Sports-free budget TV services gain momentum as competitors raise prices

Media insiders warn sports and other costly channels will trigger futher price increases at services like YouTube TV and Hulu.
(Photo: Amazon/Handout)

When YouTube TV  announced a deal to bring ViacomCBS cable networks to its platforms, users on Facebook and Reddit questioned when — not if — the service would raise it subscription fee and by how much.

In late June, subscribers got their answer: YouTube TV announced a hefty fee increase for its one-size-fits-all streaming TV package from $50 a month to $65 a month.

It was more than what most users were expecting, with the average guesstimate hovering around the $60 price point. But executives justified the price hike by saying it more closely aligned with YouTube TV’s overall value.

Once considered a cheaper alternative to costlier cable and satellite packages, streaming cable alternatives are starting to charge close to what their traditional counterparts do. The average cost of an online cable TV replacement is $60 a month for a handful of entertainment, news and sports channels — well under the $100 a month average bill for cable and satellite customers, but still higher than the entry cost of $20 to $30 a month when these streaming services came to market.

Media experts say the rising cost of pay TV programming made it inevitable that streaming alternatives would raise prices for customers — and those price increases might continue even in the absence of new channels.

“TV is just way too expensive,” Michael Thornton, a media executive who once served as the chief revenue officer for premium movie network Starz , said in an interview with The Desk last year. “The economics [of cheap streaming TV services] don’t work — the idea that you can get all those channels compete on the price basis just isn’t possible.”

Thornton predicted companies like YouTube TV, Disney-owned Hulu and others offering streaming cable alternatives would have to raise prices if they wanted to continue offering the same or more channels while bundling additional features like cloud DVR storage and access to TV network apps.

“The unit economics of competing against Comcast and Charter are very, very difficult,” Thornton said. “I wouldn’t be surprised if Hulu and YouTube TV lose money with every subscriber they add.”

But there are some alternatives on the market that provide access to basic cable programming without breaking the bank for customers. Those services offer general entertainment, lifestyle and educational programming while shirking costlier cable news and sports packages that are largely to blame for high bills.

Philo Chief Executive Officer Andrew McCollum is pictured in an undated image. (Photo: Philo/Handout, Graphic: The Desk)

Andrew McCollum is responsible for bringing one of those services to the masses. His company, Philo, offers more than 60 channels of high-definition pay TV channels over the Internet for the reasonable price of $20 a month.

“Philo has, from the beginning, represented a really unique and differentiated option for consumers,” McCollum told The Desk in July. “Before we launched our service more than two years ago, there was no place to get the entertainment, lifestyle and knowledge-focused networks that we carry without paying a huge premium for broadcast, sports and news.”

For years, the traditional cable and satellite business model was to bundle top-tier broadcast, entertainment, news and sports channels together and offer consumers one or two programming tiers to receive them. Retransmission agreements between programmers like Disney and Fox and distributors like AT&T, Dish and Comcast ensure customers are able to watch programs while content creators and distributors are fairly compensated.

But media consolidation coupled with the rising cost of programming over the last decade has created friction in the traditional pay television space. As companies made costly merger and acquisition deals and rights for sports programming increased, programmers began passing on the costs to distributors, who in turn passed along costs to consumers.

Cheaper Options

For a while, consumers were stuck with two options: Pay around $100 a month to get a handful of cable channels they wanted (and a lot they didn’t), or do without. Things changed around 2014 with the entrance of Sony’s PlayStation Vue and Dish Network’s Sling TV, two cheap streaming cable alternatives that offered a mixture of basic pay TV channels — including news and sports — at prices that undercut more-expensive cable packages.

The overall economics of the pay TV landscape didn’t change, though, and things eventually caught up with both services: Faced with increasing programming costs, Sony shut down PlayStation Vue last year. Dish Network has raised the base price of Sling TV several times since it launched in 2015; recently, the service shuffled some channels between certain packages to ward off another price increase, a source familiar with the matter said.

Philo is an outlier in the streaming cable alternative space. From the start, the company focused on making deals with media companies that didn’t operate expensive news or sports channels, choosing instead to ink deals with programmers like Discovery, A+E Networks, AMC Networks and Viacom’s MTV Networks, companies that charge less for programming rights while still offering networks that are in high demand.

“There are a lot of people who want the Viacom channels like Comedy Central and Nickelodeon…but they don’t want to pay $100 a month to get them,” McCollum said. “If you look at our subscriber base, more than half of them had no TV service when they signed up. They’re not switching from somewhere else, they’re brand new because we’re presenting them an option to get linear pay TV channels where otherwise they wouldn’t.”

When interviewed last month, McCollum was hesitant to disclose Philo’s customer count, but a Discovery executive later revealed the number was between 700,000 and 750,000 active subscribers (Discovery is an investor in Philo). The number might be small when compared to the number of pay TV accounts at a company like Comcast or AT&T, but those companies have been around a lot longer and are losing customers every year to streaming. Philo, on the other hand, has experienced a 300 percent growth in customer accounts this year compared to last year, and executives believe the company’s momentum will only grow from here.

Always On

Just a few hours away from Philo’s San Francisco headquarters, that same momentum is happening at an office in Studio City where Thornton and a handful of other media executives have launched Orby TV, a slim satellite television service that offers a slim package of basic and premium pay TV networks via satellite.

Michael Thornton, the CEO of satellite TV startup Orby TV. (Photo: Orby TV/Handout)

Orby TV is able to keep prices low because, like Philo, it chose to make deals with companies that offer cheaper general entertainment channels. Though customers have to pay for equipment and installation, Orby TV’s hardware bundle includes a free over-the-air antenna to pick up broadcast stations — meaning Orby TV customers can receive top broadcast networks from ABC, NBC, CBS and Fox without the company having to negotiate agreements to receive those channels and other more-expensive ones.

Distribution costs are also lower for Orby TV because, unlike Dish Network and AT&T-owned DirecTV, Orby TV doesn’t own the orbital satellites used to bring customers programming. Instead, Orby TV rents transponder space from Eutelsat, which keeps operating costs low and allows Orby TV to pass the savings on to its customers.

At $40 a month, Orby TV is double the cost of Philo, but Thornton believes the service is a great value for people who want always-on TV without the inconvenience of switching inputs, logging into apps or worrying about broadband data caps. Customers seem to agree, too: In a follow-up interview with The Desk last month, Thornton said the number of active accounts is “growing month over month,” and while he declined to disclose how many subscribers Orby TV has, he said the company is close to breaking even.

Thornton believes the budget model that works well for his company will start to be examined more closely by traditional pay TV companies like Comcast and AT&T as their customers continue to leave for cheaper options like Orby TV and Philo.

“Going forward, as we have popped up and as Philo has popped up, those smaller bundles [of channels] are going to start to look more and more attractive to the point where other distributors are going to have to look at that in order to keep their subscribers,” Thornton, who serves as Orby’s chief executive officer, said. “At what point does it become necessary for them to rethink their model? I don’t know. I do think they’ll have to think about change and what the future looks like and whether they’re going to need more value-conscious bundles like we do.”

The same is likely just as true for some streaming cable alternatives: If they want to continue offering channels from programmers who insist on bundling expensive news and sports channels, they’ll have to continue raising prices. Thornton offers a bleaker prediction: Based on programming alone, some streaming cable alternatives like YouTube TV will have to jack up prices beyond where they are now because they continue to offer channels and features at a loss.

“The retransmission and sports costs are significant,” Thornton said. “So I don’t know how long they can last — and it appears at least that they’re looking at those unit economics.”

The ‘800-Pound Gorilla’

Thornton and McCollum are looking at unit economics, too: At launch, both Philo and Orby TV offered cable channels from Viacom’s MTV Networks, including Comedy Central, MTV and Nickelodeon. Those agreements were in place before Viacom merged with CBS last year, and at some point, carriage of those channels will need to be renegotiated.

The merger could eventually create a problem for budget services like Philo and Orby TV: The newly-formed ViacomCBS is bundling CBS, Showtime and the Viacom cable networks together, according to a person familiar with the matter, and ViacomCBS is pressuring cable, satellite and streaming distributors to carry all three brands.

Should ViacomCBS use a similar negotiating tactic with Philo and Orby TV, McCollum and Thornton believe their companies have a significant amount of leverage when it comes to working out a favorable deal.

“Viacom, I’m sure, is very happy to get paired up with CBS, because CBS is an 800-pound gorilla,” Thornton said. “People have to have CBS in their home, and if CBS can drag Viacom into it and get a price increase, that’s great for Viacom. But there is leverage on the distributor’s part — all these programmers are looking for distribution. Their business models are part subscription and part advertising. They need to have people watching their services.”

For that reason, McCollum said, there’s less incentive for ViacomCBS to force budget-conscious companies like Philo and Orby TV to add costlier CBS networks if it meant the alternative is a lack of distribution for the programmer’s other cable channels.

“I’m not sure we would necessarily welcome [CBS] with open arms,” McCollum said. “We spend a lot of effort thinking about how we can keep from raising our prices. So far we’ve been successful with that to a large degree — I can’t promise the price will never go up, but we spend a lot of time thinking about how we can deliver a great value to our customers.”

At least for now, both Philo and Orby TV are immune from the merger — Philo’s contract for the MTV Networks channels lasts for “more than a year,” McCollum said, while Thornton said their pre-merger contract lasts for “a few more years” — but both are confident their services can exist with or without ViacomCBS channels when the time comes to renegotiate their agreements.

“When you think about losing the Viacom suite of channels, you’ve got a lot of space to fill,” Thornton said. “Some of those channels are going to be easier to backfill than others.”

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