-home video entertainment at unprecedented levels, overall churn rates for vMVPDs continue to exceed 70%.
Beyond the subscriber losses, stagnant uptake, and sky-high churn, recent developments in the vMVPD space may signal an even more uncertain future for online pay-TV providers. In late June, YouTube TV announced a whopping 30% increase in its monthly price from $49.99 to $64.99. The price hike is effective on June 30th for new subscribers and the next billing cycle (around July 30th) for existing subscribers. The rate increase corresponds with the addition of several channels from ViacomCBS and follows similar increases YouTube TV imposed previously as it added channels from leading content providers.
At the time of the announcement, the service acknowledged the challenges in raising prices during a pandemic but cited the “rising cost of content” for the action.
The YouTube TV situation highlights a major challenge that pay-TV services face as they try to stabilize and grow their revenue and subscriber base. These services, which do not utilize original content as part of their core offering, must rely on content providers for their channel offerings. These channels come at an extremely high cost via carriage agreements. The only viable way for vMVPDs to effectively absorb these sky-high carriage fees is to pass along the cost through price increases to subscribers whenever they make significant additions to their channel lineup.
Shortly after the YouTube TV announcement, fellow vMVPD fuboTV also revealed a price increase for some subscribers of its service. The pricing announcements coincided with the dropping of Turner channels such as TNT, TBS, CNN, and Cartoon Network and the long-anticipated additions of Disney-owned channels such as ESPN, Disney Channel, ABC, and National Geographic. The changes include an increase in the Family bundle from $60 to $65 a month. Existing Standard bundle subscribers, who pay $55 a month, are automatically migrated to the Family with an opt-out back to Standard tier for $60. Once again, vMVPDs, because of the restricted parameters of the pay-TV business model, have to pass on content distribution costs from high-profile content owners to subscribers in the form of higher subscription costs.
In response to the YouTube TV and fuboTV announcements, other vMVPDs announced measures to attempt to stave off further subscriber erosion. Sling TV, which has experienced its first subscriber losses in recent quarters since its inception in 2015, is providing new and existing subscribers a 1-year hold on their monthly subscription price, effective August 1st. The price hold is being offered in addition to extended free trials and other promotional offers. Low-cost vMVPD Philo announced that it would hold its $20/month subscription price despite adding additional channels to its offering, though the length of the price hold was not revealed.
For the past five years, vMVPDs have attempted to occupy the space between traditional pay-TV services and standalone subscription-based OTT services. The relative low monthly price was once a significant differentiator for these services among those who were cutting the cord with traditional pay-TV. However, with the ever-escalating costs of content carriage agreements, monthly prices for channel packages are quickly approaching the levels of traditional pay-TV services with some subscribers even migrating back to a video service via a cable or satellite provider. Unless something drastic happens in the vMVPD space, such as the complete reconfiguration of its business model, the long-term viability of these services will continue to be in question.
Steve Nason is a director at Parks Associates, specializing in entertainment content and services. He brings more than 15 years experience in a variety of market research and marketing strategy roles including several in the emerging technology and media space. Parks Associates tracks OTT services through its OTT Market Tracker Service, tracking over 200 OTT services, and its surveys of 10,000 broadband households quarterly.
Industry Voices are opinion columns written by outside contributors—often industry experts or analysts—who are invited to the conversation by FierceVideo staff. They do not represent the opinions of FierceVideo.