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Straight Talk Media & Entertainment

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Thanks to increasing consumer dissatisfaction with traditional pay-TV services and rising interest in OTT SVOD offerings, alternative packaging strategies continue to develop apace, predominantly in the form of "skinny bundles" or OTT-delivered subscription services. These are aimed at tapping into the growing "cord-cutter," "cord-shaver," and millennial segments, to extend the reach of traditional pay-TV operators on connected platforms. Skinny bundling is still finding its feet as service providers wrestle with the pricing and positioning of a la carte pay-TV content. As consumers' options expand and their expectations rise, emerging forms of pay-TV packaging need to be liberating rather than constrictive.

Skinny bundling is still finding its feet

A recent Ovum consumer survey showed that nine out of 10 consumers considered a wide variety (not necessarily a large number) of channels to be either an "important" or "very important" component of an ideal TV service, while more than two-thirds (69%) cited the ability to choose a variety of channels themselves as "important" or "very important" (see Figure 1). More than half (53%) of respondents planning to downgrade to a cheaper service said their current plan was too expensive, while 42% said they didn't watch the channels enough to justify the cost.

The main aim of skinny bundling is to give consumers more choice and flexibility in configuring their home video entertainment services. Unbundling individual channels on an a la carte basis presents a challenge because such channels have always formed part of a wider channel package, with pricing based on expected subscription volumes. Channel unbundling undermines established pricing structures, with uncertainty around individual channel demand inevitably driving per-channel costs upward.

Skinny bundling and a la carte package customization within traditional pay-TV services are likely to have limited impact without content providers rethinking how they sell individual channels and experimenting with how channels are packaged to consumers. Verizon has twice revamped its Custom TV offering since its launch two years ago, expanding the channel line-up and extending the range of themed bouquets on offer. In Canada, where availability of skinny bundles and a la carte access to individual channels are now mandatory, consumers have complained about high per-channel prices, a lack of flexibility for bundling with other services, and little transparency around additional charges such as STB rental.

Can pay-TV unbundling really work?

It's not only traditional network-based operators that are looking into stripped-down subscription TV. Outside of the established distribution landscape (i.e. cable, satellite, IPTV), a handful of online subscription TV services has sprung up. Sky's Now TV has gained significant traction in the UK, where it is in third place behind Netflix and Amazon in the SVOD space with an estimated 1 million subscribers. It is also building momentum in Germany (under the Sky Ticket brand) and in Italy. Earlier this month YouTube TV launched in US metro areas, offering a 40-channel package with cloud DVR functionality for $35 a month. The Sling TV and PlayStation Vue services have both been available for a couple of years now.

Ovum has limited expectations for standalone OTT pay-TV offerings because they don't enjoy the same established relationships with both content providers and consumers. They present a more limited "me-too" version of traditional pay TV, without such benefits as multiservice bundling and mobile data discounts that are available from network-based service providers. Some individual US channel networks have had modest success with standalone SVOD services, but their offerings are dwarfed by aggregated products from the likes of Amazon, Netflix, and Hulu – largely as a result of having failed to provide anything different from what's already available on traditional TV. The likes of HBO, Starz, and Showtime work better either as part of a regular channel (or service) bundle or as an optional add-on (rather than on a standalone basis).

OTT pay TV benefits from links with other services

Traditional, network-based service providers have more to gain from diversifying into online distribution than standalone players – particularly as some larger players move further into content ownership, giving them control over a bigger piece of the value chain. AT&T is aggressively combining its pay-TV and access businesses, offering promotional discounts, including a year's free HBO subscription for customers taking both DirecTV NOW and its wireless products. Comcast has just announced plans for its own SVOD service which will almost certainly leverage its NBCUniversal affiliation and may (or may not) end up including linear channels and sports coverage. Meanwhile, NowTV is using its affiliation with Sky in the UK to offer traditional triple play which (if successful) will make for a more attractive and stickier value proposition.

New pay-TV packaging has to be liberating rather than constrictive

Skinny bundling and a la carte channel packaging are a reaction to the ascent of OTT SVOD and an attempt to answer the following question: How can operators address consumers' growing dissatisfaction with big, expensive package tiers built on enforced channel bundling while accommodating a growing desire for third-party alternatives such as Netflix? SVOD growth is accelerating while pay TV is stagnating in most mature markets. However, for the most part, pay TV is not in competition with OTT SVOD. In fact, the distinction between the two will increasingly blur as pay-TV operators (both broadcasters and distributors) gain SVOD market share. Ovum's consumer research shows that most pay-TV users are more likely to be SVOD customers than those without pay TV.

Evolving pay-TV packaging strategies should entail the development of services that don't try to emulate what the SVOD giants are doing (as Rogers in Canada recently acknowledged with the closure of Shomi) and don't end up as a maze of opaque and unfeasibly priced mix-and-match options. Looking at some of the so-called skinny bundles currently on offer, it becomes clear that once you've added one or two premium networks and coughed up fees for local sports channels, the overall costs quickly add up, leaving little change for the obligatory SVOD subscription. Ultimately, customers will choose the service package that enables them to get the content they want within a budget that suits them.

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