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Online Video Has (Price) Limits

11.02.2016

Viewers will go over the top, if the price is right.

Consumers want their TV content anytime, anywhere on all their devices, but they aren’t willing to pay for the over-the-top (OTT) video experience unless the price is right. And “right” means less than what cable and satellite TV providers charge.

Although interest in OTT services is strong, consumer demand is highly price sensitive and falls sharply as the cost increases, according to an analysis by MoffetNathson and Altman Vilandrie & Company (AV&Co.).

Only 20 percent of U.S. households said they would subscribe to a slimmed-down internet-delivered content package priced at $40 per month or higher. At $30 per month or higher, the potential market increased to 40 percent, according to the analysis.

AT&T’s planned DirecTV Now (set to cost $35/month for 100 channels) and the reported Hulu service (rumored to cost $40/month) are the most recent offerings targeted at "cord cutters." These services join similar services such as Sling TV from Dish Network and Sony's PlayStation Vue.

Web video services tend to be less expensive than cable television because they piggyback on the wiring installed by cable or internet providers. Current offerings range from $14.99 a month for HBO Now to $11.99 for Netflix’s most expensive option. Sling TV offers a package of 25 channels, including TNT and AMC, for $20 a month.

While targeted at “cord cutters” and “cord nevers,” an aggressively priced OTT service that includes the broadcast networks would likely cannibalize subscribers from higher-priced cable and satellite TV services, according to MoffetNathson.

At Hulu’s rumored $40 monthly cost, nearly 19 million of the projected 24 million subscribers would transfer from more expensive pay TV subscriptions. Just under 5 million subscribers would be people who had previously cut the cord. If the price dropped to a $30 price point, slightly more than 36 million of the projected 47 million subscribers would come from the current pay TV market, and 11 million would be cord cutters, according to the analysis.

Satellite and cable TV companies, which originally saw OTT alternatives as a way to win back cord cutters, appear to realize that cannibalization is inevitable. Dish TV now markets directly to current pay-TV subscribers. The latest Sling TV ads, featuring movie tough guy Danny Trejo, ironically criticize everything that consumers dislike about traditional pay-TV services, including long-term contracts, add-on fees and big bundles.

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