The vMVPD: Money-Losing Service Or Digital Dent-Maker?


Thursday, September 26, was a monumental day for the media industry.

In New York, more than 550 C-Suite leaders from the broadcast TV industry gathered at Pier 60 for the daylong TVB Forward 2018 conference. A full slate of Radio Show sessions began in Orlando with a 7:30am breakfast featuring Publicis Groupe Chief Growth Officer Rishad Tobbacowala, who largely discussed the monumental changes in media consumption habits taking place across the U.S.

In Washington, D.C., on Thursday afternoon, change was the key focus of testimony delivered by one of Wall Street’s top media industry analysts during a “State of the Media Marketplace” hearing convened by the House Energy & Commerce Committee’s Subcommittee on Communications and Technology.

His comments put vMVPDs on notice, and could impact broadcast TV stations.

In prepared testimony, Craig Moffett, Senior Research Analyst at MoffettNathanson Research, opened his discussion in much the same manner that Tobbacowala began his Radio Show address.

He said, “One of the most popular aphorisms in media is that the media industry has seen more change in the past five years than it had in the previous fifty. Nevermind whether that is precisely accurate. As a call to action — any action — it is a good one. Change or be left behind.”

Moffett focused his commentary on “two of the most important trends today” — the emergence of so-called virtual Multichannel Video Programming Distributors (vMVPDs, like Sling TV, YouTube TV, and DirecTV Now), and the trend toward vertical integration, as with AT&T’s acquisition of Time Warner – “through a decidedly unrevolutionary lens.”

Starting with the rise of vMVPDs, he dismissed the term “cord-cutting” by saying it wasn’t entirely an accurate verbal description of what is taking place today.

“The cord itself (that is, the physical infrastructure used to deliver video) remains the same, so what we’re talking about here is merely switching video to a third-party provider that delivers the video stream over the public Internet,” Moffett said.

He noted that the popularity of vMVPDs largely comes down to cost savings. But, there’s a flaw to the design of vMVPDs that troubles Moffett.

“The problem here, of course, is that the programming itself doesn’t cost any less to produce just because it is delivered over the Internet, nor is it any cheaper for the aggregator – in this case, an vMVPD – to buy it from the content creator,” he said, noting that, in fact, the vMVPDs usually pay more for the same networks than do traditional cable and satellite operators, as they are generally smaller and have less negotiating clout.

Why are vMVPDs cheaper for the consumer? Fewer networks are only part of the equation.

“[The] bigger reason is that the vMVPDs are currently selling the service at a zero or negative profit margin,” Moffett revealed. “The content in a $40 package from DirecTV Now or YouTube TV costs, by our estimate, around $40 at wholesale. After accounting for costs associated with things like billing, customer service, and marketing, the service is losing money.

He continued, “There’s an old saying among economists that when something is unsustainable, it will eventually stop. Selling a service for a loss isn’t sustainable, even allowing for the fact that companies like Google (owners of YouTube TV) believe the path to monetizing video is not by selling the service to consumers for more than it costs but instead by trying to sell advertising against it.”

Of course, trying to keep pace with Alphabet and its Google products, and Facebook, continues to be a key focus of media. Should they?

“It will be very hard for traditional distributors to compete with a service provider
that is willing to lose money on selling the service,” Moffett concludes. “The question is… how long will even Google and Facebook tolerate losses? There’s a limited amount of advertising inventory for them to sell, and the assumption that better targeting of advertising, based on all the information that companies like Google and Facebook know about you, will lead to higher advertising prices (in industry parlance, CPMs) may
not prove to be correct.

“Either Google and Facebook will come to dominate video distribution in a model that is based on highly targeted advertising – raising obvious questions about privacy – or the prices of vMVPDs will rise significantly to become self-sustaining, and in the process, the distinction between ‘new’ and ‘old’ models won’t look so significant after all.”