Virtual MVPD Growth Could Spur More Calls for Regulation

The growth of virtual multichannel video programming distributors and of their subscriber bases is ratcheting up the competitive pressure on legacy MVPDs to consider launching their own, industry experts and watchers told us. That virtual MVPD growth likely will be followed by increased calls for regulation of them, they said. Google meanwhile is stepping up its offerings.

Legacy MVPDs might start putting their political clout behind a push for virtual MVPD regulation just from a competitive standpoint, said Boston University assistant professor-mass communication John Carroll. Strategy Analytics analyst Michael Goodman emailed that the FCC's regulating the market under the current administration seems unlikely. But legacy pay-TV operators "have a lot of clout (as well as cash) in the halls of Congress and they don’t like that virtual MVPDs are operating with far less oversight than they are," he said.

Legacy MVPDs will resist entering the virtual MVPD market "as long as they can rationalize it," said the professor. "The more of these options that become available, the more people will start migrating to them." One big question mark is Apple's TV aspirations and whether it wants to pursue a virtual MVPD platform, Carroll said. A Google/Apple faceoff "becomes a real heavyweight bout," he said.

Legacy pay-TV providers have paid less attention to virtual MVPDs than they should due to "a degree of legacy arrogance," Goodman said. He said Comcast's streaming video offering, Stream, currently available only within its footprint, undoubtedly will go everywhere. Comcast denied that. He said other facilities-based MVPDs likely will follow suit, since offering virtual MVPD service is both a defensive strategy as a means of offering a cheaper service to possible cord-cutters, lowering churn, and an offensive one by letting them expand their addressable market beyond their footprints.

For legacy operators, Goodman said, "Whether you go over the top or not, your monopoly is going away," due to the existing virtual MVPD competitors, YouTube's announcement it will launch a virtual MVPD service later this year, and Hulu's likely following suit. That increased virtual MVPD competition also will be more fuel for ongoing cable industry consolidation of smaller operators, Goodman said.

Virtual MVPDs are more effective at cannibalizing legacy MVPD subscribers than luring millennial subscribers, BTIG analyst Richard Greenfield wrote. He said traditional MVPD bundles will keep "die-hard sports fans," but everyone else likely will look to cheaper options such as combinations of virtual MVPDs, over-the-top services and free broadcast via over-the-air. Virtual MVPDs don't enjoy the price benefits of bundled broadband since ISPs charge more for that service unbundled, but they also avoid the surcharges and fees of facilities-based MVPDs, Greenfield said. DirecTV Now's base package and YouTube TV both cost $35 a month, Hulu Live is expected to run $40 a month, and Sling TV's base offering is $20 a month, he said. Virtual MVPDs are cheaper, but their shortcomings include uneven channel lineups, impaired cloud DVR functionality in cases where a video on demand version is also available, quality-of-service issues and the lack of TV Everywhere ability for NFL content due to the league's exclusive deal with Verizon, he said.

Greenfield also said Amazon potentially could be the first virtual MVPD offerer to plumb the untapped market of a cheap, non-sports, nonbroadcast entertainment bundle, with such an add-on to Amazon Prime potentially costing $15 a month or less. DirecTV Now's launch at $35 a month affected cord-cutting/cord-nevering rates, and YouTube's virtual MVPD will compete at the same price, meaning Hulu might also need to match that price, MoffettNathanson analyst Craig Moffett said in a note to investors Wednesday.

The pay-TV industry lost 1.7 million subscribers in 2016, marking the fastest rate of decline on record, MoffettNathanson said. Factor in growth in occupied households, and "lost or missing" pay-TV subscribers were closer to 2.5 million last year, it said, saying the Q4 acceleration in cord cutting was arguably due to the launch of DirecTV Now. MoffettNathanson said DirecTV Now's gains didn't seem to come at the expense of similar services like Sling TV.