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Online TV Is Growing Too Slowly to Stop the Bleeding in Cable

Published on .

Credit: Bloomberg News
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The online TV market went from zero customers to almost 3 million in a couple years, but it still isn't enough to make up for cord-cutting.

Sling TV, which went live with the first service in January 2015, has emerged as the leader with 1.7 million users, two people with knowledge of the matter said. The Dish Network Corp. offering, which starts with about 30 channels for $20 a month, is ahead of AT&T's DirecTV Now and Sony's PlayStation Vue -- which had about 400,000 and 450,000 subscribers as of early April, said the people, who asked not to be identified because the numbers aren't public.

For all their success, these skinny bundles of live channels delivered over the internet are looking more like a patch than a panacea for what ails pay TV. About 6 million subscribers have shut off their cable or satellite service since 2010, dropping their $80- or $90-a-month packages. New subscribers aren't fully replacing the old ones and they're paying less, meaning media companies will lose $13 billion in revenue over the next decade, according to Barclays. They're probably not profitable for the companies selling them either.

'Truly lousy'
"Most of these businesses are at best break-even or money losers," said Craig Moffett, an analyst at MoffettNathanson. "This is shaping up to be a truly lousy business."

Optimists in the industry argue that the online skinny bundles are at least slowing audience losses. And the packages are giving TV consumers more options than they've had for years from legacy phone, cable and satellite TV companies.

The industry's 2.7 million subscribers represent an increase from about 2 million in February, a number Time Warner executive John Martin reported at the time. Since then, YouTube and Hulu have introduced their online alternatives and have attracted about 160,000 subscribers combined, the people said. The new players are still expanding, striking deals to distribute their services in more ways and rolling out local channels to more cities.

That's welcome news for cable networks like Walt Disney Co.'s ESPN, which have lost millions of subscribers to cord-cutting in recent years and see online TV services as a way to bring some of them back.

Anthony DiClemente, an analyst at Instinet, expects 1.6 million people to sign up for skinny bundles this year and another 1.3 million next year. DiClemente says he's become "more confident" that online TV will "(re)connect millennials to the bundle."

Sling, AT&T, Sony, YouTube and Hulu declined to comment on the subscriber figures.

Leaking bucket
So far, skinny bundles are only making up for about 60 percent of the people who drop pay-TV service, according to Moffett. Over the next decade, 31 million homes will cancel or cut back their traditional TV service, while just 17 million will go for live online options, says Barclays.

For consumers, the new options represent the closest thing yet to a la carte TV, where they can pick and choose the channels they want. Not long ago, TV customers had only two or three choices from cable, phone or satellite companies. Now there are at least six online providers and more varied channel options.

It's also easier to switch providers. While canceling cable or satellite means a frustrating customer service call and turning in bulky equipment, dropping online TV service is a click away.

Jake Kocorowski in Madison, Wisconsin, only watched 15 of the 200 channels he got from DirecTV -- mostly sports networks like Big Ten Network. So he cut the cord and tried Sling TV, cutting his bill by more than half. Then he tried DirecTV Now because the company offered him a free Apple TV device. He says he wants to try YouTube TV and Hulu next.

Targeted ads
"I'm excited for the competition," said Kocorowski, who blogs about the Wisconsin Badgers for SB Nation. "There are so many companies providing better options for those of us who don't want 150 channels."

Sling TV leads in part because it arrived first. The company offers a cable-like service with three base packages ranging from $20 to $40 a month. Subscribers can pay $5 more for add-on channels.

With its marketing, Sling TV targets potential customers when they're most interested in a new service, according to CEO Roger Lynch. If you "like" a college team on Facebook, Sling TV may serve you a Facebook ad with the game score and a link to watch the rest online.

"Over the years we've identified good indicators for who would be a Sling subscriber," Lynch said in an interview. "We spend a lot of money with Facebook and Google."

So far, at least, profits in online TV have been tough to come by, according to Moffett. To sign up new customers, providers are mostly selling the service at cost, he said.

Expenses can rise even more as new companies enter the market and promotions heat up. DirecTV Now is offering HBO for $5 a month, instead of the usual $15. YouTube TV is giving new subscribers a free Google Chromecast device. Tell a friend about Sling TV and get $5 off your monthly bill.

The long-term answer is to keep customers and eventually move them to higher-priced packages.

Andrew Hickey, 37, of East Brunswick, New Jersey, tried out Sling TV and found some channels his wife wanted were on its "Orange" package while others his kids wanted were only on the "Blue" package, forcing him to pay more.

"They call it 'a la carte TV' but it's kind of misleading because you're not really choosing the channels you want," said Hickey, who works in digital marketing. "It feels kinda like a game."

-- Bloomberg News