vMVPD profitability questioned from all sides

While the operators are struggling to eke out a profit in a market that now has more than half a dozen well-backed vMVPD services, programmers aren’t making money hand over fist, either.

While Dish Network could follow up AT&T’s 152,000 DirecTV Now subscriber additions with some pretty impressive second-quarter virtual MVPD customer metrics of its own tomorrow, don’t look for programmers or media and telecom analysts to get that excited about it.

“Most of these businesses are at best break-even or money losers,” said Craig Moffett, an analyst at MoffettNathanson LLC. “This is shaping up to be a truly lousy business.”

And while the operators are struggling to eke out a profit in a market that now has more than half a dozen well-backed vMVPD services, programmers aren’t making money hand over fist, either.

RELATED: Editor’s Corner—AT&T’s video/wireless bundling strategy bears fruit, but the endgame remains unclear

“The over-the-top services that have been launched so far are doing about as we expected they would do,” said NBCUniversal CEO Steve Burke, speaking during the second quarter earnings call for parent company Comcast Thursday.

“And they're not all that material to our business,” he added. They've all launched. They have subscribers. We have deals in place with all of them. They're actually very favorable. So from an NBCUniversal point of view, if someone goes to an over-the-top provider, it's actually slightly better. But it's a very tough business. And as we've said before, we're skeptical that it's going to be a very large business or profitable business for the people that are in it. And they're off to a relatively slow start.”

AT&T said last week that its virtual DirecTV Now service ended the second quarter with 500,000 users, a benchmark achieved seven months after launch.

AT&T said in its second-quarter conference call last week that half of the service’s customers have migrated from traditional linear services, mostly outside the AT&T umbrella.

RELATED: DirecTV Now’s 152K subscriber gains in Q2 can’t offset 351K lost by U-verse and satellite

However, AT&T lost 351,000 customers across its U-verse and DirecTV satellite linear platforms in the second quarter, so certainly cannibalization was at least somewhat of a factor.

For its part, AT&T spent much of its presentation last week trying to tell investors that bundling video services like DirecTV Now cuts down churn in its core business, wireless. In fact, AT&T CEO Randall Stephens said the operator’s postpaid churn has fallen 25 basis points since AT&T closed its DirecTV acquisition.

Stephens cited the “pretty dramatic growth” of the DirecTV Now platform. But he did not dwell on the service’s narrow margins.

"By our estimate, DirecTV Now's $35 Live-a-Little package carries roughly $30 in programming costs,” Moffett said. “Selling $10-per-month subscriptions may help results in the wireless segment(s), but it won't help in entertainment. Nor will selling HBO for $5 per month help Time Warner.”

On the other side, Moffett said the “skinny” channel selections of vMVPD services has forced programmers like Discovery Networks into tough decisions, such this week’s purchase of Scripps Networks Interactive. 

“By purchasing SNI, the acquirer will enjoy near-term cost savings and will hope to us the ‘leverage’ of underpriced Food and HGTV networks to muscle their way into new vMVPD platforms,” Moffett added.