DirecTV Now DirecTVs skinny bundle service has confirmed that it will hike prices, drop some cable channels, and add HBO to new package offerings, per Variety.

Skinny Bundle Adoption
Business Insider Intelligence
Skinny Bundle Adoption

The $10 price hike affects two new packages, and is DirecTV Now's second in under a year.

Skinny bundles have earned a reputation as money-losing services, and scale actually makes that problem worse, not better.The carriage fees skinny bundle operators pay out to networks are on a per-sub-per-month basis.

These fees are essentially equal to the service's price point, meaning margins are slim or nonexistent. Scale compounds this problem because the more subs a service adds, the more they must pay out to networks in fees. So far, operators have been willing to stomach the losses in order to test the viability of these services as a cable replacement, and to build scale through more reasonable pricing. But DirecTV may be tiring of that paradigm:

  • The move, which will worsen churn, underscores DirecTV's laser focus on profitability even if it means losing subs in the near term.DirecTV is now the second biggest skinny bundle service on the market, with about 1.8 million subs but it reported 267,000 in sub losses in Q4, or about 14% of its total sub base. That's after adding only 49,000 subs in Q3. Simultaneously hiking prices and paring down channels is unlikely to reverse the service's fortunes around sub growth.
  • And if DirecTV were to build scale at an unsustainable price point, it would eventually need to either raise prices or cut costs to bring the service in line anyway.The service may just prefer to correct customer expectations of the product earlier on. While the move will likely result in sub losses, those who stick around or sign up could generate per-sub profits. DirecTV Now will also get a more accurate read of the true market demand those willing to pay a higher price for a "skinnier" service are likely stickier subs, including any new adds.

We think that the skinny bundles are headed for a correction , and YouTube and Hulu could come out on top.Market leader Sling TV is also hurting: While it has amassed 2.3 million subs, it's also seen growth slow dramatically over the past year. And while DirecTV's price hike may make sense in some ways, it's also likely to hurt its relationship with customers.

Meanwhile, skinny bundles from YouTube and Hulu have actually grown , and aren't too far behind Sling and DirecTV Now. In our view, the skinny bundles offered by YouTube or Hulu are more likely to appeal to consumers. They're reasonably cheap and offer superior user experiences:

  • YouTube still costs $40 a month, and although it operates at a loss, its less likely to jack up prices because it can be subsidized by Google.
  • Hulu now costs $45, following a recent hike , but has proven that it can improve margins thanks to ad sales on its VOD content, which would suggest that its looking for alternative solutions to negative gross margins than price hikes.

In our view, the only thing that makes DirecTV Now a possible get for a customer is that it bundles HBO the service is likely to market itself accordingly.

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