NBCUniversal's CEO says the growth of an emerging cash machine for TV is 'starting to plateau,' and it couldn't come at a worse time
- The mood around digital TV packages (vMVPDs) is starting to turn sour because of flagging growth and bad margins.
- This could mean financial pain for TV networks which were counting on them to help offset some of the losses they will take from the decline of traditional pay-TV packages on cable and satellite.
- On Thursday, NBCUniversal CEO Steve Burke said "the growth of the virtual MVPDs is starting to plateau, at least in the last month."
- UBS analysts on Thursday revised their estimates of pay-TV subscriber loses to reflect "worsening" trends.
The evidence is piling up that digital TV packages (vMVPDs) will not be the savior some TV networks were hoping.
The trend of subscribers ditching satellite or cable TV bundles has been worrying for TV networks, which get paid carriage fees by distributors (per subscriber) to have their channels in the bundle. Luckily for networks, digital TV packages that pay similar carriage fees - from companies like Hulu, YouTube, and AT&T's DirecTV - have sprung up to replace some of that revenue.
But the growth of these new digital packages could already be slowing, which is bad news for networks and distributors alike. A noteworthy data point is AT&T, which has both a traditional pay-TV arm (DirecTV's satellite business) and a digital one (DirecTV Now).
On Wednesday, AT&T reported its earnings, and its DirecTV numbers raised some eyebrows around the industry. AT&T lost 359,000 satellite TV subscribers, significantly more than the 245,000 Wall Street was expecting. But worse, growth of its digital TV service, DirecTV Now, slowed. DirecTV Now added only 49,000 subscribers, well below both Wall Street expectations of 287,000, and its second-quarter additions of 342,000. (Management blamed a price increase.)
Those numbers do not paint a rosy picture of the ability of digital bundles to combat pay-TV subscriber losses.
In a note distributed Thursday, analysts at UBS revised estimates for the sector to reflect "worsening" pay-TV subscriber trends suggested by Verizon and AT&T's quarterly results.
"Including streaming TV, we look for 670K pay TV subscriber losses in 3Q18, up from -115K in 3Q17," UBS wrote. UBS expects traditional pay-TV subscriber losses of 1.25 million for the quarter.
NBCUniversal CEO Steve Burke dumped more cold water on optimists during an earnings call Thursday.
Burke addressed a perceived weakness in digital TV packages. While painting an upbeat picture of the pay-TV marketplace in general, Burke said "the growth of the virtual MVPDs is starting to plateau, at least in the last month."
Starting to plateau already?
Using DirecTV Now as an example again, the streaming TV service only has 1.86 million subscribers. DirecTV's satellite business has 10 times that amount. This is not a good time to plateau. And fewer subscribers means fewer dollars to TV networks.
Let's not forget the terrible margins
But potentially flagging growth isn't the only problem for these digital TV bundles. They also have terrible margins. Morgan Stanley recently did the math on Hulu's live TV product and estimated it had negative gross profit.
So it should come as no surprise that in the last few days, executives at first Hulu and then AT&T talked about slimming down the bundle and offering packages with positive margins. This could be beneficial both as a way to cut costs and boost subscriber growth.
But it's probably going to hurt the revenues of some TV networks, which risk getting cut out of packages and losing even more subscribers.
Which networks are we talking about?
In Thursday's note, UBS addressed AT&T's comments about "evaluating program lineups."
"We view network groups with broadcast (CBS, Disney, NBCU, Fox) as best-positioned to hold their negotiating leverage against AT&T while standalone cable network groups (AMCX, A&E, Discovery/Scripps, Viacom) are most at risk," UBS wrote. "Still these network groups represent a smaller percentage of program cost and generally have a better price/viewership relationship than networks with sports rights."