Sub Fees Seen Growing Despite Over-the-Top Competition

 While some analysts are alarmed about the effects over-the-top will have on the ability of programmers to generate revenue, others are confident that the trend of rising subscriber fees will continue, at least through 2015.

The launch of Dish’s Sling TV was a sign that OTT would truly arrive as an option for that growing group of consumers who have opted not to subscribe to traditional cable. Streaming is becoming more popular, particularly with younger viewers, and with more programming becoming available online, the bundle—long a predictably profitable cash cow—is being threatened.

Following Sling’s launch, Michael Nathanson, analyst with MoffetNathanson Research, enumerated the threats to the media ecosystem that existed at the end of 2014, and “officially” added OTT to his list.

Looking at the agreements Dish has made to launch Sling TV, Nathanson figures the programming cost for the 12 networks in its “Best of Live TV” package are about $13 per month, including ESPN. With a $20 monthly price point, that leaves $7 for “customer acquisition costs, technology and hosting, interconnection and transport costs and at least some customer service,” Nathanson says. “That won’t leave a lot of room.” Nathanson figures Dish will make money as Sling sells higher-margin additional channel packages. “We don’t think Dish’s new service will take the world by storm…but we do think this product will find a niche and that its pricing will be genuinely disruptive,” he concludes. “Consumers now have the ability to craft their own bundle that might, just might, be ‘good enough.’ Combining a basic entry broadband and broadcast-only package with a Netflix subscription or a password-shared HBO Go service may give consumers enough content at a reasonable price to render the bigger [multichannel video programming distributor] bundles unattractive.”

Disruption doesn’t worry CBS, which has profited from pushing MVPDs for higher programming fees and has made a deal to be on Sony’s upcoming OTT system. “We see opportunity, a lot more opportunity than we see risk,” says Ray Hopkins, president for distribution at CBS. “It is a golden era in terms of the way you can monetize marquee content, whether it be through a traditional MVPD platform or the over-the-top platforms that we’re discussing, or SVOD platforms. Marquee content, you could argue, is as in-demand today as it has been at any point in television history.”

But a distribution head at another programmer that has made an OTT deal warns that Dish chairman Charlie Ergen wants to be disruptive. New services generally pay higher fees than distributors with large numbers of subs, but Dish is leveraging its satellite subs to get a lower rate for Sling TV than other new streamers. The exec warns that if Sling is successful, other traditional MVPDs will jump into the market, creating a free-for-all that could fray the industry’s moneymaking bundle and push subscriber fees lower.

But in the short term, Derek Baine, an analyst at SNL Kagan sees programmer subscriber revenue continuing to climb. “I think there’s no question they will because most of the big deals have been done and they’re long-term deals. Those are in the bag. I don’t see any slowing on that at all,” Blaine says.

Kagan expects programming costs to grow 8.8% to $51.6 billion in 2015. While not as impressive a gain as the 9.1% rise in 2013, it beat the 8.1% increase registered in 2014.

Baine says that for an over-the-top service to be successful, it will need shows from traditional programmers, and for those programmers, protecting their traditional business is a top priority.

“They’re trying to do it to get some of the cord-cutters and not cut into their core audience,” Baine says. “I think that basically a lot of these OTT services, the ones that will be successful are the ones that are done by the multichannel operators because they’re going to be really careful not to tread on their core customer base.”

That means Dish’s entry is going to have to compete with offering from cable operators, which have a big advantage also being in the broadband business. “They can do big marketing campaigns to their broadband-only subscriber bases and then try to capture that,” Baine says. “I think that’s how a lot of the OTT is going to play out.”


While programmers wrestle with the effects of over-the-top competition, media buyers are glad to find a new distribution system that will carry commercials to cord-cutting millennial viewers.

The new Web-based Sling TV system, which will be ad-supported, “allows us to get in there and reach them in a way we haven’t been able to before potentially,” says Darcy Bowe, VP and media director at Starcom.

Netflix and HBO Go have been attracting viewers, but they don’t take ads, cutting off buyers who want to follow eyeballs in the shift from TV to streaming. “This represents an opportunity to find a potentially younger audience, depending on who will sign up for it.”

Bowe says she doesn’t expect commercial-avoiding millennials to object strenuously to paying for a video service and having to watch commercials. “The younger generation is starting to understand that in order to consume content for free, you may have to watch ads and they’re OK with that trade off,” she says.

Sling TV will be inserting commercials digitally which opens up the possibilities of different types of addressable and interactive ads, which might also make it popular with marketers.

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.