NEW YORK (TheStreet) -- The low-cost, streaming service of popular cable channels, including ESPN, that was announced this week by Dish Network (DISH - Get Report) has plenty of potential to disrupt the cable television industry. But it's also not without its share of potential drawbacks, analysts say.
First, though, the positives.
"The best thing is the price," Tom Eagan, managing director of the Telsey Advisory Group, said of the new Sling TV offering, which will cost just $20 a month and launch in the first quarter of 2015. Creating a good video service package under $40 has proved difficult until this point, he said, and the inclusion of Disney's (DIS - Get Report) ESPN also helps. The ability to watch sports is one reason some customers have held on to their cable TV subscriptions.
"It's an interesting service," MoffettNathanson analyst Craig Moffett said of Sling TV. "It's materially cheaper than we had anticipated," he said, pointing to comments Dish Chairman Charlie Ergen had previously made suggesting the service would cost about $30 a month. "Obviously, the cheaper it is, the more disruptive it has the potential to be," said Moffett. "This is a disruptive price point, and it's a meaningful step towards a la carte" service. At $20 a month, Moffett said consumers can afford to pair Sling TV with other services, including Netflix (NFLX), which costs $8.99 a month for a streaming subscription, and the coming HBO GO service that won't require a pay TV subscription, which hasn't announced pricing yet. "This is the first serious shot across the bow of the existing ecosystem that offers a meaningful alternative."
Netflix could still be hurt by Sling TV, said Moffett. "It's inevitably going to cannibalize at least a little bit [of] the traditional ecosystem," said Moffett. But Sling TV is mainly targeted at customers who don't subscribe to a pay cable or satellite TV service, he said. "And that customer is likely a Netflix customer," he said. Many Netflix subscribers will see Sling TV as a complementary service, he said, but some will select Sling TV over Netflix to cut down on their monthly expenditures. Netflix didn't immediately respond to a request for comment.
But the lack of regional sports networks, such as the New York Yankees YES Network, was cited by Moffett as a potential negative. Dish's satellite service also lacks YES. "It's not clear how much demand there is going to be for a service that is anchored around ESPN and yet doesn't include the regional sports networks," he said. "The average fan, if they care enough about sports to want to watch ESPN probably also cares enough about sports to want to watch their local sports team in at least one of the sports, and you don't get that with ESPN."
Telsey's Eagan, though, is more concerned about low margins than the lack of regional sports offerings. "I can't see how they're making any money on this thing," he said. Programming costs for most cable operators run about 40 to 45 percent of revenue, he said. In comparison, he projected Sling TV programming costs could make up as much as 70 percent of Sling TV's revenue.
Another drawback is the inability to view content on more than one screen in a home at the same time, as well as the lack of fast-forwarding for certain content, Eagan said. But "I think it will do well," he said, predicting it will do better than the coming over-the-top offering from Sony (SNE), which is expected to include many more channels than Sling TV and cost considerably more. Eagan said he doubted that many consumers would drop their cable or satellite TV services for Sony's service.
Sling TV will offer add-on packages to the basic $20 service, including sports, news and information, and kids programming, Sling TV CEO Roger Lynch told us. But the sports tier will not include the channels of regional sports teams such as the New York Yankees or Mets, he said. That would be too costly, Lynch said, adding that each additional tier will cost $5. "Frankly, the viewership is relatively low on that" also, he said, referring to regional sports channels. The sports add-on will include ESPN channels other than ESPN and ESPN 2, which will be included in the basic service, in addition to other unannounced channels, he said. While Sling TV would like to offer all the networks, it isn't because of the complexity involved in such deals, he said.
Lynch declined to comment on Sling TV's expected margins or how much their programming costs would be.
Dish subsidiary Sling TV L.L.C. is targeting its service at the growing number of households that don't subscribe to pay TV. "The biggest contributor to that growth is millennials, who get their first apartment and they don't choose pay TV," said Lynch. "The big bundle market -- the traditional pay TV market -- is in decline. It's declining in absolute terms, and it's declining even faster in relevant terms, in terms of penetration," Lynch added. The Sling TV strategy is also much different than the one for Sony's coming service, he said, telling us he didn't see that more costly offering as direct competition.
Moffett played down the significance of Dish's shares falling more than 2 percent Monday. "They were kind of in line with the market. It's hard to point fingers at any one individual stock," he said.