As the Bundle Unravels, Relationships Shift Too

Skinny bundles, digital shifts prompt big programmers to focus on core brands

Why This Matters

Market forces are making media giants relent on insisting that small cable operators carry big bundles of their networks.

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Conflicts between programmers and distributors are almost as old as pay TV itself. But over the past few years, as subscriber numbers have fallen—pay TV had its worst first quarter ever, losing 762,000 customers, and the second quarter doesn’t look any better—the relationship between content companies and small cable operators is beginning to shift.

With customers increasingly preferring smaller video packages and greater flexibility in accessing content, some distributors are beginning to see a greater sense of compromise on both sides of the table.

Pricing is always a bone of contention and will likely remain so. Nonetheless, programmers are beginning to loosen their video bundles and offer up new and innovative ways to bring added value to their content.

Viacom was one of the first to publicly commit to focusing on six core brands out of its nearly two dozen channels. Other large programmers, such as NBCUniversal and Turner, have said they might be better off focusing on a handful of channels.

New speculation that Discovery Communications and Scripps Networks were contemplating a merger has highlighted the pickle programmers are in today: with millions of viewers seeking alternatives to traditional TV, how do content companies reach them?

The answer used to be more scale, and if Discovery and Scripps are serious, that’s the path they seem to be willing to take. But analysts critical of the deal said that more isn’t necessarily better in today’s programming environment.

“Having 18 combined networks in a world shifting towards skinnier bundles might only compound secular challenges,” UBS Securities media analyst Doug Mitchelson said in a recent report.

Honing on Core Brands

After NBCUniversal CEO Steve Burke said the programmer probably would be better off focusing on its biggest brands — it currently has about 13 networks — NBCU closed its lightly carried digital network Cloo on Feb. 1 and switched off the Esquire Network on June 28.

At the MoffettNathanson Media & Communications Summit in May, Turner CEO John Martin said Turner likely would not see all 10 of its networks included on all skinny bundles. But that’s OK, he added, given that 85% of its total affiliate fees are generated by four networks.

“If we can get four or five, we’re in good shape,” Martin said.

Rich Fickle, CEO of the National Cable Television Cooperative buying consortium, said large programmers are beginning to offer distributors more options.

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“I think the large guys are moving in the right direction, but at kind of a glacial pace,” he said, “because they are trying to preserve their current revenue streams and structures. It’s heading in the right direction, but I don’t think the large programming entities are necessarily the ones leading the path on that.”

Many programmers are focusing hard on being included in the growing number of digital MVPD offerings and skinny bundles, seeking a short-term revenue boost that could have broader implications down the road. But “it’s not clear that it’s going to solve the long-term trend of decline on the subscriber counts and the decline in ad revenue,” Fickle said. “It’s a question they haven’t answered yet.”

Fickle said he was encouraged at what seems to be a loosening of the once tightly held programming bundle. Small operators, especially those with limited bandwidth, have chafed at requirements to buy all of a programmer’s channels or none at all. The counter argument from programmers is that distributors have had the option to purchase channels separately, but at a higher cost per network.

Viacom’s decision to focus on core channels comes about two years after several NCTC members (mostly small to midsized multichannel providers) dropped Viacom networks in a carriage dispute. While the headlines went to Cable One, which dropped Viacom in April 2014, and Suddenlink Communications, which dropped the channels in September of that year, about 50 NCTC members with a total of hundreds and thousands of customers also jettisoned the networks.

“I think it sent a message,” Fickle said of those drops, adding that there wasn’t a migration of customers to other MVPDs as a result. “It should give large programming network groups pause. It is a little market-specific, but it is the beginning of a trend that has to be accounted for.

“We are seeing some of the programming groups heading more creatively in that direction,” Fickle added. “We encourage it and we are glad to work with them.”

Programmers said they are working hard to add value to existing relationships with distributors, developing new and exclusive content and creating new revenue streams.

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In April, AMC Networks reached a deal with Charter Communications to co-produce and co-fund original content. The first content to come out of that arrangement will debut on Charter systems in 2018. Charter gets an exclusive initial window in the U.S. to the co-produced content for use on its own platform, while AMC Studios will retain subsequent rights, including the right to distribute the content internationally.

Charting a New Course

CEO Josh Sapan told analysts on an earnings call shortly after the Charter deal was announced that it represented “a new horizon” for AMC Studios, its production arm. AMC has long focused on developing content for its outlets and avoided the past trend of flooding distributors with more and more channels, instead focusing on developing content that would create loyal fans, not just viewers.

“This approach has differed quite a bit from many of our cable network peers,” Sapan said on the call. “For a long time, as most of you know, many programmers were very focused on expanding their number of channels to include 10, even 20 or more channels and many held back spending on new content to populate those channels. Today, some of those trends are reversing as programmers respond to changing consumer viewing patterns and begin to trim back their offerings. … We’ve always believed in the value of having a strong portfolio with five clearly defined networks that mean something important to their audiences.”

In June, AMC said it would offer an ad-free version of its networks — called AMC Premiere — exclusively to Comcast Xfinity customers for an extra $4.99 per month.

In addition to offering ad-free versions of current seasons of shows, the new channel has exclusive bonus and first-look content, curated movies and is expected to expand over time to include a growing array of fan-focused opportunities, potentially including new, exclusive original programming, AMC library content and other companion content.

Fickle called AMC Premiere “an interesting experiment because they can price it differently, of course, and some consumers would value that. It’s healthy.” Some smaller operators, though, might not have the technology in place to exploit new channels like this. “I think these are good things to look at. We’re not there yet. You need a good large population of all-digital to do those kinds of experiments.”

Distributors are closely watching options, including the rising number of OTT services and networks that are readying direct-to-consumer offerings, as the business evolves, Fickle said.

Smaller operators were among the first pay TV companies to integrate subscription video-on-demand services, led by Netflix, into their set-tops — through TiVo — and faced criticism from larger companies who saw it as a recipe for losing subscribers. The opposite came true. More recently, several small operators, including NCTC members, have migrated toward offering broadband first and tacking on video components, including competitive OTT offerings.

“It’s not one of these things where it’s black and white [and] you automatically start shifting away from the current model,” Fickle said. “It’s an evolution.… In general, yes, there is movement away from the traditional video model, but not away from video.”