The Risk With HBO, CBS, and Dish Network's New Services

By Markets Fool.com


Dish's Sling-TV is the latest effort to attract the broadband-only audience. Source: Dish Network.

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The year 2015 may be the year over-the-top services not named Netflixreally take off. Time Warner's HBO announced plans to offer the premium network a la carte. CBS followed suit offering its flagship network over-the-top for $6 per month, and announced plans to follow HBO's model with Showtime. Most recently, Dish Network unveiled Sling-TV, a mini-bundle of channels, including ESPN, delivered over the Internet.

All three of these companies cite an opportunity to capture the broadband-only market they all claim to be 10 million to 15 million households. But those numbers may be well off the mark. A recent report from MoffettNathanson shows Nielsen's sample of broadband-only homes sits at just 2.7% of households it surveys. Applying 2.7% to the entire U.S. population puts Nielsen's estimate at just 3.5 million broadband-only households.

If the broadband-only audience is smaller than what HBO, CBS, and Dish all project it to be, as Nielsen's data suggest, it could cause problems for the companies.

Cannibalizing sales
We don't have pricing on HBO's and Showtime's over-the-top services yet, but HBO told cable operators that they shouldn't worry about getting undercut. Similarly, CBS priced its All Access service at $6 per month, and it doesn't even include CBS's most valuable content -- NFL games. The strategy of pricing these a la carte services at a higher price than cable operators pay, or at least the same price, is used to increase leverage over the cable operators.

Cable operators are especially useful for Time Warner, the parent company of CBS and HBO, because the operators pay a fee to each company for every subscriber. Cable companies also help market HBO and Showtime for the companies. Offering an alternative to cable gives CBS and Time Warner leverage over cable operators to receive better terms.

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On the flip side, attracting too many customers to these over-the-top services will cannibalize their bread and butter -- cable subscribers. Because Nielsen's numbers only suggest 3.5 million broadband-only households, it's possible cable cutting may occur at faster rates than previously thought.

The problem is just as bad for Dish Network and Sling-TV. The company has 14 million pay-TV subscribers paying an average of $84.39 per month. With Sling-TV, Dish charges just $20 per month, and its margins are likely significantly smaller considering programming and content delivery costs. Dish will have to plan carefully to ensure the product is additive to its bottom line and doesn't completely cannibalize its satellite business.

Getting in before it's too late
While there's certainly a lot of risk for Time Warner, CBS, and Dish Network offering over-the-top service, there could incur greater risk by not entering the over-the-top market. Nielsen's data show that the number of broadband-only households is increasing. From December 2013 to December 2014, the percentage of Nielsen households that were broadband-only rose from 1.4% to 2.7%, signaling an upward trend.

As more young people establish their own households, a higher percentage of them will likely be broadband-only -- creating greater opportunity in offering stand-alone video services, like Netflix. In this context, these services from HBO, CBS, and Dish are acting as more of a hedge against further growth in broadband-only households. Ironically, these services may accelerate the trend they're hedging against.

The bottom line
It's difficult to precisely know how more cord-cutters will affect Time Warner's and CBS's revenues and profit margins, but there are strong indications that cord-cutting will have a net negative impact on both companies. Time Warner might profit more from HBO Go-it-alone subscribers compared to cable subscribers, but it won't benefit from the requisite cable subscription otherwise necessary to get HBO. On the other hand, CBS doesn't present quite enough value to justify its $6 per month All Access subscription price, and Showtime could suffer by losing marketing from cable operators.

For Dish, it's even more difficult to determine. If Sling-TV takes subscribers away from other pay-TV operators, it will provide a net positive for Dish; but if it cannibalizes its own service, it doesn't bode well for its average revenue per subscriber or its margins.

The article The Risk With HBO, CBS, and Dish Network's New Services originally appeared on Fool.com.

Adam Levy owns shares of Apple. The Motley Fool recommends Apple, Google (A shares), Google (C shares), and Netflix. The Motley Fool owns shares of Apple, Google (A shares), Google (C shares), and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.