How TV Can Weather the "Skinny Bundle" Storm of Streaming Services (Guest Column)

Illustrated by Chris Madden

Services like CBS All Access and Amazon  Prime should be additive, not replacements for cable — it's the only path to protect both consumers and profits, writes a partner at entertainment law firm Ziffren Brittenham.

Whether from Wall Street, programmers, research analysts or media observers, there is virtually a daily report on the impending disruption and/or destruction of the traditional television business. The culprit: the forces of over-the-top (OTT) transmission, meaning internet-enabled streaming content via boxes like Apple TV or Roku or such devices as smartphones or tablets. Among the threats, perhaps the most ominous is said to be the "skinny bundle," or the destruction of the traditional bundle of hundreds of channels sold via a "fat" cable or satellite packages in favor of a dramatically pared down selection of desirable channels delivered (for the most part) OTT.

The top executives in the TV business have given conflicting statements on the issue in comments to investors and analyst groups in the past month. According to CBS Corp. chairman Leslie Moonves, who has launched the CBS All Access OTT service, there is opportunity in an OTT ecosystem. "People online are doing so much catch-up viewing, the ability to put advertising there just makes perfect sense," he said recently. Added Time Warner CEO Jeff Bewkes, who has the HBO Now subscription service, "If existing subs move from pay TV to OTT, it's not a problem for us." But support is not unanimous. Said NBCUniversal CEO Steve Burke, "OTT sounds like a better business than in reality it is."

No doubt the TV industry is in the throes of transition, and more attention will be devoted to whether an OTT skinny bundle as a replacement for the big bundle will be beneficial for the production industry and the viewing public. My position is the skinny bundle can and should help both — but only as something that is additive to the big bundle, not as a replacement. Losing the big bundle and moving either to a skinny bundle or, even worse, an "a la carte" channel system would be bad for both the TV industry and consumers. Here are six key factors to consider:

1. The number of OTT of players is growing

Let's try to bring clarity to these issues by looking at the current players in the world of professionally produced OTT content. The market has four player-types: ad-supported services (e.g., CBS All Access, NBCU's comedy hub Seeso), transaction-supported platforms (Apple's iTunes Store), subscription-supported streaming services (Netflix, Amazon Prime Video, likely Hulu Live and maybe Google's You Tube next year) and digital multichannel video programming distributors (the so-called DMVPDs, which include Sling TV, PlayStation Vue and the soon-to-launch DirecTV Now). Many of these operate under multiple revenue models (CBS All Access, for instance, costs $6 a month). In the U.S., subscription services is the largest category, followed by ad-supported services, transactions and the DMVPDs.

2. Cost leads consumers from fat to skinny

On the face of it, a consumer should want as broad a selection of programs — and channels — as possible to watch. From a programmer's perspective, the ability to produce and distribute more programs, from diverse sources and serving as many demographic groups as possible, also is desirable. So why the antipathy to the big bundle? For the consumer, it can only come down to money. The average monthly cost of the midrange or larger bundle has increased nearly 40 percent from 2010 to now. That's probably why the subscriptions to traditional MVPDs have decreased 1 to 2 percent per year recently. The proposition is that OTTs (in particular the DMVPDs) will pick up the slack. Thus far, the results are questionable.

3. So why do programmers lust after OTT?

A cynical but probably accurate view is that programmers are trying to appeal to Wall Street to get higher stock valuations. Netflix, YouTube and Hulu, for example, have enjoyed a higher multiple compared with the traditional media companies. So, they say, why fight OTT when it's much more profitable to join? And for the established programmers, there are advantages to entry. Just like in the traditional TV business, customer acquisition and service expertise (avoiding churn) is crucial to OTT success. Moreover, ad-supported OTT businesses can offer their customers both broad and targeted audiences (and younger ones at that). Viewers of CBS All Access, for example, are as much as 20 years younger on average than for the mother ship. And top-tier and niche content (for superfans in such diverse genres as sports or news) is more valuable than lower-rated, midtier programs. So if the genre proposition of an OTT offering meets public taste, there's considerable upside.

4. Skinny actually costs programmers more

Does it make any sense for programmers to push smaller bundles at the risk of breaking up the big ones? Consider these facts:

A. In the effort to compete to be included in the skinny bundles, program costs will rise significantly (they have risen 7 to 10 percent per year, while revenue is flat).

B. Each new OTT entrant will cost at least $25 million to $50 million annually to pay for its fixed infrastructure costs, plus launch and marketing costs on top.

C. The current TV ecosystem is largely predicated on a dual revenue stream of advertising and subscriber fees, which investors favor. Many internet companies rely solely on ads for their revenue; ad-blocking technologies and nonhuman traffic (i.e., fraudulent ratings) certainly will emerge, putting these channels at severe risk. There are presently only four premium pay TV channels (HBO, Showtime, Starz and Epix) that carry no advertising; new DMVPDs would be wise to avoid a single revenue business model.

D. Because of favored-nations clauses, aside from normal business practices, no channel would dare to accept a lower cost-per-subscriber in dealing with a new OTT entrant. Therefore, the OTT entrant will have to pay more, not less, in license or affiliation fees to channels it exhibits than those channels now receive from traditional cable and satellite services. And of course, there's no guarantee the OTT offering will appeal to the cost-minded public. Many of the new services are suffering red ink.

5. An "a la carte" system would be a disaster

Look at what happened in Japan, certainly not a third world country, and with avid TV viewing. In the mid-'90s, its legislature proscribed an a la carte system — allowing customers to choose the exact channels they wished to pay for — for satellite companies that wanted to launch there. Three large consortiums came in — DirecTV (whose operations essentially went bankrupt after a couple of years), News Corp (which sold its operations to the third consortium) and Sony (which acquired the customer list from DirecTV and the remnants of News Corp). Why? Because none of the carriers or programmers was willing to spend the necessary yen to jump-start subscribers. In essence, they refused to market their wares. Even today, the remaining satellite service has less than 10 percent penetration in the territory. It will be instructive to see whether Canada, which recently has adopted a hybrid a la carte system, has hurt both the programmers and the public.

6. Skinny should be additive, not a replacement

Experimentation with new OTT services is bound to occur. The upside can be significant, as Netflix has shown. But it's hard to believe the existing system will be — or should be —disrupted. Bundling, after all, is optional. And unbundling destroys $100 billion of market capitalization, according to one thoughtful analyst, and arguably even more value for consumers as midtier channels may disappear.

Ziffren is a partner at Ziffren Brittenham and an adjunct professor at UCLA Law School.

This story first appeared in the Oct. 21 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.