Analysis: Network Execs Embrace Skinny Bundles; Wall Street Is Wary

Hulu announcement spurs talk of a streaming TV future
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With Hulu's announcement that it plans to introduce a skinny bundle of live and on-demand programming coming during earnings season, calls with analysts were loaded with questions about how traditional networks would approach streaming.

Nearly all of 21st Century Fox's call with analysts late Wednesday was about CEO James Murdoch's digital strategy, an approach that by itself was met with a mixed reaction.

"We don't think the commentary on an all-IP streaming ecosystem was taken particularly well," said analyst Marci Ryvicker of Wells Fargo, noting that 21st Century Fox's stock rose after the earnings were announced but sagged once the call turned to streaming.

Related: Murdoch—Hulu Deal Opens Doors For Other Distributors

"We understand Fox's interest in being at the forefront of change but the questions we keep getting are: 1) Won't [earnings estimates] have to go down before they go up during such a swift transition period? And 2) How does Fox know it will be able to monetize its content at rates that are higher than what it currently receives in the existing ecosystem," Ryvicker asked in a research note.

"It sounds like Fox is willing and able to put its content everywhere, begging the question how does Fox get paid? They mentioned Hulu, Sling, other "core" (rather than skinny) bundles, etc., but the most positive comment we heard was that the RSNs (Regional Sports Networks) aren't just included in these offerings, they'll be big drivers as well."

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As Thursday morning rolled on, other top programming executives weighed in on the critical issue.

"I like the skinny bundle," said Discovery CEO David Zaslav on his company's earnings call. In fact, the concept has worked perfectly well in Brazil, he said.

Related: Hulu Goes Interactive With Advertising

To make it work here, "we as an industry have to make some compromises. And if we do, I think we'll be healthier. So, if in the end we're going to do an over-the-top bundle that's 30 channels for $30 then each of the media companies can't have every one of their channels, every one of their sports channels, every one of their regional sports channels carried," Zaslav said

Discovery has 14 channels. "Having six or eight of our channels carried in a package to me seems quite effective," he said. At six networks, Discovery would get paid 83% of what it gets now; at four it would be 70%.

"If we all came together, and if you saw it's kind of the best of cable, where we would have six of those slots, then I think it can be quite attractive." Zaslav said.

"But if we each try and put all of our kids in there, which is how we are used to doing business, I think it's going be overly bloated. There's going to be a lot of channels that aren't that strong. It's going to be quite expensive, and it's not going to be that attractive," he said. "But the marketplace is quite rational. So I think in the end, the smaller bundles that are working around the world are those that have 20 or 30 channels and those are kind of a best-of-bouquet, and that's probably where it will end up in the U.S."

One analyst noted that at this point, Discovery isn't a part of any skinny bundles, including Dish Network's Sling TV.

"We're talking to everyone. The reason that we're not on Sling right now is that… those deals tend to get done on Sling as the [Dish] deals come up and our deal with Charlie [Ergen, Dish's chairman] is not up. But we look at over-the-top as a real opportunity," Zaslav said

On their calls this week CBS CEO Les Moonves and Time Warner CEO Jeff Bewkes maintained that their networks were so strong that they'd have to be included in any skinny bundle that hoped to be successful.

Related: Turner CEO says U.S. has too many networks

And Scripps Networks International seemed to be on the same page as Discovery's Zaslav.

"The way we would look at it is we have our main networks on every existing smaller bundle that's been out there," said COO Burton Jablin. "And, as you know, our less distributed networks DIY, Cooking and GAC have always been on tiers. And so we would expect a similar kind of relationship between a core bundle, if you want to call it that, and the premium tier bundles to continue."

So Scripps would prioritize three networks. "HGTV, Food and Travel, we want to make those part of any kind of core bundle that's out there, no matter how skinny or fat, and the others will talk to distributors about various tiers," Jablin said.

Analyst Todd Juenger of Sanford C. Bernstein enjoyed the Fox conference call and its discussion of streaming media options. But he believes a move to streaming will be economically challenging for traditional media companies.

"The conference call was more like a strategy session with James than a financial review of operating results (which we thought was awesome)," said Juenger. "The good news is, Fox is clearly thinking hard and long-term about the evolution of the pay-tv video market. They're willing show leadership and take risks to confront the rapidly changing technology which is enabling rapidly changing consumer viewing habits and preferences. And they're willing to talk openly about their thinking."

But Juenger added there was bad news.

"We strongly believe the migration to on-demand is inherently deflationary. Fox's plan may be an attempt to have their cake and eat it too. Much like everyone in the early days of SVOD," he said.

"We think Fox is steering a course that will lead consumers to choose the viewing mode that provides the lowest economic returns to the content owner," he added. "If Fox pursues the 'everything everywhere' path, we believe consumers will choose the platform with the best economics for them (in terms of time and money), and therefore the worst economics for Fox and the entire value chain."

Juenger said the way media companies were approaching the new virtual MVPDs was similar to the way they looked at Netflix when it was new.

"All of the content companies took an attitude of 'this is great. They will pay us. Our current customers will pay us. Everybody will pay us. It's all incremental.' But soon it becomes cannibalistic instead of incremental, and the lower-return business model replaces the higher-return business model," he said.

"Perhaps the most optimistic view we could take is 'if it's going to happen anyway, you might as well take control and do it to yourself' (the classic innovator's dilemma)," Juenger said. "Our problem is, even in our best case view of that outcome, we believe it's a Pyrrhic victory because the resulting economic return profile is so inferior, structurally, to the glory days of 30-40% TV network [return on invested capital], with mid/high-single revenue growth as far as the eye could see."

(Photo via Pictures of Money's FlickrImage taken on May 6, 2015 and used per Creative Commons 2.0 license. The photo was cropped to fit 3x4 aspect ratio.)

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