Game of VMSOs: Is winter coming for the pay TV market?

In a new study by Ampere Analysis, ‘Virtual Multiple Systems Operators’ (VMSOs) are under the microscope. A recent entrant into the subscription OTT space, both in the US and internationally, they are more direct competitors to traditional cable and satellite TV providers than services like Netflix and Amazon. With low subscriber acquisition costs and slim channel line-ups, they offer cheaper contracts – starting as low as $20 a month. Ampere Analysis believes VMSOs could achieve 3.5 million subscribers by the end of 2017, as more consumers transition to OTT services.

Core targets for VMSOs are younger, connected, tech-savvy families. 25-44 year olds are most likely to be considering churning from their pay TV service, according to Ampere’s consumer research, and are also the strongest users of subscription online video services. Consequently, this is an important target audience for VMSOs. Consumers are driven by content and convenience over price, so offering a comprehensive core channel line-up and easy cross-device access is essential. But the flexibility VMSOs offer also presents them with a major challenge: that of keeping their hard-won customers. A further obstacle is service quality, which is contingent on device capability and connection speeds which can vary wildly.

The facts

• • VMSOs are maximising the consumer shift away from ‘traditional’ pay TV services. These online services aggregate a mixture of linear and on-demand content.
• • The services offer cheaper, ‘skinny’ packages of channels compared to cable and satellite, with entry prices from $20-$40 per month. This is considerably less than pay TV average revenues per subscriber (ARPUs) of $80-$90 per month.
• • Existing VMSOs include Dish Network’s Sling TV, AT&T’s DirecTV Now, Sony’s PlayStation Vue, Google’s YouTube TV, and Hulu’s Live TV. Verizon and CenturyLink are also poised to join the fray.
• • The addressable market for VMSOs is already large. In 2016, 60% of US broadband households had Internet speeds of 10Mbps or more, the minimum recommended speed for most VMSOs.
• • By contrast, cable, satellite and IPTV services continue to struggle. Household penetration dropped below 80% in Q3 2015 in the US and continues to decline, reaching 76.5% at the end of 2016. Ampere Analysis forecasts that pay TV penetration will drop below 70% before 2020.
• • The prevalence of 24-month pay TV contracts in the US means VMSOs must fight to win subscribers in these first few years, and wrestle customers from incumbents.
• • One key advantage for VMSOs is lower subscriber acquisition costs (SAC). The infrastructure and installation costs of a new customer can be $800-$900 for a traditional cable or satellite multiple-system operator (MSO). A virtual provider skips this in favour of third-party hardware and self-install.
• • But this flexibility has a downside. With shorter contracts and no need for special hardware, VMSO subscribers can switch easily.
• • Broadcasters have been demanding high per-subscriber fees from their VMSO partners. Sling TV subscribers pay $5 per month for ABC channels/affiliates in select markets, while CBS was widely reported to have asked for more than $3 per subscriber from Hulu. Ampere estimates that collectively, Fox, ABC, CBS, and NBC channels would cost a VMSO approximately $12 per subscriber per month.

Cord-cutting and price wars

In Ampere’s most recent US consumer survey, content package price was the most important consideration for all age groups except 25-34 year olds. The average consumer here is paying $2000+ over the course of a 24-month pay TV subscription. Almost half (48%) of US Internet users agreed that they could see their household no longer watching broadcast TV in the next five years. Half are already using online video services as the main way to watch TV. So, for channel groups, finding a middle-ground in the form of virtual MSOs to prevent cords being completely cut in favour of cheaper channel-less services is increasingly vital if they are to survive and thrive.

VMSOs represent a burgeoning new market that many organisations are sizing up. Traditional MSOs such as Comcast and CenturyLink see the opportunity to expand beyond their existing infrastructure and footprint to reach new consumers. Channel groups like Viacom and Discovery are considering the prospects of creating their own direct-to-consumer bundles of proprietary content and moving beyond carriage negotiations and downward pressures on per-subscriber fees. Tech players are contemplating new revenue streams from a lucrative content market, and mobile operator Verizon has already announced it plans to launch a VMSO.

Toby Holleran, analyst at Ampere Analysis, said: “Longer-term, we believe that the rapid growth in the VMSO market will offset the continuing decline in traditional pay TV subscriptions. But it’s not all good news for channel owners as VMSOs’ focus on low cost means that many smaller thematic channels are left by the wayside. We also expect the competition from VMSOs to push down pay TV pricing and have particular effect on those operators who don’t own their own broadband infrastructure – so are unable to adapt broadband and bundle pricing to compensate for decreasing TV ARPUs.”