Google's YouTube TV is raising its monthly rate from $50 to $65. The Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) subsidiary announced a deal with ViacomCBS (NASDAQ:VIAC) in May to bring 14 additional channels to its live TV service. The company cited those additional channels, its deal with AT&T (NYSE:T) to offer subscribers HBO Max, as well as some new features in its price increase announcement.
YouTube TV had been the lowest-priced virtual multichannel video programming distributor (vMVPD) that offered a full-fledged cable subscription replacement. That title's now shared by Disney's (NYSE:DIS) Hulu + Live TV and FuboTV, which are both $55 per month.
But that pricing lead might not last very long. Disney and FuboTV announced a carriage deal to bring its expensive networks, including ESPN, ABC, and The Disney Channel, to its service. Meanwhile, Hulu + Live TV has several CBS channels, but none of the Viacom channels. That could change in ViacomCBS' next round of negotiations.
As the media industry continues to consolidate, virtual MVPDs may be forced to become the bloated bundles of channels cord-cutters were trying to leave behind when they first signed up.
The biggest reason for traditional cord-cutting
The No. 1 reason people cancel their pay-TV subscription is because of increasing prices.
AT&T has unabashedly raised its prices for subscribers over the past couple years, and its subscriber losses show it. AT&T's average monthly price for its premium TV service climbed nearly 10% year over year in the first quarter, reaching $126.27. Meanwhile, it's lost 17% of its subscribers, nearly 3.8 million, over the past year. It's seen a similar trend after raising prices for its virtual MVPD, AT&T TV Now.
AT&T consistently gives the same reason for its price increases: The cost of programming continues to climb. Meanwhile, it's reduced its promotional pricing for new customers, looking for consistently profitable subscribers. That's notable, because while the company offers a lot of other services, many of its legacy satellite subscribers remain unbundled from any other AT&T service.
In other words, AT&T has to make stand-alone TV subscribers profitable while most traditional cable providers are willing to mostly break even on the video service if it keeps customers subscribed to their home internet service.
vMVPDs look a lot like AT&T
Most vMVPDs face the same challenge as AT&T. The rising cost of content will force them to raise prices in order to reach profitability.
vMVPDs' price advantage stems from low customer acquisition costs and greater potential for ad revenue. YouTube has been trying to get into the $70 billion TV advertising market for years. Hulu cleverly pushes viewers to its ad-supported on-demand content instead of DVR recordings. While digital advertising is still growing rapidly, and there's lots of potential for companies like YouTube and Hulu to command higher ad prices still, it cannot overcome the impact of rising content costs.
As more subscribers cut the cord across both traditional and virtual MVPDs, media companies are looking to get more channels into the bundle and raise the prices for their most popular channels. Consolidation in the industry is giving the media companies more leverage over the distributors to dictate which channels make it into the bundle and at what price. And despite the growing subscriber bases for Hulu + Live TV (3.3 million) and YouTube TV (more than 2 million), they don't have nearly enough negotiating leverage to prevent further content price increases.
Prices for vMVPDs will continue to climb. While consumers may be able to get a better deal than with traditional pay-TV services, the pricing gap is certainly closing. It may not be long before more consumers jump from traditional pay-TV to full-fledged cord-cutting instead of switching to a vMVPD.