Hulu’s price increase for live TV won’t be the last

Streaming services that offer top-tier news and sports channels will have to keep raising fees if they want to break even, experts say.
Hulu with Live TV. (Photo: Handout)

On a recent conference call with investors, Disney’s chief executive Robert Chapek heaped praise on the company’s triple-threat streaming services.

More than 70 million global subscribers to its family-friendly on-demand service Disney Plus helped carry the company through the economic woes brought on by the ongoing coronavirus health pandemic. And the company’s more-adult streaming service, Hulu, had become another crown jewel, bringing in another 32.5 million paying accounts.

Perhaps most surprisingly is how many of those Hulu customers were willing to fork over $55 a month for more than five dozen live streams of local broadcast, general entertainment, news and sports pay TV channels: 4.1 million, making Hulu the top streaming pay TV service in the country.

“We’ve got a product that we’re really excited about and has experienced some rapid growth and that’s Hulu with Live TV,” Chapek said. “It really gives the utility that consumers might normally find from the cable or satellite subscriber and be able to get it over-the-top directly to their homes.”

Now the company is asking those customers to pay a bit more for the channels starting next month.

On Monday, entertainment trade publications reported Disney would soon hike the cost of Hulu’s basic live TV service to $65 a month, putting it neck-and-neck with its two closest competitors: YouTube TV, which offers more than 80 channels coupled with cloud DVR, and Fubo TV, the sports-centric streaming service that will soon launch a betting platform.

The news had irate customers threatening to jump ship for cheaper offerings, with Dish Network’s Sling TV emerging as the apparent cheap platform of choice. For $30 a month, customers can get a similar mixture of local broadcast, news and sports channels, though they’ll be asked to make some sacrifices at that price. Additional packages of news, entertainment and lifestyle channels can be tacked on for $5 a piece, though by the time a customer adds everything they want, the price will start to creep closer to Hulu with Live TV’s forthcoming subscription fee.

A cheap start

Disney’s decision to hike the price of Hulu with Live TV is not unusual: Every major streaming TV service that offers local broadcast, news and sports channel has raised the price of their base offering from their introduction rate:

  • When Sling TV launched in 2014, it offered a handful of channels for $20 a month. It now costs $30 a month.
  • YouTube TV’s initial price at launch was $35 a month — more expensive than Sling TV, but a bargain considering the Google-backed company included unlimited cloud DVR storage in its price.
  • In 2017, Fubo TV transitioned from a service that offered international sports streams to one that resembled Sling TV. The service cost $35 when it relaunched.
  • AT&T’s DirecTV Now offered customers a mixture of news, sports and general entertainment channels for $35 a month.

Each service sought to take on expensive cable and satellite packages by offering customers the same live channels for a lower rate. For a while, it seemed like streaming TV was the future.

But programmers didn’t offer deals for their channels — they charged streaming services comparable rates that were billed to cable and satellite services. Rather than pass those costs on to customers — as cable and satellite companies had done for years — streaming services absorbed those costs as they sought to scale their startups.

“The unit economics of competing against a Comcast or a Charter are very, very difficult,” Michael Thornton, a former Starz executive who heads up the startup satellite TV service Orby TV, said in an interview last year. “I’m not surprised if Hulu or YouTube TV loses money with every subscriber they add — whether they think they’ll be able to make that up with lower prices in the future, that’s unclear, but in the current form, they lose money with every customer they bring into their platform.”

At some point, Thornton said, services like YouTube TV or Hulu with Live TV would have to raise their rate if they wanted to break even and come close to turning a profit. Less than a year after that interview, YouTube TV and Fubo TV raised their subscription price to $65 a month. Hulu with Live TV will follow suit next month.

Experts think the worst is yet to come: Many believe recent fee increases are related to programming and infrastructure costs. Other expenses, including marketing budgets and employee salaries, have yet to be covered by subscription fees, and despite their best efforts, the major streaming services aren’t scaling fast enough to cover these costs.

Bait-and-switch

When AT&T launched DirecTV Now in late 2016, its customers were attracted to the offer of more than 100 channels for an unheard of price of $35 a month. The rate was guaranteed as long as customers were willing to subscribe to the service early and weather its many bugs and outages in the months to come.

Most felt it was a decent compromise, even after the promotional period ended and the number of channels in the $35 a month package was reduced to just over 60. Even more were drawn to the service in early 2018 when AT&T said it would offer subscribers those same channels for $30 split into payments of $10 spread over three months. Even better promotions were offered to customers of its wireless phone service; it wasn’t unheard of for customers to get up to half off the normal subscription rate if they agreed to bundle their services.

But, like its closest competitors, AT&T was losing money on every customer who signed up for DirecTV Now. In 2019, the company announced two separate fee increases that brought the base price of the newly-renamed AT&T TV Now to $65 a month. Even worse, AT&T shuffled its channel lineup so some networks that were offered in its cheapest, basic package were now relegated to a more-expensive tier that cost $80 a month.

By July 2019, AT&T reported it had lost nearly 1 million customers across its three pay TV businesses (at the time, the other two were DirecTV and AT&T U-Verse TV). More than 168,000 of those pay TV customers were from AT&T TV Now, according to the company’s quarterly earnings report. In a statement to investors, the company admitted a combination of “higher prices and less promotional activity” were to blame for customer bailing on the once-promising streaming service.

Budget services are gaining ground

AT&T’s loss was a boon for Philo, a company that just two years earlier had transitioned from offering distribution Internet-based infrastructure to college campuses seeking to transmit cable channels to students to one that offered a slimmer package of pay TV channels to consumers at rock-bottom prices.

Philo has, from the beginning, represented a really unique and differentiated option for consumers,” Andrew McCollum, Philo’s co-founder and chief executive, said in an interview with The Desk earlier this year. Rather than making deals with programmers that offer top-tier — but expensive — news and sports channels, Philo decided to make distribution deals with programmers that didn’t have sports, news or local broadcast channels in their portfolios.

Early on, Philo inked distribution deals with Viacom, AMC Networks, A&E Networks and Discovery Networks to distribute dozens of channels in two packages — a slim package of more than 40 channels for $16 a month and a premium package with around a dozen more channels for $20 a month. (Last year, the company eliminated its $16 a month package after finding most of its subscribers opted for the more-expensive tier.)

“There are a lot of people who want [general entertainment channels]…but they don’t want to pay $100 or more or $80 a month to get them,” McCollum said. “We wanted to create a service with an honest price point where customers look at it and think, that’s really fair for what I’m getting.

Some industry experts were skeptical that Philo’s business model would work if it didn’t also include news, sports and movie channels. But Philo pulled it off — the company has been growing every quarter since it launched the direct-to-consumer service three years ago.

“There are a lot of people who find Philo to be the TV package for them and there aren’t a whole lot else on top of that,” McCollum said. “Right before we launched, a number of media analysts looked at that question, and they found the number of households that want a package similar to ours are something like 15, 20 million households. There are a lot of consumers who feel the package that we offer is all that we want.”

This month, Philo crossed 800,000 paying subscribers, and that momentum shows no signs of slowing down. The company has also inspired at least one copycat: In late October, wireless phone company T-Mobile said it was entering the streaming TV space with two offerings, including a service called T-Vision Vibe that offers 30 entertainment and lifestyle channels for $10 a month.

Executives at Philo aren’t worried that TVision will attract customers away from their service — Philo is still a better value, they argue, because they offer twice as many channels and include features that T-Mobile didn’t offer like TV Everywhere authentication and unlimited 30-day cloud DVR storage. But T-Mobile’s decision to offer a cheap, sports-free streaming TV service helped reinforce the idea that Philo’s strategy is a winning one — and Philo had the benefit of being one of the first to bring it to market.

Others may eventually have to follow suit: Customers who bought into what YouTube TV, Hulu with Live TV and AT&T TV sold them early on are becoming increasingly frustrated with each fee increase. The exodus from expensive pay TV packages to cheaper ones will continue — few will switch back to cable; instead, they’ll sign up for Philo, TVision or something else.

It seems inevitable that the more expensive streaming pay TV services will offer cheaper packages of service — ones that don’t include sports, news and all that comes with it. The question isn’t if this will happen, but when — and will it be too late?

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