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Morningstar | OTT Pay TV Subs and Usage Continues to Expand; New Entrants Could Help Spur Innovation

OTT pay TV platforms such as Sling and YouTube TV continue to gain momentum as both subscribers and viewing time have grown rapidly over the last year. As we previously discussed, the subscriber growth of the new OTT pay TV distributors has helped to offset many of the subs losses at the traditional distributors, helping to stabilize the overall pay TV market. Households with an OTT pay TV subscription are also much larger consumers of all OTT video than households without a subscription according to a new report from comScore. We believe that the gains in subscribers and viewing time have allowed media companies to become more open to placing their networks on the platforms of new untested partners such as FuboTV and SiliconDust. These new players should help to bring some long-needed innovation in both pricing and bundles to the traditional pay TV landscape.

We continue to project that the OTT pay TV distributors will help to stabilize the overall pay TV market which will help the media firms with cable networks that either have or could gain carriage on every platform. Among our media coverage, this includes wide-moat-rated Disney and Fox along with narrow-moat-rated AMC. With shares of both Fox and AMC trading in 3-star territory versus our fair value estimates of $46 and $69, respectively, we prefer Disney as its shares are trading a larger discount against our fair value estimate of $130.

As we noted in our recent Dish note on Aug. 3, Sling remains the largest player within the total OTT pay TV landscape with over 2.34 million subs. DirecTV Now hit 1.8 million subs by the end of June, which means the two largest players now control over two thirds of more than 6 million total OTT pay TV subscribers according to Digiday. While Sling continues to lead the pack, we note that the gap between the top two players continues to shrink with only 535,000 separating the two providers, down from 836,000 at the end of the first quarter. While Sling grew with 41,000 net adds in the quarter, the pace of expansion continues to slowdown as the service added 120,000 subscribers in the second quarter of 2017 and 91,000 subscribers in the first quarter of 2018. In contrast, DirecTV Now added 342,000 subs in the second quarter of 2018 versus 152,000 in same period in 2017 and 312,000 in the first quarter of 2018. We expect that DirecTV Now will overtake Sling within the next year, but that YouTube TV and Hulu with Live TV will expand faster than their slightly older peers.

A recent report from comScore highlights the enduring value of the pay TV bundle by noting that in April 2018, households with an OTT pay TV subscriptions watched 128 hours of OTT content versus an overall average of 54 hours of OTT viewing per household. Roughly 49% of the 128 hours was spent watching the OTT pay TV service with almost all viewing done via a streaming box or stick. The use of a streaming box or stick to view pay OTT content implies that the in-home large screen TV remains the screen of choice for TV content and implies that the AT&T WatchTV skinny bundle may not have the intended impact on wireless subscriptions. Also, of note is that OTT pay TV also watched 20% more of other OTT content than the average household, reinforcing our contention that SVOD services like Netflix serve as an additional conduit for video content for many households and should not be simply viewed as a replacement for the pay TV bundle.

While much of the attention about OTT pay TV revolves around the five largest players (Sling, DirecTV Now, YouTube TV, Hulu with Live TV, and PlayStation Vue), a number of smaller players are attempting to carve out a piece of the growing pie. One of the first smaller entrants was FuboTV which focused on live sports with an emphasis on soccer and has over 100,000 subscribers. The service has expanded it channel lineup over the last year but is still missing the Disney channels including ESPN. While not carrying ESPN lowers the affiliate fee costs, we think that FuboTV will be hard-pressed to expand rapidly as a sports-centric service without offering the most popular sports channel in the U.S. Philo TV is an attempt to create a non-sports bundle for $20 per month and the service does offer content from Viacom, AMC, Discovery/Scripps, and A&E but is lacking the entertainment channels from Fox, Disney, CBS, and NBCUniversal. While we think there is a market for this sport-lite bundle, we believe the price point of $20 per month for Philo may be a hard sell versus DirecTV Now that offers many of same channels plus the other major networks for $40 per month.

A more recent entrant is SiliconDust, a company best known for its HDHomeRun extenders and DVR service for over-the-air broadcasts. The firm recently announced a skinny bundle offering, HDHomeRun Premium TV, that includes 45 cable channels from Disney, Fox, NBCUniversal, Viacom, AMC, Discovery, Scripps, and A&E for $35 per month. The service avoids the painstaking process of obtaining streaming rights on a market by market basis for the broadcast channels by requiring the use of one of its OTA hardware products which cost from $89 to $180. The HDHomeRun products support playback on a number of popular streaming devices including Xbox One, Android TV, Apple products, and Amazon Fire TV. While the required use of the HDHomeRun hardware may limit the appeal of the HDHomeRun Premium TV, we believe the splitting of OTA broadcast channels and cable networks may appeal to some cord-shavers as the channel lineup is relatively robust. We note that Sling TV offer a similar product with its Air TV device, but the hardware has received mixed reviews and Sling TV does not heavily promote the product. While the three smaller players each have flaws that could hinder their overall growth, we believe that every new entrant could help strengthen the overall pay TV landscape by serving unique niches better than the traditional one size fits all pay TV bundle has done in the past.