News this week that Apple is trying (again) to get into the pay-TV business. Nice to see it still wants to be part of our Big-4. Having sworn off skinny bundles for the time being, however, Apple intends to offer a premium bundle consisting of Showtime, HBO, and Starz.
Will this work and what does it mean for the future of TV? Two thoughts.
1. Skinny Bundles Encourage Cherry Picking
Cherry pick (verb): To selectively choose the most beneficial items from what’s available.
Michael Porter’s classic competitive strategy matrix describes two basic modes of competition: cost leadership and product differentiation. The funny thing about the old world of legacy pay-TV competition is that MVPDs didn’t really engage in either. Everyone’s costs (and prices) were largely the same. Most-favored-nation (MFN) clauses in affiliate deals led to convergence in content prices, and no one ever had a significant edge in cost inputs like STBs or truck rolls. At the same time, pay-TV packages in the US all featured largely identical channel packages. Television channels themselves were identical across MVPDs, based as they were on a common satellite feed. Looking back with the benefit of hindsight, this ecosystem never manifested much competition at all.
The new world of broadband pay-TV (BPTV, aka ‘vMPVD services’) has blown the old equilibrium to bits and re-introduced competition with respect to both price and product. There is no Ministry of Silly Walks telling BPTV providers what channels have to be included in their skinny bundles. DirecTV Now launched without CBS, while YouTube TV has decided to go to market without any channels from Turner (e.g., TNT, TBS), Viacom (MTV), Discovery (TLC), or Scripps Networks Interactive (Food Network). The only real commonality across these services is the desire to reduce the size of the bundle and the monthly cost of the basic service.
This new “less is more” strategy puts traditional premium channels like HBO, Showtime, and Starz into a bit of a quandary. These channels are generally the first to go when the traditional fat bundle goes on a diet. (The notable exceptions are the new bundles between DirecTV Now and HBO. Of course, AT&T had to buy Time Warner for $85 billion in order to secure those particular arrangements). Most of the new services do not offer traditional premium channels as an option. At the same time, the reason these brands got labeled as “premium” in the first place is that the combination of original shows, fairly new movies, and no advertisements is valuable to some portion of the pay-TV market.
Enter Apple. The folks in Cupertino have (correctly) realized that there’s not a lot of margin in creating yet another basic skinny bundle package in an increasingly crowded space. Instead, Apple seems set on creating a new bundle that (more affluent) consumers could use to supplement their base BPTV package. This could be quite profitable. The costs (to Apple) of offering such a bundle are minimal. The customers to whom this would appeal already have an Apple ID and a credit card on file. To use another analogy, the BPTV services provide the “milk” at little or no-margin, and then Apple comes in and skims the cream in the form of the most profitable customers and content. Broadband pay-TV providers are obviously not going to be too happy about this, but there’s not much they can do about it. By the same token, however, there’s no guarantee this gambit will succeed, which brings us to our second point.
2. Cherry Picking Isn’t So Easy
Creating a new premium bundle is technically easy but commercially difficult. That is, Apple still has to secure the rights to resell the premium content. This may be easier said than done.
The dominant premium “channels” in the world today are Netflix and HBO. No one else comes close to the breadth and depth of original shows offered by these two. It’s worth noting that there is no reference to Netflix in the rumors about Apple’s new bundle. Why? Simple. Netflix has little or nothing to gain from such an arrangement. It already has roughly 50 million US subscribers, and it owns the customer relationship (including pricing) in every case. Bundling Netflix as part of an Apple premium bundle imperils both elements. Standalone Netflix subscribers might (correctly) perceive that a small group of Apple devotees are getting a discount. This undercuts the perceived value of the subscription and puts downward pressure on price.
So what about HBO? As discussed above, AT&T is totally focused on using HBO as a carrot to lure subscribers to both DirecTV Now and AT&T unlimited mobile data plans. Wholesaling HBO to Apple as part of a bundle with Showtime and Starz would muddy these waters. HBO has spent billions on original content to separate itself from its traditional pay-TV channel competitors. An Apple bundle drags it back down by implying that Showtime and Starz are of equivalent value. As discussed above, AT&T paid billions in order to be able to (exclusively) associate HBO with its brands. From AT&T’s perspective, my response to this offer from Apple would be that if Tim Cook wanted to bundle HBO so badly, maybe he should have put in a bid for Time Warner.
Bottom line: Showtime and Starz are almost certainly very enthusiastic about this idea. They have nothing to lose. I don’t understand why HBO would do this. Netflix is a total non-starter.
The unwritten rules that long governed pay-TV competition have broken down. The new reality is an ever-changing kaleidoscope of competitive alliances and partnerships of convenience. Apple’s new premium bundling gambit would be good for Apple and paint skinny-bundle BPTV providers into a low-margin corner. Let’s see whether Apple can get HBO to play along.
Stick with TDG and stay ahead of the curve.
Joel Espelien is a Senior Advisor for TDG and serves as an advisor and Board Member to technology start ups. He lives near Seattle, WA.