DirecTV Now’s price hikes and skinnier bundles could worsen churn — but push towards profitability (GOOGL, GMH)

Skinny Bundle Adoption

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DirecTV Now — DirecTV’s skinny bundle service — has confirmed that it will hike prices, drop some cable channels, and add HBO to new package offerings, per Variety.

The $10 price hike affects two new packages, and is DirecTV Now’s second in under a year.

Skinny bundles have earned a reputation as money-losing services, and scale actually makes that problem worse, not better. The carriage fees skinny bundle operators pay out to networks are on a per-sub-per-month basis.

These fees are essentially equal to the service’s price point, meaning margins are slim or nonexistent. Scale compounds this problem because the more subs a service adds, the more they must pay out to networks in fees. So far, operators have been willing to stomach the losses in order to test the viability of these services as a cable replacement, and to build scale through more reasonable pricing. But DirecTV may be tiring of that paradigm:

The move, which will worsen churn, underscores DirecTV’s laser focus on profitability — even if it means losing subs in the near term. DirecTV is now the second biggest skinny bundle service on the market, with about 1.8 million subs — but it reported 267,000 in sub losses in Q4, or about 14% of its total sub base. That’s after adding only 49,000 subs in Q3. Simultaneously hiking prices and paring down channels is unlikely to reverse the service’s fortunes around sub growth.
And if DirecTV were to build scale at an unsustainable price point, it would eventually need to either raise prices or cut costs to bring the service in line anyway. The service may just prefer to correct customer expectations of the product earlier on. While the move will likely result in sub losses, those who stick around or sign up could generate per-sub profits. DirecTV Now will also get a more accurate read of the true market demand — those willing to pay a higher price for a “skinnier” service are likely stickier subs, including any new adds.

We think that the skinny bundles are headed for a correction, and YouTube and Hulu could come out on top. Market leader Sling …read more

Source:: Business Insider

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