Rising content licensing costs and tightening margins are pushing CenturyLink Inc. (NYSE: CTL) towards a leaner, Internet-delivered pay-TV package, said President and CEO Glen Post, during the operator's fourth-quarter earnings call Wednesday.
In fact, CenturyLink's Prism IPTV product can drift into negative margins for the company, according to Post. And the "truck-roll" cost for installing the service doesn't help. Operating expenses were up for the operator, primarily driven by its IPTV service.
But it does help drive new subscriptions: CenturyLink added 40,000 new Prism subscribers in 2016, approximately 50% of whom were new to the carrier. And Post said the real value of a TV service was the additional services it was able to pull through, anchoring a multi-play bundle for the operator.
CenturyLink is already running trials of an OTT service in four markets, according to Maxine Moreau, executive VP of global operations and shared services for CenturyLink. The streaming service is expected to launch in the second quarter of 2017, with further expansion planned for the rest of the year.
Post also said that the operator was open to other options, including the possible licensing of the DirecTV Now service from AT&T Inc. (NYSE: T). He said he was open to dropping the platform that CenturyLink has developed in-house in favor of DirecTV Now if it worked out to be a better deal and offered the same type of service.
CenturyLink did not disclose pricing for the new streaming service, but said it will include local channels and a network DVR.
It's interesting to hear Post's comments about tightening margins for pay-TV. There have been numerous skinny bundle launches in the past six-to-12 months, but they have largely focused on cord-cutting and millennial preferences for OTT/multi-device video delivery. Here, the driver appears to be different: It's the high cost of licensing content that is the primary reason for CenturyLink to cut back on its full-fat service.
It has 325,000 pay-TV subscribers, which doesn't put it in the best position to take on large media conglomerates during licensing negotiations. Compare this with Comcast Corp. (Nasdaq: CMCSA, CMCSK), which has 22.5 million subscribers and still believes in traditional full-fat TV bundles. Comcast grew its video revenue 4.3% in 2016, while adding pay-TV 161,000 subscribers; its best pay-TV results in a decade.
CenturyLink's net addition of 40,000 Prism subscribers is actually a very good result if seen in percentage terms (14% growth vs. Comcast's less than 1% growth). Of course, there are a number of other elements at play here, but generally speaking, if a service is helping pull in additional subscriptions for voice and broadband, and you are growing subscriptions in an industry where cord-cutting is the prevailing trend -- that should be good news, right?
The fact that it is not is a testament to the power of scale in this business, which is why we are practically tripping over mega-mergers these days. (See Merger Musings: TW + AT&T = ? and Cable Has One Thing Verizon Needs.)
But it also suggests that programming networks may not be thinking long-term in their approach. The growth of skinny bundles and cord-cutting is not just costing them carriage fees from operators, it's also reducing the number of homes some of those channels reach and can therefore monetize through advertising. As such, CenturyLink's decision to prioritize skinny bundles hurts them as well, and maybe more than it does CenturyLink in the long run.
Maybe less really is more, in this new world of TV programming.
— Aditya Kishore, Practice Leader, Video Transformation, Telco Transformation