M&E Connections

Analyst: Keeping CBS All Access, Showtime OTT Separate Offerings Makes Sense

As CBS executives continued to express confidence that combined subscriptions to its CBS All Access and Showtime over-the-top (OTT) streaming services will hit 25 million by 2022, it still makes sense for the company to keep them separate direct-to-consumer (DTC) offerings, according to Wolfe Research analyst Marci Ryvicker.

“Keeping these products separate but OFFERING a bundled price (eventually) is probably the most efficient, most flexible and most consumer-friendly alternative,” she said in a research note May 2, after CBS reported results for the first quarter of fiscal 2019 (ended March 31) and company executives expressed a similar position to Ryvicker’s on an earnings call.

After all, she said: “DTC is all about choice – don’t start forcing DTC products that people don’t want. That is what is killing the cable bundle in the first place.”

But “it would be in CBS’ best interest to take a page out of the Disney playbook and break out their digital investment spending (and revenue for that matter),” MoffettNathanson analyst Michael Nathanson said in a research note May 3. “As was the case after Disney’s investor day, more clarity around CBS’ core performance versus their direct-to-consumer investing would result in … material upside to the stock price” of CBS, he said.

Despite reporting stronger overall revenue and profit for Q1 than a year ago, the 11% increase of revenue to $4.17 billion that CBS reported was weaker than analysts had expected, and company shares were down 1.9% at $49.46 in afternoon trading May 3. Entertainment revenue grew to $3.18 billion from $2.75 billion, while local media revenue increased to $457 million from $415 million and publishing revenue inched up to $164 million from $160 million.

However, cable networks revenue fell to $552 million from $571 million. The company reported profit grew to $1.58 billion ($4.21 a share) from $511 million ($1.32 a share).

Combined CBS All Access and Showtime OTT subscriptions had increased so quickly that CBS early this year boosted its projection for subscribers to 25 million by 2022 from its prior forecast of 16 million by that year.

In the first quarter, DTC subscriptions were up 71% year-over-year, Joseph Ianniello, CBS president and acting CEO, said on the May 2 earnings call. He also expressed little concern over the new streaming video service that Apple recently announced.

“Our two main services, CBS All Access and Showtime, will be anchors for this platform from the outset,” he said, adding: “We’ve already had great success offering our direct-to-consumer services on Amazon, Roku, Hulu and others. And now with Apple getting into the game, we’ve added another distribution powerhouse that will make our content available to even more consumers, which allows our services to grow even faster. So, between our content investment and our expansion onto new platforms, we feel even better today than we did just a quarter ago about reaching our target of 25 million direct-to-consumer subs in 2022.”

CBS has also “already been at this since 2014, so we’ve already been competing against Netflix, Hulu, Amazon, YouTube, HBO this entire time as we’ve been building our service and exceeding our expectations on sub growth,” Jim Lanzone, CBS chief digital officer and CBS Interactive CEO, said during the Q&A. He added: “So, we definitely have a position in that market that’s unique and we definitely feel good about it regardless of who’s coming into the space.”

Asked why, in light of the competition, CBS doesn’t combine Showtime OTT and CBS All Access into a bundle or different package, Lanzone told analysts: “We already offer these as upsells to each user base, so you can already get one service as part of the other. And just – so far, to date — the user bases are differentiated somewhat. It’s not that they couldn’t come together in the future — they could — and we could add more content to that internal bundle.”

Another important reason why CBS isn’t combining the two DTC services now is that “the consumer wants optionality,” Ianniello said, adding: “We’re giving the consumer optionality. They can certainly today buy them together for a discount, and we offer that to them. But [for] some who don’t want to spend in the teens or dollars and only want to spend $5.99, we’re going to give them that choice. Consumers want choice, convenience and control…. So we’re serving that up to them and they will decide. And so, if we combine them, we think we actually could have less subscribers.”

The company’s 25 million DTC subscriber target doesn’t include its international services, “where we continue to increase our footprint,” Ianniello said earlier on the call, noting CBS launched All Access in Canada a year ago and followed it up with All Access in Australia last fall. “Next up we will launch our direct-to-consumer services in Latin America and Western Europe, two regions where we see high growth potential and strong interest in our premium content,” he said. Noting that there’s “nearly 7.5 billion people living outside” the U.S., he said: “The international marketplace presents a huge opportunity for further long-term growth.”

The 25 million domestic subscriber target also “excludes the growth we’re seeing at our ad-supported streaming services” CBSN, CBSN Local, CBS Sports HQ and ET Live, which are a big part of our future as well,” he said, adding: “We will be launching our second local version of CBSN in Los Angeles this quarter, followed by Boston and San Francisco later in the year. So, we are well-positioned in both” the subscription video on demand (SVOD) and ad-based video on demand (AVOD) marketplaces and “we are expanding on platforms locally, nationally and internationally,” he said.

CBS, this year, is “on track to invest more than $8 billion in programming, which positions us competitively with any player in the marketplace,” he also said, adding the company is “confident that increasing our investment in premium content will continue to be the best way to drive revenue growth, led by our fastest growing opportunity, direct-to-consumer streaming.”