Michael Wolff: Why Fat Is the New Skinny (TV Bundle)
Sling, Hulu and YouTube are chasing low-margin, bargain-hunting customers, but a new $100 million startup sees the full-figured future in TV's most profit-generating clientele.
The new television, the Achilles' heel of television, the canny play by which digital takes over television, is the so-called "skinny bundle." Over-the-top competitors are forcing the greedy and unresponsive cable industry to give consumers fewer channels for less money because that's what consumers really want. Right?
Hulu recently announced its plan to provide a discount package of several live-TV channels. YouTube says it, too, is going into the thin business and will offer a discount over-the-top live-TV service. For $20 a month, Dish's Sling service will give you a cord-shaved package of about 20 channels accessible from any device. Charter — with its newly acquired Time Warner Cable — is gearing up its skinny service for broadband customers called Spectrum TV. And Comcast is coming with Stream TV; it's TV for millennials and cheapskates. Here's the data: An average subscriber uses less than 10 percent of the channels he or she is buying — so just buy the channels you'll watch! No-brainer.
But a $100 million startup, Layer3 TV — founded by Jeff Binder, who sold his video-on-demand startup, Broadbus Technologies, to Motorola in 2006 for $200 million, and Dave Fellows, the former chief technology officer at Comcast — says hold on. Actually, this company, funded by TPG Growth and beginning a city-by-city rollout of its service in June in Chicago, says this is all hokum. And everybody in the MVPD (multichannel video programming distributor) business or in VMVPDs (the same, but virtual) knows it's hokum. That "skinny" is a PR term rather than a business strategy; that it is a marketing work-around, or it had better be. Otherwise, it's suicide for the television industry — or, at best, a dreary, slogging, low-margin game.
Hence, Layer3 TV is betting on the attractiveness — and profitability — of an enhanced offering. Call it a "fat" bundle. Here's some compelling data, too: The full-bundle audience represents upward of 40 percent of the $110 billion a year pay television market and nearly 80 percent of pay TV revenue; more than 35 million U.S. homes have full bundles, most of which pay upward of $200 a month or more; at DirecTV alone — the provider with the highest average revenue per user — industry data suggests that more than half spend more than $200 a month on their fully loaded package.
Churn generally is the lowest among the highest-paying customers. In these homes, there so far is little inclination to cut or shave the cord — indeed, practically speaking, no one has. The cord shaving and cutting come largely from the barely or temporarily connected young and from basic subscribers constantly shopping for a better deal — marginal or unprofitable customers whose business often fails to cover the cost of their cable box. In other words, the fight over them is something of a battle for a worthless prize. Hence, the ideal programming distribution business — a margin business if there ever was one — is to get rid of the lower end and upsell the high end. In this, the future of television is more expensive rather than less.
So why then are so many people seeming to build a future that doesn't add up?
In some sense, Dish's Sling, the most aggressive skinny purveyor so far to have launched, is the catalyst for the industry's seeming pell-mell conversion to cheap television. It's offering an aggressive live discount programming bundle while at the same time loading up on VOD offerings — about 10,000 hours of VOD on the Sling platform. Live + VOD is a direct challenge to such OTT services as Netflix and Amazon Prime with only VOD (and nominal original content). In the Hulu and YouTube calculations, it's cheaper to add a skinny bundle VMVPD service to their offerings and thereby compete with Sling and other bundlers than it is to make a high-risk investment in original content and compete with Netflix.
But wait! Will they really be competing with Sling, or is Sling drawing them into a necessarily losing battle? That is, Hulu and YouTube will be in the low-margin skinny bundle business — their customers ever trading out for a better deal — whereas Sling, as a feeder to its parent Dish, really is a step up to a high-end business. Sling, in other words, like the other full-service cable providers, can lose money as an acquisition and marketing vehicle if it graduates its users — millennials as they get older — to Dish's highly profitable fat bundle.
The essential assumption of the skinny bundle, or at least that of the media writing about it, is that simply because there is a cheaper product out there, everybody is going to go buy it. But the opposite assumption is certainly as compelling: People have different needs and will pay for service quality to enhance the experience of a key activity of their day, watching television.
Indeed, much of the skinny assumption rests on a younger person's fleeting economics. For instance, the numbers of unwatched channels in a full bundle vastly diminishes if the customer is a family of four, which suddenly is using something more like 30 to 40 percent of the total package. While the young are spending less, families are spending more, sometimes much more, layering in an OTT service on top of full cable bundles. (Or there's Apple, which doesn't give its equipment away — meaning something like an extra $700 outlay if you need Apple TVs in three rooms.)
So what exactly are Hulu and YouTube talking about?
The new Layer3 TV recognizes that the future of television is more expensive, not less.
They may not, in fact, be talking about much. Although Hulu is backed by content-rich partners Disney, Fox and NBCUniversal (a skinny bundle puts it into direct competition with NBCUniversal owner Comcast), it is far from certain that those partners will be willing to support Hulu at the expense of their better deals with the fat bundlers. YouTube was open about admitting it does not have a single content licensing arrangement in place. In any event, for both services, the enthusiasm and PR usefulness of a skinny announcement today might well be significantly at odds with the reality of the services that will launch a year or 18 months from now.
Meanwhile, Layer3 TV — the first real startup cable company in a generation, delivering its programming to a vastly enhanced cable box and having spent several years negotiating licenses for more content than many available fat bundles — is launching with every major cable network and broadcaster on board. That means it has all the deals that eluded Intel, Apple and other would-be television players, becoming the first distributor to specifically target the fat market. More programming. Higher service. Better tech. It's a fulsome promise of not just an easy-to-work television, a vastly more intuitive interface, but of turning the television into a household internet of things platform.
In some sense, it merely takes the skinny point of view — that not all consumers want the same thing — and refocuses on a better business proposition, a less price-conscious market, pushing television, that former everyman medium, into the direction it has been going, as a high-end experience — a blissful, treat-yourself purchase.
Television is the new luxury. Cable is, er, the new cable.
Skinny to Fat: Who’s Got What TV Packages Online
PRICE $49.99 a month
WHAT IT’S GOT More than 50 channels of live and recorded television, with sports costing extra.
PRICE $20 a month
WHAT IT’S GOT More than 20 cable and online video channels as part of Dish TV’s skinny live bundle; some sports.
Xfinity Stream TV
PRICE $15 a month
WHAT IT’S GOT Access to broadcast networks and HBO. But it is available only to Comcast broadband subscribers in a few cities.
Charter Spectrum TV
PRICE $13 a month
WHAT IT’S GOT A free Roku player and access to network channels as well as options for premium content. But it’s offered in only a few cities and only to Charter subscribers.
The satellite provider this year will roll out several streaming options with broadcast and cable options. However, there are scant details available at this time.
PRICE $14.99 a month
WHAT IT’S GOT HBO hits such as Game of Thrones, documentaries and specials without a cable package.
PRICE $10.99 a month
WHAT IT’S GOT Originals such as Homeland as well as access to more than 300 movie titles.
PRICE $8.99 a month
WHAT IT’S GOT Outlander and other on-demand (but not live) access to movies, plus downloadable shows.
CBS All Access
PRICE $5.99 a month
WHAT IT’S GOT The upcoming Star Trek series and more than 7,500 on-demand shows from CBS.
PRICE $3.99 a month
WHAT IT’S GOT Series for comedy fans, such classics as Kids in the Hall and such NBC shows as 30 Rock and Parks and Recreation.
PRICE $11.99 a month
WHAT IT’S GOT A growing slate of originals such as The Mindy Project and Casual as well as next-day access to TV shows.
WHAT IT’S GOT Such originals as House of Cards and Orange Is the New Black in addition to access to TV shows but a diminished movie library.
PRICE $8.99 a month
WHAT IT’S GOT Original series led by Emmy Award winner Transparent and Mozart in the Jungle as well as indie-focused movies.
Michael Wolff, a THR contributor, writes frequently about the media business. His latest book is Television Is the New Television.
This story first appeared in the June TK issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.