It’s time for networks to play... 'The Price Is Right'

The TV industry appears poised to launch a fleet of new products that go over-the-top direct to consumers. The new business model will force programmers to ask themselves a crucial question they have never had to answer before: how much will viewers pay to watch our shows?

Broadcast networks offer shows free over-the-air with advertisers paying the bills. In cable, operators negotiate a wholesale price and pass the cost along to customers as part of a bundle of channels.

Over-the-top creates consumer choice. They can subscribe to what they want, assuming the price is right.

“Suddenly the person writing you the check, he is the same as the person who’s watching your show. That’s a first for the broadcast world,” says former CBS News and CNN executive Jon Klein, now CEO of TAPP TV, which sells the Sarah Palin channel over-the-top for $9.95 a month.

“All of a sudden networks are going to have to get good at understanding their consumers and delivering value to them in different ways than they ever had before. They’re going to have to become good merchandisers in addition to being marketers.”

Price is becoming an issue because digital technology is finally affecting TV the way it has disintermediated the distribution and consumption of other media. The newspaper industry was devastated because readers resisted paying for online content. Napster, iTunes and Pandora eviscerated album sales in the music business as consumers gained access to the songs they wanted to hear. Amazon’s flat-fee e-book offering has rewritten the world of publishing. Major movie exhibitor AMC Theatres is experimenting in some markets with a flat-priced monthly ticket plan because nothing beats subscription revenue for predictability and reliability.

In TV, viewers will have more opportunities to watch shows on-demand and buy their TV viewing on a network-by-network basis.

Nickelodeon Nickels

Last week, Nickelodeon unveiled its new premium mobile service aimed at preschoolers, called Noggin. It will provide subscribers with short-form and long-form content from Nickelodeon’s library, including Blue’s Clues and Little Bear. The price, after a free trial, will be $5.99 a month.

Sarah Kirshbaum Levy, COO of Nickelodeon/MTVN Kids and Family Group, said the price was determined after looking at a competitive set of kids and entertainment services that were in the $3.99 to $9.99 range. “We think the price was in a sweet spot,” Levy says. “It offers a safe environment, it’s affordable, with a deep, rich content offering.”

Levy added that the app relies on library product that does not appear on Nick’s linear networks. “It’s important to keep TV as the first screen where fresh TV content will be,” she says.

That’s only the latest announcement. The OTT buzz was turned up to full blast late last year when HBO announced it would launch a direct-to-consumer over-the-top product aimed at the 10 million or so consumers who currently don’t have a cable subscription but do have broadband. HBO chairman and CEO Richard Plepler said going over-the-top would “produce hundreds of millions of dollars of revenue,” but would be designed not to cannibalize HBO’s current pay-TV subscribers. That has analysts guessing HBO will charge about $15 a month—or about what cable subscribers pay. HBO wouldn’t comment on how much it plans to charge.

But research company Centris says that price might be too high, based on a “willingness to pay” survey it did with nearly 8,000 households in Q3 2014. It seems that in the OTT world, Netflix has already set the bar on pricing at less than $10 a month.

“It’s showing us that, yes, people are interested in getting HBO and other such services on a streamed basis, but they’re not necessarily going to go very much above the price points that have been established by Netflix or Hulu Plus, which is even lower,” says Centris senior VP Aniruddha Banerjee.

Banerjee says Centris found that HBO’s SVOD service could command a small premium over Netflix, maybe $1.50 or as high as $2. With Netflix at $8 or $9, that means HBO would risk turning off potential customers if it prices the service at more than $10. “That’s about the extent to which pricing over the currently established market price for these services will go,” says Banerjee. “When the industry leader sets a price point it becomes very difficult to justify moving too far away from it, unless you have something that is so different or appealing that it commands a premium.”

But at that price, HBO would risk irritating its current distributors and cannibalizing its own business.

Jumping In

After HBO announced its OTT plan, CBS launched CBS All Access, which provides a live stream from local affiliates and VOD access to CBS’ programming library for $5.99 per month. CBS declined to discuss what consumer research it did to select that price point.

Since then, Showtime and Nickelodeon have announced plans to launch OTT services, and top execs at other media companies have talked about taking brands direct to consumers, including Time Warner with Adult Swim, Disney with Marvel and Star Wars, and Discovery Communications, which has OTT offerings in Europe, with Science and Oprah Winfrey’s OWN.

“The interest in getting into the over-the-top space has mushroomed. It’s just incredible the number of players who are not public yet who are investigating it,” says Brent Magid, president of TV research firm Frank N. Magid Associates.

While OTT appears to be a fertile field, “it’s unlikely that a lot of services are going to get out there at the price points being floated and end up being successful at it,” he says.

Magid also sees Netflix as the standard-setter for price. Netflix offers an overwhelming amount of original content (320 hours of originals in 2015, triple the 2014 level) for that price, not to mention windows for major movie releases and TV properties such as Friends. That makes it tough for any single channel to come out with a product at even half the price if its library is a fraction of the size of what Netflix has.

Those channels may think their programming is so attractive it will be compelling over-the-top.

“Maybe they don’t need millions and millions of customers. They can do extremely well with actually a couple of million or a million people.” Magid says. “I think the bigger question is, are there enough high-affinity consumers per each of these OTT offerings where they can be profitable with not a huge number of subs?”

TAPP’s Klein says his company puts a lot of thought into figuring how much to charge. “We are obsessively experimenting with price to find that elusive optimal level,” he says.

Pricing decisions are based on the value of the product, the uniqueness or scarcity of that product and a demonstrated willingness to pay on the part of the targeted consumer, Klein says. A fourth factor TAPP looks at is what people are paying for similar products.

“We looked around and we saw that Glenn Beck was charging $9.95 a month, WWE went in charging $9.95 a month,” he says. “People ask us, well, how can you charge more for one single channel than Netflix charges for every movie and every TV show that’s out there? We say well, the one thing you can’t get on Netflix is the Sarah Palin channel and if you are a superfan, which is what this channel is aimed at, then you’re more than willing to pay.”

Klein think pricing is trickier for an existing channel that simply wants to make its cur current programming available over-the-top.

“They’re not adding any value other than the accessibility. There are no additional features, there’s no ability to talk to the stars or communicate with other fans of the show or anything like that. It’s simply convenience,” he says. “And so it’s an open question as to how much people are willing to pay for the convenience or for the opportunity to strip that out and no longer have to pay for 200, 500, 800 channels on cable that they never watch. We’ll find out.”

ESPN on Top

Last September, Beta Research surveyed subscribers about much they would pay for individual cable networks. The consumers were asked: “Suppose there would be a separate monthly fee for each cable TV channel. This fee per channel can range from 5 cents to over $5. What do you think the following channels would be worth to you and other household members on a monthly basis if they were sold by themselves?” The average perceived value of the average network was $1.09 per month and 33% of viewers were not willing to pay anything for the average networks.

Viewers saw the most value in ESPN, which they pegged at $1.45 (ESPN2 was worth $1.22). Next were AMC at $1.29, Food Network and History at $1.27 and Disney Jr. at $1.26 (see chart on).

Pricing is also important to companies looking to sell their own cable-like bundles of programming over-the-top, such as Sony, DirecTV, Verizon and possibly

Apple. For Dish, which launched Sling TV earlier this year, having a low price was crucial, even if that meant a limited channel lineup.

Roger Lynch, CEO of Sling TV, believes $20 per month is the magic number for his product, which is aimed at millennials who have broadband but don’t subscribe to cable or satellite.

“We did some research and looked at what we thought the elasticity curves would be. Of course you’d get more at $10 or $15, but your content would be so constrained that you don’t really have enough of a viable offer. So it’s really a balance of, can I get a content offer that is broadly appealing enough for the target market and at the right price point,” Lynch says.

Lynch doesn’t think it’s necessary to benchmark Sling TV against Netflix, or add them up and compare the total a consumer would spend over-the-top to the cost of a cable subscription.

“I think frankly that’s missing the point because first of all, people already have broadband, they’re not going to decide to get broadband so they can get Sling TV,” he says, adding that “people already have Netflix. I wouldn’t be surprised if 85% of the subscribers we get already have Netflix. We’re not trying to be all things to all people. That’s more the pay-TV model. And we know millennials are more comfortable assembling together different services to meet their content needs.”

Centris’ Banerjee surveyed consumers about Sling’s price and found that, “there were people willing to pay more. At an average of between $27 and $29, there were people who are definitely interested in subscribing.” But at the same time, Centris found that a little more than half of the people who were either probably not, or not willing to subscribe indicated that price was the reason.

How much would those people be willing to pay? About $10, says Banerjee—about what Netflix costs. “Once a center of gravity has been established around the $9 to $10 price point, the offering will have to justify the reasons why it charges more than that,” he says.

Analyst Rich Greenfield of BTIG Research is a bit more skeptical about the rush to OTT and says talking about price now is premature.

“When one of these companies actually launches a real direct-to-consumer product that’s compelling, with all of their content, then we have something to talk about. Everyone keeps saying ‘opportunity’ and yet no one’s launched,” Greenfield says. “The proof will be in the pudding. I want to see a Discovery direct-to-consumer offering. I’d love to see what they offer and how they offer it and what the price points are.”


Young viewerslike streaming video and they’d prefer to pay for a subscription and not watch ads.

A new survey by Frank N. Magid Associates found that 53% of all households already subscribe to at least one subscription video-on-demand service, and three-quarters of those who stream have a subscription.

There were big generational differences in how viewers would spend a $100 TV budget. While baby boomers would allocate $42 of their tally to live and linear TV and only $18 on streaming, millennials would spend $30 on streaming and only $28 on traditional TV.

Looking at potential cord-cutters, 69% cited the availability of programming they wanted to watch on streaming as a reason. That contrasts with 60% of all potential cord-cutters who said that traditional pay TV is too expensive.

Consumers prefer subscriptions to a la carte, according to the survey. When thinking about all the ways consumers get TV content, 77% of them say they prefer a set monthly fee over an a la carte model that lets them pay for each piece of content.

Younger viewers said they were willing to ante up to avoid commercials—60% of millennials say they prefer to pay for streaming content, vs. 42% of generation Xers and 47% of baby boomers. When looking at millennial parents (more than 40% of the demo group), the trend is accelerated, as 66% would rather pay than have a free, ad-supported model.

Magid interviewed 1,600 representative consumers in February.


Going over-the-topmight mean programmers can keep more of what they charge viewers to watch their shows.

Speaking to analysts last month on an earnings call, Walt Disney Co. CEO Bob Iger said over-the-top presented an opportunity to bring out a Disney-branded service, or others based on Marvel or Star Wars content.

“If we see that the market dynamics are changing in such a way that it’s better for us as a company to take the product out directly and to not only improve our margins by taking out the middleman, but to create a closer relationship with the consumer that can be mined for other revenue generating purposes then we will do that,” said Iger. He added that the company is mindful of the value of cable’s expanded basic bundle to the company, and that going over-the-top right now “would be somewhat precipitous.”

In the movie business, when theater owners balked at showing The Interview, Sony went over-the-top, distributing first through YouTube, then via other on-demand outlets. Sony picked a relatively low price point for a first-run movie—$5.99 for pay-per-view and $14.99 for purchase—but was able to break even on the film because it kept a larger share of the digital box office than it would have if it had sold actual tickets.

And HBO might see the same thing, if it’s able to keep all of what consumers pay to subscribe to its over-the-top service, rather than splitting it with cable operators.

Analyst David Bank, managing director of RBC Capital, assumes there would be costs to HBO associated with the launch of an over-the-top service—marketing and customer, for example. But he said, “I don’t think they’re viewing this as, ‘Which is the more profitable distribution mechanism.’ I think they look at it like, ‘I have an incremental audience in the form of cord-nevers and some margin on that business is better than no margin.’”

Bank expects HBO to price its OTT service in line with its cable price “so you’re not incenting people to churn and then just go get it over-the-top cheaper.” He added that, “The big X factor is whether or not people are getting cable just to get HBO. I would make the guess that there aren’t a lot of those people.”

Jon Lafayette

Jon has been business editor of Broadcasting+Cable since 2010. He focuses on revenue-generating activities, including advertising and distribution, as well as executive intrigue and merger and acquisition activity. Just about any story is fair game, if a dollar sign can make its way into the article. Before B+C, Jon covered the industry for TVWeek, Cable World, Electronic Media, Advertising Age and The New York Post. A native New Yorker, Jon is hiding in plain sight in the suburbs of Chicago.