Saturday Speculation: Acquiring Philo Could Launch Target's Return To Video

Every Saturday, we post a "what if" column which examines an idea in the media industry that makes sense, even if it isn't likely to happen. This week's speculation involves a possible attempt by retail giant Target to move back into the streaming video space.

Whether or not you're a customer of Target, it's hard to argue with the recent series of successful moves by the company. It's doubled-down on its retail business by signing a number of exclusive fashion and home goods deals and repositioned itself as the hipper, more trendy alternative to rival retailer Walmart. It's tackled increased competition from Amazon by acquiring the Shipt delivery service, which allows it to offer a subscription-based home delivery option for customers. It has shifted online order fulfillment from warehouses to local stores and has invested heavily in technology to compile customer data in order to help predict behavior.

So the news on Friday that Target will be presenting at IAB's Digital Content NewFronts for the first time this year on May 2 created a bit of a stir in the industry. The NewFronts are a "week-long New York City marketplace will feature media powerhouses and pioneers showcasing innovative digital content & advertising opportunities." Companies presenting this year include traditional media companies such as BBC News and Viacom, print/digital hybrids such as The New York Times and the Meredith Corporation as well as technology & content companies like Google/YouTube, Twitter and Verizon Media. Hulu will make a presentation, and so will the Walmart-owned streaming television and movie service Vudu.

So why is Target going to be there?

According to AdAge, Target sent out invitations to the event that promised a "spectacular" announcement. The company had previously experimented with a video-on-demand digital entertainment service when it launched "Target Ticket" in 2013. That service never seemed like a good fit for the retailer and it was shut down by the company within two years.

Even though I'm based here in the Twin Cities, I have no inside knowledge about what the hometown retailer might have in store in the video space. But by examining what its competition is doing, I can make an informed guess.

Rival Amazon bundles its Amazon Instant Video service into its Prime membership for free and uses the service as both an incentive for membership as well as another source for aggregating customer behavioral data. Walmart owns the smart TV/connected TV platform and video on demand (VoD) distribution service Vudu. It previously announced it is producing a small amount of original programming for the service and has discussed rolling out some still-unspecified shoppable ads. It's unclear what Vudu will be presenting at the NewFronts, since it seems to have backed away from plans to add some sort of new streaming service.

Which puts Target in an interesting spot. Unlike Amazon and Walmart, they don't currently have a streaming media option. They aren't going to wade deeply into the very expensive original content space and while there are plenty of smaller players in the AVOD and SVOD space, most of them aren't going to be a good fit for the Target customer demographics. But owning some sort of a streaming service makes sense for Target. It's another opportunity to harvest customer data and integrate a streaming component into the Target universe. It's a good place to cross-promote other products as well as offer member-only deals. So making a video move makes good business sense. Sifting through the options is a bit trickier.

In the end, I can only go by deciding what I would do if I were Target. And in that case, one move seems to be the best decision by far. And that is for Target to acquire the virtual MVPD service Philo.

Philo was launched as a company that would deliver television to college students. But in November 2017, it launched an OTT entertainment-centric live television service. Because the service doesn't carry sports, it has been unable to reach carriage deals for channels that are owned by media companies who also own sports networks. So it doesn't include networks owned by Disney/Fox, CBS, Turner or NBCUniversal. But it does include channels from A+E Networks, AMC Networks, Discovery, Scripps Networks, and Viacom and with a programming package cost of either $16 for 44 channels or $20 for 57 channels, it's a solid low-cost option for viewers.

It's not clear how many subscribers Philo currently has, although the number was estimated to be around 50,000 at the beginning of 2018. It's also not clear what Philo's current valuation might be, although the company has so far raised $25 million from A+E, AMC, Discovery, Scripps and Viacom, as well as $26 million of funding from New Enterprise Associates, CBC New Media Group of Raleigh, NC, Rho Ventures, XFUND, HBO, WME, and Mark Cuban’s Radical Investments. 

Given Philo's lack of traction with customers, why would Target be interested in Philo? Well, the lack of subscriber growth means the service is the one vMVPD that is affordable. It already has content deals in place, an existing technology and even though it only costs $16-$20 a month, it's likely the one service in its space that is close to breaking even. Having a live television service would distinguish Target from its competitors and at the current Philo price point, Target could bundle Philo with its existing Shipt delivery service to offer up a viable alternative to Amazon Prime. 

But the feature that holds the most promise for Target may be Philo's social media and brand integration functions. When Philo launched, one of the company engineers walked me through a Beta version of a social media component for Philo they planned to roll out once the service hit the number of subscribers needed to make it work. Viewers would interact with other fans of specific shows and could receive messages from approved networks and brands. Social features like those would be like gold for a retailer looking to build a closer relationship with customers, compile data and offer extra value to advertisers.

Acquiring Philo would be a way for Target to build out a video offering at a discounted price. And Philo has struggled to differentiate itself in a crowded field of well-funded competitors. Having a major retailer as its primary partner would give it a reach and visibility it could otherwise never accomplish on its own.

As I said, I have no inside info on what Target is set to announce on May 2. But I do know what I would do if the decision were left up to me.