Following in the footsteps of Hulu Plus, Time Warner's (NYSE:TWX) HBO, CBS' (NYSE:CBS) All Access, and Showtime are now offering, or planning to offer, over-the-top streaming subscription services. It appears the biggest trend in pay TV is a gradual movement toward unbundling. The ability for viewers to subscribe only to channels they wish to purchase, instead of subscribing to prearranged packages, comes as welcome news to many consumers fed up with high cable bills.
There's just one problem: These channels apparently don't want unbundled cable and are treating their services as sources of incremental revenue from consumers without pay-TV service -- cord cutters -- and as opportunities to gain a stronger negotiation position with pay-TV providers. In the end, this appears to be less about changing the business model and more about monetizing the existing system more effectively.
Hulu Plus offers the best deal, but will not champion unbundling
When it comes to content, the best network-turned-streaming service (read: not Netflix) appears to be Hulu Plus. For $7.99 a month, subscribers can view television shows from NBC, CW, Fox, and ABC the day after the episode airs. This "mini bundle" offers faster viewing of those shows than Netflix, which provides full seasons for streaming only after the show's season ends.
However, it doesn't appear Hulu Plus will be the unbundling champion that many hoped it would be following its 2007 founding by NBCUniversal and News Corp.. Many hopes were dashed when GE sold a controlling stake of NBCUniversal to pay-TV provider Comcast (NASDAQ:CMCSA) in December 2009; Comcast would subsequently acquire the entire entity.
Comcast derives the vast majority of its revenue from its core business of cable communications. In the last fiscal year, the company boasted 65% of consolidated revenue and 80% of operating income from that business. While Hulu had a strong 2013, pulling in $1 billion in revenue to be split roughly equally between Comcast, News Corp. spinoff 21st Century Fox, and later investor Disney, Comcast reported nearly $65 billion in total revenue that year, rendering its stake in Hulu essentially a rounding error.
CBS and HBO go it alone; ESPN is "well positioned"
Recently, CBS and HBO have announced their intentions to go through with over-the-top streaming services. Premium channels HBO and CBS' Showtime appear set to launch their separate services in 2015; CBS' All Access is available now for $5.99 per month. While the companies have not confirmed what the premium channels' streaming will cost viewers, HBO's service is rumored to cost $15 per month.
HBO recently has had concerns with pay-TV providers on the marketing front. HBO CEO Richard Plepler commented that "hundreds of millions of dollars [in revenue]" have been left on the table due to poor marketing by pay-TV providers costing HBO subscribers. Even companies that fare well under the status quo have chimed in: This month, Disney's CEO Bob Iger commented on ESPN plans for an over-the-top service by stating "we will be well positioned to go direct to the consumer or with a la carte offerings if the marketplace demands it, but we don't feel a great need to do that now."
A solid negotiation tactic
However, outside of Hulu Plus, none of these over-the-top services appear to be priced to encourage viewers to cut the cord. Rather, they appear to be an opportunity to make revenue from those currently without pay TV. However, there's a more insidious reason for a station to offer an over-the-top service: to strengthen its hand in fee, marketing, and bundle disputes with pay-TV providers.
If over-the-top services become moderately popular, pay-TV providers would find their importance diminished and would have to offer concessions to those networks. So, in a weird way, programmers would prefer their streaming offering to have "Goldilocks" success: not too hot to encourage cord cutting, but just hot enough to elicit concessions from pay-TV providers.
Pay-TV provider Comcast appears to be working to strengthen its negotiation hand by its planned acquisition of Time Warner Cable. The combined entity would boast nearly one-third of all pay-TV subscribers, which should allow it to better negotiate exploding content costs going forward. That's important, as (according to financial data firm SNL Kagan) those costs could increase by 8.5% per year until 2018.
Right now, the best deal for networks is to remain committed to the status quo. However, it appears many of them are preparing for a future without pay-TV providers. Interestingly enough, they could unwittingly be hastening pay TV's demise in order to improve negotiations against it.
Jamal Carnette has no position in any stocks mentioned. The Motley Fool recommends Netflix and Walt Disney. The Motley Fool owns shares of General Electric Company, Netflix, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.