Bank Shines A Light On ‘Light Bundling’

The latest disruption to the TV ecosystem is the proliferation of “light” bundles — smaller, cheaper packages of TV networks offered not only by cable and satellite operators looking to placate bargain-hunting subscribers, but also by a new breed of online video distributors like Sony PlayStation Vue and Dish’s Sling TV.

Investors in cable programming companies worry that the unbundling will cause an unraveling of the current business model that is based on the programmers’ selling networks to cable and satellite in bundles and allowing the strong networks to cross-subsidize the weak.

As a RBC Capital Markets securities analyst following the major cable programmers, David Bank took a hard look at unbundling in a 70-page report released two weeks ago.

Yes, some consumers are cord-shaving, opting for light bundles of one kind or another and the biggest cable networks are shedding subscribers, the report says. But the trend and its impact on traditional programmers, it concludes, are “somewhat overstated.”

In this interview with TVNewsCheck Editor Harry A. Jessell, Bank discusses the causes and the extent of unbundling and why programmers, particularly broadcasters, will handily adapt and survive.

An edited transcript:

We have begun to see the breakup of the big cable and satellite bundles to one extent or another. By that I mean consumers can now opt for small or light bundles or even individual networks in the case of the CBS and HBO OTT services.  Is this an inevitable and growing trend?

It is inevitable that the consumer wants more choice and probably wants more control to self-curate and self-program. I came of age in an era where there were four things on television and some guy in an office in Midtown Manhattan was essentially scheduling when it was I would be watching them. 

We don’t operate that way anymore and technology has brought us to the point where, if we so choose, we can almost be 100% self-programming. I think that impacts the way we think about video offerings.

There will be some segment of society right now that doesn’t want the broader bundle, even if it is a better value. They just sort of want only what they want and might even give up some of the value proposition to know that they are not buying something that they don’t want. 

But I don’t think it’s going to be a massive revolution — a dramatic, damaging change. It will be gradual. That’s the difference between the way I think about it and the way other people might think about it.

How gradual?

The major fully distributed networks are losing 1% or 2% of their carriage base each year and I would expect to see that continue.

I don’t have any reason to believe that’s going to accelerate to 5% or 10%. I think the key is that the distribution agreements probably limit the ability of consumers to be able to buy en masse a broader offering of lighter bundles.

What accounts for the shrinking of the networks’ carriage base?

The MVPDs have some limited ability to carve some networks out of basic packages and put them in narrower bundles. They can carve out 1% or 2% of the subs and still be compliant with the basic carriage agreements.

These packages have been around forever. I just think they’re being slightly more aggressively marketed and more demanded. The consumer and the MVPD are maximizing the legal limit of lightening the bundle for the most distributed packages.

I guess that limit is being tested. ESPN is suing Verizon to stop it from relegating ESPN to a smaller tier.

The ESPN suit at the end of the day may be more about the court of public opinion than New York State Supreme Court. I think that could be what the distributor is banking on here, that maybe they will lose the battle, but this gets them to a better position to win the war.

You downplay the impact of cord shaving and cord cutting, yet the consumer survey you conducted as part of your study found that 9% of consumers are seriously considering cutting the cord within the next 12 months. That would be catastrophic to the cable and satellite industries.

Well, the consumer survey also found that half those people didn’t realize it would cost more if they unbundled their broadband. You have to take all these data points together.

When push comes to shove, when they’re ready to pull the trigger, they will call up and find out that their broadband is actually going to cost a lot more than they think it costs and so they won’t do it. That’s my bet.

Can Dish’s Sling survive without the broadcast channels? I always thought those signals are fundamental to any multichannel TV service. That how cable got started, right?

It did. I mean the original justification for cable was that you lived in some valley behind a mountain and you couldn’t get a clear broadcast signal. I think that one would think you would have a fairly valueless product if you didn’t include the broadcast networks. That’s where the bulk of premium sports come from and highest rated programming and event programming. 

Some will argue that you can just have some sort of a digital tuner pick up the signal off the air. But the viewer today expects a different kind of utility than he did in 1970. You may be able to pick a signal off the air, but you can’t DVR it and you can’t watch it on demand. That’s why I think it’s crucial to have the broadcasters in any sort of online bundle, but Sling certainly didn’t adhere to that principle.

What about the rumored Apple OTT service?  Do you know anything about it?

I don’t know anything more than what I read in the papers.

It will be interesting to see what utility they can bring to it or what kind of programming packages they can come up with.

It will probably be somewhere between the light Sling bundle and the very broad bundle, and the pricing will be very similar, between the two. When you are a device manufacturer like Apple, you can probably do things differently. It’s like a reverse razor model, right? You’re not selling the blades; you’re actually selling the razor. So you could potentially discount the price of the blades to subsidize the price of the razor. 

Is there room for an OTT distributor that provides a pure a la carte service where the consumer can assemble his package one network at a time — the old Chinese menu approach.

No. That’s not remotely feasible.

Why not? 

Because the networks just don’t offer that as an option to distributors. That’s not how the North American television ecosystem operates.

Everything in the bundle is kind of cross-subsidizing other things in the bundle. We probably couldn’t afford to have a lot of channels if we were buying them on an a la cart basis. They only really work because they are sold to everybody. So I mean it’s such a complicated question. I think it’s impractical to be on, the use your phrase, the Chinese menu approach. Most networks would not really be viable.

Are the big programmers eventually going to have to give up their bundle selling, their wholesale selling in bundles to some extent?

I think they are going to have to offer more flexibility. I don’t think that we’re going to get to the Chinese menu. I think we’re a long way from there. Before that happens it might amount to the networks selling their own direct-to-consumer bundles. But I think the distributors and consumers want more flexibility. That to me implies a narrower bundle as opposed to I want TBS, but not TNT.  We’re probably not going to see that.

You say CBS emerges as the biggest winner in all this.  Why is that?

Because if anyone is open for the position of an a la carte Chinese menu, it’s CBS.  CBS is a standalone channel essentially. All their viewership and all their affiliate revenue is concentrated in that one channel. So there really is a difference to how the distribution paradigm plays out.

The SVOD guys — Nexflix, HuluPlus and Amazon — get a lot of attention. But you say that the basic SVOD proposition — the best of TV for less than $10 a month — is a fallacy?  Could you explain that?

It lacks a lot of programming. It lacks event programming and live programming and sports and current programming. So it is a distant second because of what it lacks, but it is in a sense a best of television in that there is a lot of content behind one wall.

So it’s really complementary to broadcasting, the purveyor of the big events.

And current programming. It’s like the old cable world that was nothing but reruns and maybe a couple of originals with no sports and no events. It’s akin to TBS in 1983. It gets an audience, it’s got some compelling content on it, but I don’t think it’s a substitute for the rest of the television ecosystem.

Retrans wasn’t part of your report, but I have to ask. The broadcast networks and the affiliates believe that they deserve parity.  If they are delivering 30% of the audience, they should get 30% of the cable and satellite programming fees. Do you think that is likely to happen ever?  I mean can they do that?

Yeah, I do.  I think that broadcasters’ retransmission consent revenue is the last kind of real secular full-growth story in traditional media.

So if the retrans fees keep going up, what does that do to the other cable networks? That’s got to put downward pressure on what they can charge the MVPDs.

I don’t know. You would really have to ask the MVPDs about that. My understanding is that they have got a pretty robust broadband business such that they could probably subsidize whatever they want to subsidize.