Deals Like AT&T-Time Warner Won't Solve TV-Streaming Mess
(Bloomberg Gadfly) -- Like to binge-watch TV? There's an app for that. And another. And another. And another.
It seems that overnight, there appeared a deluge of online video-streaming services -- all of which hope to capture what Netflix Inc. has. They won't. In fact, a recent report from The Diffusion Group predicts that every major TV network will have its own streaming service by 2022. But that's neither good news for media investors nor consumers.
There's already Netflix and Hulu, and then the cable-like services from Sling TV, YouTube TV, DirecTV Now and PlayStation Vue. Smaller networks rejected from those are pushing Philo, which shuns costly sports programming and broadcast news in favor of the entertainment genre. CBS Corp. offers CBS All Access and a Showtime app. Time Warner Inc.'s HBO has two online versions. Walt Disney Co. is launching an ESPN service alongside an offering for Disney fans. Comcast Corp.'s NBC News division is planning an app, as is Discovery Communications Inc., the new home to HGTV and Food Network. Even World Wrestling Entertainment Inc. and Ultimate Fighting Championship have their own. You get the idea.
While pay-TV companies and network operators are billing their new products as the solution for providing cheaper, more tailored and convenient viewing, it seems they're instead moving further away from what consumers want. Americans hate their cable providers, mostly because they pay too much for packages full of channels they don't watch. But the new services aren't really any more personalized or that much cheaper than cable. Say you mostly like the DirecTV Now lineup that includes MLB games and can't live without Netflix or HBO's next season of "Game of Thrones" -- that'll cost you $63 minimum.
On top of that, in order to stream, subscribers may need to upgrade to a faster home-internet connection, which is probably offered by the same company they're trying to ditch by cutting the cable cord. A Deloitte survey published this week found that 56 percent of current pay-TV subscribers say they keep their service because it's bundled with their internet access.
The TV giants are turning more insular and protectionist of their content, which The Diffusion Group refers to as "media tribalism." For example, Disney will no longer supply content to Netflix that it will put on its own apps. Meanwhile, consumers are headed the other direction, attached to certain binge-worthy TV series and agnostic as to the network brands producing them. (One exception may be HBO because of the belief that generally everything on HBO is good.) Consumers hoped for a-la-carte packages, but instead will probably have to subscribe to multiple apps as companies increasingly reserve their content for their own direct-to-consumer offerings.
This is what Netflix got right. It's cheap, and the content lives detached from the brands that produced it. But Netflix also set unrealistic expectations of the industry while alienating it. Netflix has relied on the debt market to keep funding its growth and original content, a beneficiary of low borrowing rates and a strong lending appetite among investors fascinated by its trajectory. What would happen if the country were to fall into a recession and credit dry up?
The traditional TV-network operators generate two streams of revenue -- advertising dollars, and affiliate fees paid by the cable companies. Both have felt the pressure of consumers jettisoning cable or switching to slimmer online packages. But the economics for new online offerings aren't attractive, and for the pay-TV providers, these offerings threaten to cannibalize the more profitable side of their businesses. As Craig Moffett of MoffettNathanson summarized it in a note last year about AT&T's DirecTV Now service:
These customers are almost certainly coming in at a negative margin, making their gains worthless at best and deeply dilutive at worst.
AT&T -- along with a growing list that includes Disney, Comcast, CBS and Discovery -- are trying to play defense by exploring megamergers for a white-knuckled grip on their traditional way of making money. The wireless carrier is spending the next few weeks in court defending its $109 billion acquisition of Time Warner, which the U.S. Justice Department argues will hurt competition and result in higher prices for consumers. Even if AT&T prevails, such a debt-heavy deal may not be the right answer. Or it may not be enough on its own.
We're a long way from paying just for the content we actually want to watch. Sure, there's more choice now than traditional cable packages have offered, but it's still costly and even more confusing trying to sort through which apps offer which content and what set of apps together meets your needs. And it's not like the industry heavyweights are making much money from all these streaming services. As it stands now, they risk messing up a crucial moment.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Tara Lachapelle is a Bloomberg Gadfly columnist covering deals, Berkshire Hathaway Inc., media and telecommunications. She previously wrote an M&A column for Bloomberg News.
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