In just seven years, Netflix has signed up over 60 million subscribers across 50 countries and is regarded by many as the poster child of the pay-OTT video revolution. But with razor-thin margins, massive competition, and the potential for rivalry from content owners going direct, the pay-OTT industry is an exciting but shifting space. In the first part of this IBE Market Briefing, we examine the consumer and market model, and look at drivers and strategies that can harness the potential of a billion Internet enabled viewers.
Pay-Over-The-Top (OTT) TV is the fastest growing subscription service of the last five years with an upward trajectory likely to continue through to the end of the decade. By 2019, the pay-OTT market is expected to be worth $31.6 billion globally, up from just $8 billion in 2014 - a rise that is not only changing how consumers watch content but also having a dramatic impact on today’s cable and satellite TV players. 2015 was the first year with declining viewership and a declining number of subscribers for normal broadcast pay TV in the USA. And many expect to see similar trends all over the world, where developed markets with low cost broadband services will spearhead this development, and the developing markets following later. Yet, as pay-OTT newcomers advance, they run into incumbent operators and some of the challenges faced by all content-led services providers. For many, this requires a new set of tools, techniques, and business models to survive and ultimately thrive.
Figure 1: Ericsson ConsumerLab TV & Media 2014 study.
Surpassing the classic TV offering
Pay-OTT is new but many of its traits are familiar. Think of the classic TV offering, a hundred channels packaged as a bundle, offering convenience and cost control. The TV package has been so successful that virtually no other business models exist anywhere in the world. The business model attraction has been universal and has been the fundamental driver of the pay TV industry’s growth over the past decades from the hyper growth phases of the 80s and 90s to the cash cow days of the 00s. Channels and distributors have both been happy with the bundled models and the industry has been very predictable for the past 20 years.
According to Michael Lantz, CEO of Accedo, the attraction of the bundle can be found in the human psyche: “Services that are considered ‘utilities’ are absolutely vital for a person’s home to function. To add regular purchase decisions to such utilities annoys consumers and adds a risk of churn. The less interaction with the customer the better. Services which are considered ‘discretionary’ are, on the other hand, really difficult to move to becoming a utility. Naturally, consumer attitudes to different services change over time, but I think we can safely conclude that TV can be considered a utility today.”
In his expert view, the video services over the Internet which started at beginning of the millennium offered a first wave although most of these services failed and none of these were any threat to a thriving pay TV industry. “Now, 10 years later, technology has matured and the costs for delivering an OTT service make sense for a successful business case,” continued Lantz. “What’s even more important are the changed business models. Subscription VOD services weren’t really possible 10-15 years ago, when all content licensing models were created for either the broadcasting model (one or two broadcast rights in a certain period of time) or the home video model (one time purchase or 24 hour rental). Almost exclusively, early online video services copied the home video model, which worked reasonably well, but never changed any viewing habits.”
Lantz and other industry watchers suggest that this generation of pay-OTT services has been successful by emulating the decades-old pay TV package but for a VOD model. The challenge with this model is to have enough content so content availability is never a problem in practice. Business models have slowly but surely become more attractive for these types of services and consumers are attracted to them for the same reasons as before - which are essentially convenience and cost control.
Operators going pay-OTT
So, having concluded that the OTT SVOD services are essentially the same type of services as a pay TV bundle, but without the channels, it follows logically that the same strategic challenges will arise as for an operator. Customer support, efficient billing, anti-churn campaigns, interesting bundling and tiering, and low subscriber acquisition costs are all important for an SVOD player. A TV operator excels in these areas and can leverage both staff and systems in an OTT world. Furthermore, a TV operator can include linear channels and catch-up TV in an OTT service, making it possible to work closer with the broadcaster for mutual success.
“In fact, the only hinderance for an operator to launch an OTT service is technology,” said Lantz. “A new infrastructure is needed both for the video workflow and for the service distribution. Operators should embrace cost-efficient cloud infrastructure to be able to move quickly to deliver new OTT services. Part of the challenge is that TV operators are traditionally larger, slower organisations with an in-house infrastructure. The need to become faster and more agile to stay competitive is apparent.”
In his view, some operators can manage the shift to become more agile in an OTT world: “But for most operators I firmly believe that the route to deliver OTT services would mean that they will need to relinquish some of the control over the infrastructure and service offering to content partners or technology vendors.”
Pay-OTT proves popular but exhibits high churn
It is clear that pay-OTT is gaining popularity yet the model which can encourage a kind of binge viewing maybe less stable a subscriber base than traditional pay-TV. This trend is highlighted by a new Research Now study, commissioned by Paywizard. The survey, carried out in Australia, Brazil, Germany, Singapore, the UK, and US, found that around 25% of consumers already use an OTT service, and a further 27% are planning to. However, perceived poor value-for-money and a lack of sustainable content choices mean that 15% of OTT subscribers plan to cancel their services within two months, with a further 30% churning in the next six months.
The research paints a picture of a highly diverse audience that is open to OTT, welcomes content across a wide range of devices, and is also prepared to sign up to multiple OTT services. When you get a little bit deeper, individual demographic groups are breaking away from perceived consumer norms, offering untapped potential.
Although it’s clear that Pay-OTT is proving popular, its disruptive business model is a challenge. Pay-OTT is still in a ‘gold rush era’ when compared to traditional TV. For instance, one of Europe’s largest pay-TV operators, Sky plc, which is considered innovative and stable, expects a £10 billion turnover this year and a monthly churn rate of just 0.9%**. In comparison, the research suggests that based on the people planning to leave a paid OTT service in the next month, the average churn rate is a staggering 5% per month.
Figure 2 – Paywizard/Research Now study.
Why are consumers cancelling their OTT subscriptions?
The main reason for cancelling, given by a quarter of both existing and planned subscribers, is that ‘it's too expensive’. However, rich content is the primary reason that 53% could be persuaded to stay and existing subscribers, planning to stay for as long as a year, feel that their services do offer good value for money.
Those planning to subscribe to a pay-OTT service anticipate they will cancel their subscription far quicker than longer term, existing subscribers. This appears to be linked to the availability of free trial periods as 21% of planned subscribers are essentially acting as service testers or ‘free trial bingers’, saying they either only want to subscribe over a short period, will leave when they finish watching specific content, or will take-out an OTT subscription as a gift.
However, for those that already use a pay-OTT service, it seems that they could be running out of content, with 17% of consumers saying ‘there isn’t much to watch’. The busy working 25-34 year olds, who make up the largest constituent of OTT viewers, are experiencing this content drought and are the least likely to stay.
Operators must adapt to consumers
The data also highlights that operators are still immature in terms of subscriber acquisition, shown by the low single digit sign-ups of older viewers, particularly the over 55s who tend to be loyal subscribers and the advertiser’s key demographic. For operators to make their mark on these different demographic groups, it will be essential for them to understand the different personas of their subscribers, tailoring the TV experience to fit in with their viewing habits. It is still a fledgling market compared to incumbent traditional pay-TV, both in terms of revenue and size.
According to Bhavesh Vaghela, chief marketing officer at Paywizard: “The report highlights that operators must start to embrace more flexibility around bundles, pricing and consider ways of personalising the user experience from service sign-up all the way through to customer support. They must have the potential to deliver more profitability and retention over the longer term. With the huge amount of competition and new players joining the fray each quarter, the OTT opportunity is still there for the taking.”
A full version of the highly informative report ‘The fight is on: Winning the pay-OTT battle’ is available via: http://www.paywizard.com/takeaction
In part two, we look at the technical challenges of pay-OTT content delivery and examine how operators can address the growing demand for live content.