Profiting from the OTT explosion: opportunities for pay-tv providers White Paper June 2015
Profiting from the OTT explosion 1 Executive Summary How will the provision of premium OTT video services paid-for packages of video content delivered over the internet develop over the next few years? What opportunities and challenges does this present for pay-tv operators? Provision of premium OTT services is expected to grow strongly over the next three years, driven by: TV Everywhere offerings operator services delivered over the internet, extending existing pay-tv services to connected devices Operators hybrid on-platform offerings premium OTT services delivered through set-top box platforms to provide customers with more choice (e.g. additional channels) or higher quality formats (e.g. 4K) Operators standalone or off-net services reaching out to target new customer segments including people living outside their footprint or consumers seeking low-price TV packages Independent premium offerings growing range of premium offerings from standalone players (e.g. Netflix, iflix) and major studio-broadcasters (e.g. HBO Go) Industry participants expect 4-5 major new premium OTT launches per territory internationally, on average over the next three years creating additional competition and stimulating innovation in pay-tv. In general, operators perceive the growth of premium OTT as an opportunity to improve performance (increased customer satisfaction and ARPU, decreased churn) and, in some cases, to target new customer segments off-net. Premium OTT services offered to existing customers are seen as a natural extension of triple- and quad-play bundling strategies. Operators are also becoming more open to partnering with third-party premium OTT providers, with 67% seeing this as an important opportunity for their business. Key motivations include keeping audiences on platform, differentiating content offerings and/or overcoming a lack of in-house content assets and capabilities. Third-party premium OTT providers are also interested in partnership strategies, alongside direct-to-consumer distribution, to gain access to pay-tv subscribers, leverage operator billing relationships and access marketing support. However, not all pay-tv providers are attracted to premium OTT partnership opportunities some operators are expected to leverage premium content rights and large scale to support their own on- and offplatform premium OTT video services. At present, partnerships are ad-hoc, with operators providing resource to integrate selected third-party apps onto their set-top box platforms, and in some cases providing marketing and billing support. However, some industry participants expect operators to shift towards a marketplace model, in which operators aggregate an array of third-party premium OTT apps and add value through packaging, UX design, billing, customer support and marketing. Going forwards, operators will need to develop new skills and capabilities as they become more involved in the provision and aggregation of premium OTT offerings investing in new user experiences, innovative pricing and OTT distribution capabilities. Over 90% of industry participants believe providing an integrated user experience across platforms and offering service through mobile and tablet devices will become increasingly important success factors. For operators pursuing a premium OTT partnership strategy, the ability to provide ease of integration, high-performance set-top boxes, and offer access to supporting tools and services will also become critical differentiators.
Profiting from the OTT explosion 2 Contents 1 Introduction - exploring the future of premium OTT video... 3 2 Prospects for growth in premium OTT video service provision... 4 3 Operator strategies for premium OTT video... 7 3.1 Strategic context opportunities and threats for operators... 7 3.2 Prospects for partnership between operators and OTT providers... 9 3.3 Go it alone strategies... 10 4 Implications for operators... 10 4.1 Success factors for partnership strategies... 10 4.2 Success factors for premium OTT services... 11 5 Prospects for industry participants... 12
Profiting from the OTT explosion 3 1 Introduction - exploring the future of premium OTT video In May 2015, Nagra commissioned MTM to explore the prospects for premium OTT offerings in advanced pay-tv markets. The research programme explored industry perspectives on: Growth in the supply of premium OTT video services over the next 3 years and the drivers and barriers for these offerings Operator strategies for premium OTT video The opportunities for pay-tv providers to partner with premium OTT providers The major success factors underpinning premium OTT services and partnership models, including technology, product and commercial factors. The research was structured around two main components: An online survey of 90 senior industry participants. Respondents were primarily operators (cable and satellite pay-tv, telecommunications), standalone premium OTT service providers, and pay-tv broadcasters. The sample included respondents from 31 different countries across Europe, North and South America, Asia, Africa and the Middle East. A programme of qualitative in-depth interviews with a cross-section of industry participants, including pay-tv operators and standalone premium OTT service providers. The interviews were used to explore views on industry developments and emerging opportunities. Unless otherwise attributed, all quotations in this document come from these interviews. Inevitably, this paper provides only a partial view of a highly complex industry and a challenging set of issues. Unless otherwise noted, all data comes from MTM s survey of industry respondents. The views expressed within this paper are solely those of the authors and do not necessarily represent the views of the interviewees and contributors. All interviews were completed under the Chatham House Rule. Any errors or mistakes are entirely the responsibility of the project team. MTM and Nagra would like to thank the contributing companies for their input and insights.
Number of pay-ott services Small Large Profiting from the OTT explosion 4 2 Prospects for growth in premium OTT video service provision OTT is developing rapidly in most TV markets around the world, but is starting to mature in some advanced markets. At a high level, premium OTT territories cluster into three main groups: Nascent OTT markets - highly populous, fast growing economies with rapidly improving fixed and/or mobile infrastructure, and less mature pay-tv markets. Premium OTT services are still developing Accelerating markets - various types of economy with relatively well-developed infrastructure. Strong expectations of premium OTT launches by international and local providers in coming year Advanced markets - advanced economies with strong infrastructure and relatively mature, low growth pay-tv markets. Major international providers and local incumbents have already launched premium OTT services Exhibit 1: Expectations for development of the premium OTT video market over the next 3 years 1 1. Nascent 2. Fast growing 3. Plateauing 4. Consolidating Few if any services available Rapid growth as an increasing number of providers launch services to capture market share Providers focus on investing in existing services to grow their user base Market approaches saturation, barriers to entry increase and providers seek to consolidate = present = in 3 years Nascent OTT markets Brazil, Indonesia, Malaysia, Nigeria, South Africa, Turkey Accelerating OTT markets Australia, Argentina, Germany, New Zealand, Russia, UAE Advanced OTT markets France, Norway, Sweden, Singapore, UK, USA Average number of premium OTT launches expected per territory over the next 3 years: Growth in industry investment expected over next 3 years (indicative): 5 5 3 75% 70% 60% 1 Note: Within each cluster, individuals expressed a wide range of views about future growth
Profiting from the OTT explosion 5 The nascent markets represent a major new wave of industry growth, which many industry participants expect to follow a more mobile-centric trajectory than advanced markets: We expect massive and quick growth. Last year would have been too soon for OTT, but now broadband is in place. In a year or two, the telcos will launch services regionally and Netflix will come. Exhibit 2: Expected proportion of premium-ott service launches made up by each category What proportion of premium OTT services launched over the next three years do you expect to fall into the following categories? 25% 23% 28% 19% 6% Standalone OTT services from pay- TV operators Linear pay-tv services delivered OTT to hybrid platforms Standalone OTT services without pay-tv backing OTT services from broadcasters Other premium OTT services Pay-TV operator services Third-party services Industry participants expect a growing range of premium OTT services to emerge, leading to a diverse and highly competitive environment. Over the next three years, industry participants expect: Pay-TV operators to offer TV Everywhere (TVE) services, off-net services targeting new customer segments, and new premium OTT services to super serve customers on set-top box platforms. 80% believe that pay-tv operators will increasingly use linear premium OTT services to offer higher quality content formats (e.g. 4K) and additional services to supplement their linear broadcast Growing competition from an increasing range of third-party premium OTT offerings, from standalone players and major broadcasters - in general, positioned distinctly from pay-tv service providers premium packages, with limited overlap with sports and first window film and television content. At least in their current iterations, these services are perceived to be relatively complementary to most operators packages
Profiting from the OTT explosion 6 Exhibit 3: Key enablers of growth in the supply of premium OTT services 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Availability of rights to greater range fo content Most important Consumer uptake of high speed internet Improvements in internet speeds Bundling from pay-tv providers Greater confidence in anti-piracy technology Rising consumer disposable incomes Least important Not important at all Neither unimportant nor important Very important Not very important Quite important Increasing availability of digital rights and the roll out and uptake of high speed broadband connections are believed to be the most important drivers of growth in supply of OTT video services. Bundling of premium OTT services by operators, the stimulus provided by new entrants and confidence in anti-piracy technology are also seen as important by the majority of respondents. Exhibit 4: Key enablers by type of market Nascent OTT markets Accelerating OTT markets Advanced OTT markets 100% improvements in internet speeds 90% increased availability of digital rights 89% increased availability of digital rights 93% increased consumer uptake of highspeed internet 84% increased consumer uptake of highspeed internet 89% bundling from pay- TV providers 86% bundling from pay- TV providers 79% improvements in internet speeds 83% new market entrants In nascent OTT markets, improved infrastructure is seen to be the most important enabler of growth, and the current lack of infrastructure is seen as an important barrier especially in Africa, where fixed infrastructure is generally limited. Lack of high-speed broadband also restricts service providers access to rights: Studio agreements limit our use of low quality streaming. At the moment, OTT does not allow us to stream content in sufficient quality.
Profiting from the OTT explosion 7 Growth is also impeded by demand-side barriers, such as a lack of consumer willingness to pay for OTT content in some markets 77% rated this as an important barrier, with high ratings in Brazil, Italy, Germany, France and Russia. Interviewees believed that this was caused by three main factors: 1. The development of highly competitive converged telecoms/pay-tv markets in which IPTV services are bundled with broadband, driving down prices of television packages 2. Entrenched free-to-air TV model in markets such as Germany and the Middle East, limiting demand for pay-tv and OTT content 3. High levels of piracy in some regions (e.g. Russia, South East Asia): Our competitor is not the pay-tv operators. It s piracy. In this region there is no history of paying for content at all. 3 Operator strategies for premium OTT video 3.1 Strategic context opportunities and threats for operators In general, operators perceive premium OTT video as an opportunity to improve the performance of their core business and, in some cases, to target new customers off-net or out of footprint. Key opportunities for pay-tv operators include: Improving the KPIs of the core pay-tv business. OTT is seen as a natural extension of triple and quadplay bundling strategies adding OTT video to these bundles provides customers with value add, increasing stickiness and switching costs and consequently decreasing churn Keeping customers on platform. As pay-tv and telecoms markets become more competitive, many operators see premium OTT services as an important means of defence, helping them to meet customer expectations and retain viewing on platform Targeting growth off net. In some cases, major pay-tv operators are more ambitious, seeing off-net premium OTT services as an important opportunity to target new audience segments and drive incremental growth Importantly, industry thinking is changing, and in many cases operators are starting to see the evolution of their on-net business models as an important opportunity (e.g. developing partnerships with third-party OTT providers to provide through-the-middle services and leveraging customer knowledge to support targeted advertising and other models). Cable operators and telcos rated these opportunities as highly important, relative to satellite pay-tv service providers.
Profiting from the OTT explosion 8 Exhibit 5: Perceived importance of premium OTT video opportunities Category Improve KPIs Opportunity Perceived importance Increase customer satisfaction 4.8 Reduce customer churn 4.4 Enhance brand image 4.3 Category average 4.4 Most important category Grow ARPU 4.0 Defend Capture share of viewing across mobile devices 4.2 4.2 Grow business Attract new audience segments 4.3 Provide a new channel to market 3.7 4.0 Evolve business models Bring third party OTT services onto your platform 3.8 Leverage increased customer knowledge to target advertising Leverage increased customer knowledge in other ways 3.7 3.7 3.7 Key difference by type of operator: Cable operators and telcos 4.2 Satellite pay-tv service providers 3.6 Scale: 1 = least important 5 = most important However, at the same time, industry participants, especially cable operators and telcos, are concerned about the threat of increasing competition from premium OTT, especially the danger of losing competitive advantage and viewers to off-platform premium OTT services. The risk of disruption to established business models by disintermediation of the linear channels model and migration to an al carte model are also rated as important. Exhibit 6: Importance of premium OTT video threats for different types of company Category Threat Perceived importance Category average Increasing competition Greater overall competition for viewers time on any platform Losing competitive advantage to standalone OTT players Losing competitive advantage to pay-tv bundlers 4.1 3.9 3.7 3.9 Most important category Changing business models Channels no longer the main aggregators of content Consumers buy content à la carte directly from broadcasters 3.9 3.8 3.9 Changing industry economics Rising price of some types of original content 3.7 3.7 Key difference by type of operator: Cable operators and telcos 4.0 Satellite pay-tv service providers 3.6 Scale: 1 = least important 5 = most important
Profiting from the OTT explosion 9 3.2 Prospects for partnership between operators and OTT providers Operators are becoming increasingly open to the idea of bringing third-party premium OTT services onto their platforms. 76% of respondents agreed that standalone premium OTT services are valuable potential partners for pay-tv operators and telcos. Operators are interested in carrying major international services (e.g. Netflix, Amazon Prime), the D2C offers of pay-tv broadcasters (e.g. HBO Go), local content (e.g. Tonton) and, in some cases, niche content (e.g. Hopster). Exhibit 7: Partnership strategies for on-platform OTT service provision NONE 1. Go it alone 2. Ad hoc integration 3. Marketplace Number of partnership with third-party OTT providers MANY Two-thirds of operators believe that bringing thirdparty OTT services onto their platform is an important opportunity Pay-OTT video services carried: = operators services = third-party services Our research identified three main partnership models (above). At present, most partnerships are ad-hoc, and in many cases involve only integration onto set-top boxes and some marketing support. However, many industry participants foresee operators increasingly providing distribution, billing and first-level customer support in future in some cases, providing a marketplace and/or selling packages of third-party OTT content and apps, in some ways replicating the linear channel aggregation model. Operators are pursuing partnerships for various reasons including keeping audiences on-platform, differentiating their content offers, and/or because they lack the skills and content assets to offer their own premium OTT services. Keeping audiences on-platform. Industry participants believe that consumers will subscribe to thirdparty premium OTT services in addition to pay-tv, and it is better to integrate these services and keep audiences on their platform: Consumers will find premium OTT services anyway. They will use OTT services regardless of their operator s strategy. Adding value to their content offer, helping to satisfy customer demand and to differentiate. Customer experience does not end with the video on our platform. We do want to open up the platform to selected partnerships, but we are not going to provide a totally open platform. Lack of scale, expertise and/or content assets. Some industry participants believe that self-provisioning premium OTT services is not feasible for smaller operators, with limited engineering and software development resource, and for operators lacking expertise in content including many telcos and cable operators.
Profiting from the OTT explosion 10 OTT providers are also starting to recognise the benefits of partnerships with operators, including distribution to the TV set and, in some cases, billing, marketing and customer support. We have shifted our strategy from go it alone. All the telcos were very keen to get their hands on our service. The benefits for us were billing on a monthly bill. We re talking to the big operators in the market. 3.3 Go it alone strategies One-third of respondents do not see bringing third-party premium OTT services onto their platform as an important opportunity. Operators are at different levels of acceptance of the partnership model. Some are still in a state of denial. Major pay-tv operators with access to strong content rights are well positioned to sustain a go it alone strategy, investing in their own on- and off-net premium OTT services. However, small-scale cable operators and telcos are likely to find a go it alone approach challenging to sustain because they lack the scale to efficiently develop their own premium OTT services. 4 Implications for operators 4.1 Success factors for partnership strategies Operators pursuing partnerships with third-party OTT providers need to be able to integrate third-party applications, offer a good user experience and, as the market transitions to marketplace models to provide supporting tools and services. Exhibit 8: Success factors for OTT partnership strategies Easy integration process Fast integration process, enabled by flexible platform and integration resource Scale to integrate once and deploy across multiple systems Good user experience High specification set-top boxes to optimise performance of applications Integration of apps into operator s user interface (e.g. navigation) Supporting tools and services Access to a range of supporting tools and services billing, customer support Off-platform support especially marketing and cross-promotion Interviewees believe that in increasingly competitive markets, the ability to quickly on-board third-party premium OTT services will be a priority enabling fast-moving operators to differentiate their offers: We need to be fast to integrate OTT services to stay ahead. It is important to have a flexible set-top box platform to integrate OTT services quickly. We need to be ready to integrate OTT services as and when they come along. However, in most cases integration of third party applications is a relatively slow, resource-
Platform and technology Product and model Profiting from the OTT explosion 11 intensive process. Third-party OTT service providers have finite resource to support integration and typically prioritise on the basis of expected ROI from the partnership favouring platforms that require lower resource or offer larger audiences. Operators also need to ensure that their platforms support a high-quality user experience for third-party OTT applications, which is challenging in cases where the operator has a fragmented base of legacy settop boxes: If the end consumers sees a slow loading version of our app, then that reflects badly on us. Operators need to be able to offer a user experience consistent with what users see on other platforms. As the market transitions to aggregator/marketplace models, operators will need to increase the range of services that they offer to third-party OTT providers, offering billing, customer support and packaging systems: In future, the offering sheet that we bring to third party OTT providers will include billing, ad insertion and customer support. Industry participants believed that these technology and operational challenges create strong economies of scale. The operators best positioned to succeed will be those able to standardise technology across multiple systems and territories, offering third-party services a build once, launch anywhere approach. 4.2 Success factors for premium OTT services Key hygiene factors that are important to the success of premium OTT services include an integrated user experience, multi-platform distribution and strong content protection. Product and pricing factors are also rated as important. Exhibit 9: Success factors for OTT video services, by level of importance Provide innovative pricing options (e.g. day passes) Appeal to a broad range of audience segments Bundle third party OTT services with your own service Own and produce your own content Offer service through a mobile/tablet app Provide an integrated user experience across devices Possess a best-in-class content protection system Possess a fully cloudified back-end technology Offer service through a set top box Offer customers the ability to cast programmes Offer service through a smart TV app Low Importance High 2.5 3.0 3.5 4.0 4.5 5.0 Scale: 1 = least important, 5 = most important Key differences by type of operator: Cable and telcos give high importance to bundling third-party OTT services (4.2) compared to satellite pay-tv service providers (3.8) Satellite pay-tv service providers give high importance to the ability to cast programmes (3.8) compared to cable operators and telcos (3.4)
Profiting from the OTT explosion 12 Interviewees believe that the ability to cast from devices to TV screens (e.g. Chromecast) and smart TV distribution will become more important in future, as uptake of relevant devices increases. Overall, industry participants anticipate a highly-fragmented distribution environment, in which app store distribution becomes increasingly important: 49% of respondents believe that app stores will become the main channel for customer acquisition for premium OTT services. Pricing innovation is also seen as an important, especially in nascent markets where willingness to pay for content is low and flexible pricing models (e.g. day passes) may help to stimulate uptake. Perhaps surprisingly, production of content and ownership of content rights are seen as relatively less important. However, interviewees believe that local content is important to meet local demand, especially for services seeking to differentiate from Netflix: Netflix has been hugely successful in English speaking markets. They have struggled a little more in Latin America, Germany and France where they have not moved as quickly to localise. 5 Prospects for industry participants Industry participants believe that the development of the premium OTT video market will benefit different categories of player. Standalone OTT service providers, producers of premium content and telcos are expected to benefit the most from the growth of premium OTT video services, while pay-tv operators and multichannel broadcasters are expected to benefit less. Exhibit 10: Who will benefit most from the development of premium OTT video services? Independent standalone premium OTT services Producers of premium content Telcos/broadband providers Multichannel broadcasters Traditional pay-tv operators Publically funded broadcasters Advertising funded broadcasters 1 2 3 4 5 1 = least benefit, 5 = most benefit
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