DirecTV Now: Cord Cutting and the Future of Television
Technology is empowering consumers to cut the cord – what can cable programming providers do to adapt to this changing market?
A Product in High Demand
This fall, the possibilities for entertainment on television are more promising than ever: NFL Football, a new season of The Walking Dead, Westworld and the presidential debates to name a few examples. Suffice to say – there is an abundance of “must see TV”. But the leading provider of subscription television, DirecTV is not celebrating – instead they are dramatically disrupting their own business and operating models. This month the company introduced DirecTV Now, a streaming only version of their satellite service to posture their business and operating models for long term success. A new generation of consumers empowered by technology is placing immense pressure on DirecTV and the industry. The differing methods of adaptation and value delivery will determine the ultimate success or failure of DirecTV and the industry as a whole.
A Traditional Model Disrupted: Cord Cutters, Cord Nevers and Cord Shavers
The traditional DirecTV business model had several streams of revenue: paid subscriptions, equipment rental, and advertisements.[1] This profitable model provided gross margins of 30-60%.[2] Ubiquitous bandwidth growth, mobile use, on demand streaming competitors, and price sensitive consumers have significantly driven down willingness to pay for cable’s traditional subscription model creating a new growing market of consumers. Three segments are impacting the status quo: Cord Nevers, Cord Shavers and Cord Cutters.[3] This current market is estimated at 20 million US households and growing at a rate that could soon eclipse the current paid subscriber market share of DirecTV.[4]
The Industry Responds – Business Models: Mergers, Acquisitions and Zero-Rating
In 2015 DirecTV was acquired by AT&T for $49 billion.[5] This was the first stage in an aggressive effort to posture against the shifting market by bringing the synergies of internet and mobile with television programming. In a third step, AT&T is in the process of acquiring Time Warner for $85.4 billion. With Time Warner owning several networks, this acquisition completes a trifecta of content, programming and data delivery. AT&T hopes this merger will all them to acquire a “zero rating” model. The zero-rating model allows mobile phone users to stream specific content without data usage penalties bundling all value adds of the company in a stronger way than competitors. However, this effort is currently under intense scrutiny with regulators and advocates of net neutrality[6]. Some argue that the companies should not be able to differentiate or seek preferential treatment of their internet content over their competitors.
New Operating Models: Skinny Bundles and Over the Top
DirecTV Now is attempting to target the cord cutters and cord nevers – even at the risk of cannibalizing traditional service. Differentiating from typical on-demand competitors like Netflix or Hulu – the network will provide consumers with over 100 channels of live streaming television at a price point of $35 a month.[7] The industry refers to this as an “over the top” model – skipping over the top of the cable box and taking content from the providers to the consumer. The company’s major competitor Comcast has taken a vastly different approach, attempting to lure cord shavers with Skinny Bundles. Skinny Bundles provide traditional subscription television with a much more customizable set of channels to suit personal preferences at a lower price point.
Long Term vs. Short Term: Skinny Bundles or Over the Top
Comcast’s skinny bundles strategy, strengthened by the Summer Olympics coverage, has been successful with 28% increase in revenue while posting an increase of 48,000 video subscribers during a recent quarter. [8] Time Warner publically regards “over the top” with skepticism and believes that it will not lure significant consumers from the cord nevers and cord cutters – at least in the next 2 years. The performance of DirecTV Now is unknown as it rolls out to consumers this month but similar over the top services such as Dish’s SlingTV have found some success in the market.
A Cord Cutter’s Opinion:
As a cord cutter, I am skeptical about either option. It would take a lot to bring me back. I think that DirecTV is taking a crucial first step, but needs to remain open to a bolder combination of both options. They should posture themselves as a first mover in a true over the top model with channel by channel orders – not bundling. I’m concerned that the entire concept of cable television channels is at stake as on demand content becomes more ubiquitous and the golden standard. I think sports and news channels will survive – but if the industry wants to maintain the other current content we see – it needs to continue to be flexible to shifting consumer demand and open to additional disruption.
Image References:
[1] Singleton, Micah. “AT&T Will Give Away Free Apple TVs to Some DirecTV Now Subscribers.” The Verge. 7 November 2016. [http://www.theverge.com/2016/11/7/13555490/directv-now-att-apple-tv]. Accessed 17 November 2016.
[2] The Economist, “Cutting the Cord.” The Economist, 16 July 2016. [http://www.economist.com/news/business/21702177-television-last-having-its-digital-revolution-moment-cutting-cord]. Accessed 17 November 2016.
[3] Gryta, Thomas. “AT&T Seeks to Shake Up Pay TV”. Wall Street Journal, 19 October 2016. [http://www.wsj.com/articles/at-t-seeks-to-shake-up-pay-tv-1476882003]. Accessed 17 November 2016.
Written References:
[1] Schoen, John. “How Do the Cable Companies Make Their Money.” SNBC, 20 April 2015. [http://www.cnbc.com/2015/04/20/how-do-cable-companies-make-their-money.html]. Accessed 17 November 2016.
[2] The Economist, “Cutting the Cord.” The Economist, 16 July 2016. [http://www.economist.com/news/business/21702177-television-last-having-its-digital-revolution-moment-cutting-cord]. Accessed 17 November 2016.
[3] Meola, Andrew. “Traditional Pay-TV Loses Even More Ground to Cord Cutters” 16 March 2016. [http://www.businessinsider.com/cable-tv-curbs-subscriber-losses-but-cord-cutters-continue-to-grow-2016-3]. Accessed 17 November 2016.
[4] Gryta, Thomas. “AT&T Seeks to Shake Up Pay TV”. Wall Street Journal, 19 October 2016. [http://www.wsj.com/articles/at-t-seeks-to-shake-up-pay-tv-1476882003]. Accessed 17 November 2016.
[5] Gryta, Thomas. “AT&T Closes $49B DirecTV Buy”. Wall Street Journal, 24 July 2016. [http://www.wsj.com/articles/at-t-closes-49-billion-directv-acquisition-1437766932]. Accessed 17 November 2016.
[6] Ramachandrin, Chalini. “AT&T Time Warner Deal Stokes Debate over Zero Rating”. Wall Street Journal, 2 November 2016. [http://www.wsj.com/articles/at-t-time-warner-deal-stokes-debate-over-zero-rating-1478037565]. Accessed 17 November 2016.
[7] Roettgers, Janko. “DirecTV Now Streaming Service will Cost $35 a Month”. Variety, 25 October 2016. [http://variety.com/2016/digital/news/att-ceo-directv-now-will-cost-35-a-month-1201900052/]. Accessed 17 November 2016.
[8] Ramachandrin, Chalani “Comcast Reports Strong Earnings Powered by the Rio Olympics” Wall Street Journal, 26 October 2016. [http://www.wsj.com/articles/comcast-reports-strong-earnings-powered-by-rio-olympics-1477479640]. Accessed 17 November 2016.
I agree with the fact that bundling is no longer a viable long-term play for cable television providers. While there is evidence to suggest otherwise in many markets, I feel that the “bad taste” left in the mouths of so many consumers as they scroll through dozens of channels that they never watch differentiates television in that regard. The skinny bundles are ideal for those unwilling to completely cut the cord. This eliminates the issue of paying for unnecessary channels, which is ever more important as society becomes more cost and value conscious.
I don’t, however, feel that any models other than on-demand streaming will survive in the long term. The modern consumers do not want their lives dictated by when their favorite show is on TV. They want to watch their shows at a time convenient to them. That is why Netflix and other similar models are so popular. The only exception is live sports or events, such as presidential debates. However, these exceptions are already addressed with pared-down versions of streaming TV, such as Sling. I don’t see any of the traditional content deliverers surviving unless they align their models to what modern consumers want. I also worry that other competitors, such as Google, may bundle a content delivery system that includes a pared down version of live television with streaming options with their already existing Fiber services.
Interesting post, Sean! When DirecTV announced its new offering recently I was really surprised. With network subscriber fees ranging from ~$0.15 to ~$5.00, 100 channels at $35/month seems nearly impossible. The article below projects a single digit gross margin on the offering and Deustche Bank is expecting the gross margin to be as low as 1-2% before ad revenue. I really do wonder how sustainable this will be with TV networks expecting in some cases 7% annual increase in subscriber fees. I doubt consumers will accept annual price hikes so that DirecTV’s margin remains the same.
http://www.businessinsider.com/directv-now-profit-margins-chart-2016-11
I also want to challenge your suggestion that channel by channel orders will indeed be cheaper for the consumer (though I absolutely agree that it will provide more flexibility). On average, if consumers were to put together their ideal list of channels, they would list roughly 15-20 networks. Let’s take CNN for example – it is included in most cable packages and therefore rakes in subscriber revenue from not only those who are heavy watchers, but also from those that pay for cable but never watch CNN. In an a la carte world, only the medium to heavy viewers would purchase CNN and therefore the offering would have to be priced higher for CNN to “remain whole” and make up for the lost subscribers vs when bundled in the cable offering. If every network did this, the 15-20 networks an average consumer would pay for very quickly ends up costing ~$35-45. Now that consumers no longer will be getting the cable / internet bundle discount, high-speed internet will cost them roughly $40-50. Together, this ends up being similar if not more expensive than current cable offerings.
Definitely agree with you Sean on the fact that bundling is not the best way to go. The industry is going through major disruptions which the old and established players find hard to adapt to. In order for Direct TV to survive and thrive in the long-term, it needs to disrupt its business model even more and give the customers what they are asking for: On Demand content with no additional strings attached as others are already doing.