CBS’s Q2 ’18 results reported last week, along with more details shared on its earnings call, reveal how the company is hitting on all OTT cylinders. CBS has become a shining example of how a traditional media company has been able to capitalize on the significant new opportunities that OTT presents in direct-to-consumer, skinny bundles, targeted advertising and producing for big SVOD providers.
On the subscription side, CBS said it will hit its 8 million subscriber goal for domestic CBS All Access and Showtime OTT subscribers by end of 2019, a year earlier than planned. And it said it will double that number to 16 million by end of 2022. All Access has begun its international rollout in Canada and soon Australia with others no doubt to follow. A third of All Access subs are now taking the ad-free option, so with Showtime’s DTC, that means two-thirds of CBS’s DTC revenue come from subscriptions.
Showtime’s DTC and digital distribution strategy brought total subscribers up to 25 million. As I’ve written in the past DTC and digital distribution has revitalized premium networks like Showtime and HBO by relieving them of the “buy-through” requirement in traditional pay-TV, where consumers first had to subscribe to pricey multichannel bundles before making the decision to pick up a premium. CBS CEO Les Moonves gave Amazon credit as being the top source of new subscribers and as CBS’s best partner.
On the free ad-supported side, CBS launched CBS Sports HQ in the quarter, adding to CBSN, the 24x7 streaming news channel. CBS Sports HQ already has 60% more streams than CBSN had at this stage. CBS will launch its ET streaming service in the fall. The free services not only create promotional opportunities for its paid services, but also attract premium CPMs due to targeted and younger audiences.
When the skinny bundles, or virtual MVPDs, YouTube TV, DirecTV Now and Hulu Live decided (rightly) that having local broadcast channels in their channel lineups was a must (in contrast to Sling TV), it created a big opportunity for CBS and other networks/station groups. That’s because affiliate fees are higher than with larger multichannel providers due to the smaller size of vMVPDs and reduced bargaining power. Overall CBS said the blended rate from vMVPDs and DTC translated to a 30% bump in Q2.
CBS said that revenue from skinny bundles and DTC almost doubled in the quarter. With the strong likelihood that millions more multichannel subscribers will shift to vMVPDs in the next several years, this will translate into continuing revenue per subscriber growth for CBS. Most important though is that vMVPDs keep consumers inside the pay-TV ecosystem, which is a more predictable revenue stream than advertising.
Producing for SVOD
CBS said it’s now producing 14 series for SVOD and premium cable, up from zero just 3 years ago. In the “Peak TV” era, Netflix, Amazon and Hulu are together spending upward of $15 billion per year on content, and studios around the world are benefiting from their strong willingness-to-pay. CBS said it has 4 series on Netflix now, including the award-winning American Vandal. Of course the SVOD outlets are a mixed bag for CBS because they compete pretty directly with Showtime DTC and All Access.
So stepping back, when you look across direct-to-consumer, skinny bundles, targeted advertising and producing for big SVOD providers, there’s a lot of momentum behind CBS. Some of this is due to CBS’s early innovation and some of it is due to being fortunate (best example is skinny bundles’ prioritizing local broadcast and being willing to pay high prices for it). Add it all up and CBS has played its OTT hand about as well as any traditional media company could have, with lots more upside to go.