VideoNuze readers know I’ve long been skeptical about the value proposition of virtual multichannel video programming distributors (“vMVPDs”) or “skinny bundles” as they’re commonly known. But as I touched on in last Friday’s podcast, based on some significant changes over the past year, I’m becoming more optimistic about skinny bundles’ prospects and their broader impact on pay-TV.

To take a step back, 3 main concerns have driven my skepticism about skinny bundles: (1) their incomplete channel lineups (the “Swiss cheese” challenge of too many holes, or missing TV networks) which reduces their appeal relative to pay-TV’s traditional multichannel lineups, (2) the dubious profitability of skinny bundles, especially given underlying programming costs, which raises the question of just how committed the big parent companies of skinny bundles are to them, and (3) viewers’ migration away from linear TV in favor of SVOD, which is driving up cord-cutting.

Here’s what’s changed:

Channel lineups become more robust, especially with broadcast TV

Sling TV jumped out to an early lead in the skinny bundle category, but their exclusion of broadcast channels was confounding (their AirTV workaround is only a slight improvement). In contrast, YouTube TV fully understood how important including broadcast TV was to mainstream success. From launch in March, ’17, YouTube TV has gone on to offer full commercial broadcast TV coverage in almost 100 U.S. markets, covering 85% of U.S. households. Other skinny bundles are making real progress in offering comprehensive broadcast TV coverage as well, although one missing piece for all skinny bundles is public broadcast TV stations.

Together, the broadcast networks are still the most-watched on the dial. In what is still the best skinny bundle research available, Altman Vilandrie & Company found in late 2016 that ABC, CBS and NBC were the only TV networks identified by more than 50% of respondents as being “must have,” with Fox just slightly behind. While putting up an antenna is an option for some households, it is a non-starter for many others. With broadcast TV having been included in pay-TV for decades, consumers’ expectations are well set.

While including broadcast TV is critical to skinny bundles’ success, every one of them still lack certain cable networks. I haven’t seen any research on this specific point, but my hunch is that because of the strengthening program quality on SVOD, less frequently watched, “nice to have” channels can be more easily forsaken by skinny bundle prospects. In other words, SVOD is helping reinforce skinny bundles’ “good enough at the low price” value proposition because they’re augmented by the great content available on Netflix, Amazon, Hulu, etc.

Dubious profitability gives way to parent companies’ strategic priorities

Including broadcast TV doesn’t come cheap, exacerbating the squeeze on skinny bundles’ already challenged profitability. But what’s become clear over the past year is that parent companies are using skinny bundles to serve their bigger goals. Exhibit A is AT&T, which is using DirecTV Now to attract and retain wireless subscribers (especially unlimited). By aggressively bundling DirecTV Now with wireless, AT&T grew its skinny bundle to 1.5 million subscribers by end of Q1 ’18.

AT&T is among the wireless providers pursuing a “video as bait” strategy, which is helping turn pay-TV into a value-added service for many consumers. Even with DirecTV Now’s ARPU of just $46.27/month, vs. nearly $115/month for its traditional pay-TV services, AT&T seems content to migrate subscribers over. Even though those DirecTV Now subscribers are less valuable financially, adding 312K of them in Q1 '18 more than offset the loss of 188K multichannel subscribers in the same period. And AT&T is far from done - soon it will release a skinnier bundle that will be free for unlimited wireless subscribers.

Meanwhile Google’s ambition for YouTube TV to become an entry point for selling TV advertising is now becoming more public. The risk that YouTube TV would be just another passing Google experiment seems to be melting away as the company recently extended its World Series sponsorship for another 2 years, raising the marketing stakes for all other skinny bundles.

Viewers’ migration away from linear TV in favor of SVOD

Skinny bundles have always seemed misaligned with the macro trend of viewers’ (especially younger ones) move away from linear TV. There’s no doubting this trend, but skinny bundles are starting to prove linear TV may still have their place, if priced appropriately and delivered in high quality via connected TVs.

As TiVo’s recent research showed, the overwhelming motivator for cord-cutters is traditional pay-TV’s sky-high price. But The Diffusion Group’s research also showed that 54% of skinny bundle subscribers are cord-cutters, returning to the pay-TV fold. Throw into the mix that skinny bundles’ passwords can be shared among family members as easily as SVODs’ always have been means younger viewers can gain linear access at no cost to them.

What’s Ahead?

With the proliferation of low cost, flexible choices, viewers are taking more control of assembling the video services they value and use. Multichannel subscribers are increasingly realizing that having 200-300 linear TV networks, but only watching 5-6 of them regularly, while paying around $100-$150/month doesn’t add up. That doesn’t necessarily mean giving up on linear TV entirely, but it does mean a lower cost point is essential.

It’s still very early days for skinny bundles; according to TDG, fully 71% of subscribers consider themselves either innovators or early adopters. Whether the category will ever become more mainstream and grow to 10 million, 20 million or even more subscribers is still a huge open question.

But skinny bundles have made significant progress over the past year, in providing critical content. Their parent companies have ample incentive to promote them even if their profitability is questionable. And their low price plus how they fit with consumers’ desire to exert more control over their video services, while maintaining some access to linear TV is compelling.

The video/TV market is evolving so quickly that assumptions based on conditions from as little as a year ago can change. So, despite my original concerns, when added all up, skinny bundles are likely to be one of the biggest market trends for the foreseeable future.