Discovery-led Philo a good value, but a tough sell

Discovery is partnering with Scripps, AMC, Viacom, and A&E to deliver a no-sports vMVPD direct-to-consumer service. It looks like the bundle could be a good deal for content providers and viewers, but it will still be a tough sell.

David Zaslav, Discovery Networks CEO, said last year that there was an opportunity for a “skinny bundle” without sports in the U.S. He is following through on this idea with a new service dubbed “Philo.” The service will deliver channels from Discovery, Scripps, AMC, Viacom, and A&E to deliver a suite of channels for “less than $20.”

Mr. Zaslav has every reason to be trying this approach. Discovery has struggled to get its channels in several of the major vMVPDs that have launched. For example, Sling TV and YouTube Live do not have any Discovery channels in their bundles. If these services take off, it could spell disaster, particularly as Discovery competitor National Geographic has had more success.

Can Philo be priced below $20?

According to nScreenMedia calculations, Philo has plenty of room to maneuver below the $20 price point and still come out well ahead. The top 34 channels from the four partners in Philo are jointly earning around $10 per month in pay TV license fees.

In other words, if Philo charges $15 per month, a subscriber to the service is worth more to the four partners than a subscriber to pay TV.

However, there are big risks and new expenses to be absorbed. Running a direct-to-consumer service requires many infrastructure costs, like streaming charges and customer support. As well, a channel receives credit for all the customers that can receive it in the pay TV bundle, whether or not they watch the channel. Of course, this could also be true of Philo, but with much fewer channels there is much less room to carry channels that hardly anyone watches.

These factors will likely push the price of Philo close to the $20 limit set by Mr. Zaslav. Perhaps a realistic subscription level may be $19 per month.

Will customers see value at a $19 price point?

According to research by TiVo, if looks like a significant portion of TV viewers may see Philo as a good value. The company asked consumers how much they would be willing to pay for each channel in a bundle of 20 they selected themselves. In general, consumers are willing to pay far more per channel than content providers receive in license revenue from operators.

Discovery receives about $0.54 per subscriber per month, but the 67% of consumers in the TiVo study that wanted the channel in their bundle said they would be willing to pay $1.37. A&E receives $0.41 from operators, but the 50% of consumers that wanted it in their bundle indicated they would pay three times that much. Food Network receives $0.26 from operators, but its fans would pay more than five-times that.

It could well be that a significant proportion of the population will see Philo as a good value. Unfortunately, that value still could not be enough to bring enough subscribers. Many of the channels are already carried online by other vMVPDs. Moreover, pay TV subscribers will need to cancel their service before they consider subscribing to Philo.

About the estimates

Many of the channel license fees nScreenMedia obtained from SNL Kagan estimates for 2014. nScreenMedia corrected these numbers by applying a 35% increase. ESPN license fees increased from $6.04 in 2014 to $7.86 this year, a 30% increase. Comcast content license fees increased 35% between Q2 2014 and Q2 2016, while Dish’ increased 80%.

nScreenMedia could not find good estimates for some other channels. Those were estimated based on peer channel numbers and their position versus a primary channel. For example, estimates for estimates for IFC were not available, so Sundance channel’s value was used.

Why it matters

The Discovery-led sport-less bundle Philo represents good value for both the content providers and a significant number of consumers.

However, it will be difficult to translate that into real subscribers.