-Pay TV Providers Struggle to Find Balance in OTT Economics
By Kendra Chamberlain
The great debate on skinny bundles continues this week, with a Deutsche Bank analyst arguing that AT&T’s upcoming DirecTV Now package will deliver considerably smaller profit margins for the company.
AT&T has said it plans to launch a streaming Internet TV service that’ll offer 100 channels for $35 per month. That’s raised some eyebrows, as programming prices continue to skyrocket. The service hasn’t yet launched, so there’s still some wiggle room for AT&T – but if it’s able to make good on that promise, AT&T will have done what no one else has yet been able to do. Dish Network, the Internet TV pioneer in the US and DirecTV Now’s chief competitor, is currently offering 50 channels for $40 per month under its “Orange plus Blue” package.
So, how did AT&T do it? For one, AT&T became the largest pay TV provider when it bought DirecTV; that means the telco suddenly had much more negotiating power than its rivals. Second, there’s evidence that at least some content owners have begun breaking up their content stables in licensing deals. Viacom, for example, struck a deal with AT&T for only 11 of its channels.
But the real answer, as Deutsche Bank analyst Matthew Niknam said this week, is that AT&T will be receiving razor-thin margins on the service. Niknam estimates AT&T will receive single digit percentage returns on DirecTV Now plus a little extra for ad revenue on the service. Niknam estimates that brings gross margins for the Internet TV service to the high teens – still vastly lower than the traditional 45% that pay TV providers typically enjoy…
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