• PlayStation Vue and HBO Max Underscore TV Industry’s Uncertain Economics

    Just before the WarnerMedia team took the stage to unveil details of HBO Max, Sony announced that would it shut down its 4 year old PlayStation Vue virtual pay-TV service on January 30th. The moves are 2 great examples of the constantly-shifting strategies of big media companies.

    PS Vue was an early mover in virtual pay-TV (or “vMVPD”). But if you think of the industry in 4 quadrant terms, with price on one axis and channel lineup on the other, PS Vue was relatively high on both - it offered a mostly complete channel lineup competitive with traditional pay-TV operators, but not at a significantly reduced price (which is the top motivator for prospects).

    This left PS Vue in a no-man’s land when Sling TV seized the low price, incomplete lineup quadrant (it still doesn’t carry broadcast TV) and YouTube TV, Hulu with Live TV and DirecTV Now positioned (at least initially) in the most consumer-friendly quadrant, offering mostly complete channel lineups at a discount. For example, early on, DirecTV was offering a 100-channel package for just $35 per month. YouTube TV was doing something similar. And both spent heavily on marketing.

    Of course, this strategy creates the biggest financial losses, given the cost to carry TV networks. No surprise that all 3 have raised their monthly prices and AT&T has essentially given up on DirecTV Now. But along the way, PS Vue got lost in the crowd. Sony is now throwing in the towel entirely, basically admitting that even at its current $50 and $55 per month prices, it still can’t make money, or at least not enough, to warrant continued investments.

    So vMVPDs have a hard time making money because TV networks and studios are charging them a lot for their content. But when it comes to the same TV networks and studios’ pricing strategies for their direct-to-consumer services, the opposite is happening - they’re offering consumers aggressive deals.

    No doubt this isn’t what AT&T was hoping for when it was modeling the ROI from acquiring Time Warner several years ago. It was widely reported AT&T wanted to charge $17-$18 per month for HBO Max. Disney upset those plans by pricing Disney+ at $7 per month (even less if a year or more is prepaid). Then Apple priced Apple TV+ at $5 per month, and offered a free year with new device activations. So instead of charging more for HBO Max than the $15 per month HBO Now service, to stay reasonably competitive, WarnerMedia is keeping the rate flat which means all the non-HBO content is being tossed in for no extra charge.

    One piece of that non-HBO content is “Friends” which WarnerMedia recently paid $425 million to carry. Another is the $250 million J.J. Abrams deal. Then there are all the other original projects WarnerMedia announced yesterday. In all WarnerMedia said its spending will rise to $4 billion per year by 2025, and won’t become profitable until then either. That’s 5 years of losses in order to become a long-term SVOD competitor. All of this makes the Time Warner deal look even more expensive.

    At the same time as both traditional and virtual pay-TV distributors are either experiencing tightening video margins or losses because of rising content costs - leading some like PS Vue to shut down - the same TV networks and studios driving up these costs are taking their own losses in the DTC land grab. It all shows how muddled the TV industry’s economics are becoming, raising critical questions of how all this will ultimately shake out.

     
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