Wednesday, October 8, 2014, 11:31 AM ET|Posted by Will Richmond
Lately there's been a lot of talk about so-called "virtual pay-TV operators," (vPops as my partner Colin Dixon at nScreenMedia likes to call them), which are also called "virtual MVPDs" (multichannel video programming distributors). These are companies that will deliver linear and on-demand broadcast/cable TV network bundles from the cloud, over broadband to connected/mobile devices, offering an alternative to traditional pay-TV services.
Sony, Verizon and Dish Network have all publicly stated their interest in launching vPop services in either 2014 or 2015. Though it's still early and much is yet to be known about their actual offerings, there are already many reasons to be skeptical that they'll achieve any material success.
vPops are meant to appeal to millennials and other cord-cutters/cord-nevers, primarily through lower monthly pricing than current pay-TV multichannel services. The prospect of lower rates is arguably the optimal way for vPops to gain traction, given the sky-high price of pay-TV. As an example, Dish is reportedly planning to offer a $30/month vPop service (conversely, Sony is now reportedly considering an $80/month price for its vPop service).
The eventual price of vPops' service is greatly affected by their single biggest cost, which is the monthly fees they'll pay to carry broadcast and cable TV networks. And this is exactly where the vPop value proposition is seriously challenged.
The magic of the multichannel bundle is the array of networks and programs it provides. However, this array comes at a steep cost to pay-TV operators, now generally thought to be in the $30-40/month range, depending on numerous factors like size/negotiating leverage of the operator, number of sports channels carried, retransmission consent fees, etc. (it's worth noting that some smaller operators are now actually dropping their video service due to high programming costs).
Clearly it would be impossible for a vPop to economically offer a FULL lineup of TV networks for $30/month when that represents their cost of programming alone, never mind their other costs. This conundrum has given rise to the idea that maybe vPops will offer a slimmed-down bundle of networks, whose cost is within their programming budget.
However, this approach has serious issues. Which networks would be included and which ones wouldn't? Sports are a must - but does that mean ESPN plus expensive regional sports networks (RSNs)? How about broadcast networks with their pricey retransmission consent demands? And which cable networks would be included? Is AMC, with its hit shows like "Mad Men" and "The Walking Dead" more important to include than FX, with "Sons of Anarchy" and "The Americans" or TBS, with its popular reruns of "The Big Bang Theory?" And on and on it goes. For better or worse, the pay-TV bundle includes most everything, so consumers don't need to think about this issue.
For any prospective vPop subscriber, this is where the rubber meets the road - sure, everyone wants to save money, but if the vPop channel lineup is like Swiss cheese, with preferred networks/shows inexplicably left out, they'll pass in a heartbeat, no matter how slick the UI may be. This is why the path of least resistance for vPops would be just to offer fully competitive channel lineups (as even mighty Google decided to do with Google Fiber). But then it's back to the issue of cost. With its decision to price at $80/month, Sony has no doubt grappled with this problem, as did Intel, ultimately leading it to unload OnCue to Verizon.
Pricing vPop service high means losing the big competitive advantage of cost savings, and so it becomes awfully hard to see vPops' appeal. When bundled with broadband and phone, a solid incumbent pay-TV package is about $80/month and increasingly comes with VOD, TV Everywhere, etc. If someone already decided to pass on their incumbent's pay-TV offer, what would now compel them to take a vPop offer?
It's difficult to really understand what's behind the recent spate of vPop-network deals that have been in the news - Dish with Disney, with A&E and with Scripps, Sony with Viacom, etc. (and note these are just a handful of the many deals vPops need to do, with no guarantee they'll make further progress). Do they contemplate newfound flexibility and reduced costs? Why would they when nobody is incented to disrupt the status quo? But let's say they do - and the vPop offers are somehow strong. Do they then risk cannibalizing existing full-paying subscribers? That would open yet another can of worms.
As if all this isn't enough to contend with, when pitching millennials, vPops will be struggling just to get attention from a cohort enamored with Netflix, YouTube, Hulu, piracy and other OTT options. In short, getting them back into the pay-TV tent is a Herculean task. Ultimately millennials - trained by their online experiences to pay for only that which they truly want - would be most attracted to a pure a la carte pay-TV offering. But as we all know, a la carte is a complete fantasy, at least for now.
Maybe I'm really missing something huge here, but given the existing environment, I don't see how vPops are going to gain much traction. No doubt there is a need for more creative - and lower cost - pay-TV options. And there is merit to the idea of vPops as low-cost "on ramps" for millennials to full-blown pay-TV services as they get older, as ESPN's CEO recently outlined. But how exactly vPops would successfully execute on this is unclear, for now.