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Making the most of the OTT opportunity

While OTT revenues are growing fast driven by both subscriptions and advertising, the key driver of that growth is yet to emerge, writes Andy Fry.  

Analysts agree that OTT revenues are growing fast. Digital TV Europe, for example, forecasts that the market will hit US$65 billion in 2021, more than double the figure in 2015. This growth, says DTVR, will be driven both by subscription video on demand (SVOD) and advertising video on demand (AVOD) revenues.

What’s less clear, however, is which companies stand to benefit from this expansion. In terms of SVOD, there are two likely winners – Netflix and Amazon. Although there are concerns about the amount they spend on premium content, the rapid international roll-out of their video services puts these two in poll position to benefit from an SVOD market that is expected to double by 2021 (Juniper Research).

As for AVOD, the two obvious winners are Google/YouTube and Facebook. According to Morgan Stanley, 85 cents on each incremental dollar spent on AVOD goes to these two industry giants.

For the rest of the business, “whether OTT is a true monetisation opportunity depends on who they are,” says Park Associates director of research Brett Sappington. “For some, OTT is more likely to be about brand extension – though even this can also be a step towards achieving OTT revenues.”

Looking first at PayTV platforms, OTT initially appears to represent a threat to monetisation – since it enables consumers to churn out of big channel bundles and sign up to lower cost services: “But leading players have responded by getting into the OTT space,” says Sappington. “Sky’s entry into OTT with Now TV is clearly driving revenues because they’re extending it from the UK into markets like Germany and Italy.” Confirmation of this came with Sky’s latest six-month financial results, which reported record NOW TV sport revenues.

Changes in consumer behaviour mean Sky is also able to target OTT-style revenues within the confines of its existing service.

It’s not just Now TV that is working for Sky, either, says Sappington. “Changes in consumer behaviour mean Sky is also able to target OTT-style revenues within the confines of its existing service.” As case in point is transactional service Sky Store, which – in the context of the Sky Q platform – offers premium content to consumers in the same interface as the content they have already subscribed to. In other words, if they can’t find a film they want to watch, the option of buying a new title is suddenly extremely easy. No surprise then that Sky Store revenue has doubled in the past two years (£89m vs £54m).

Sky, generally very intuitive, doesn’t make it obvious how Sky Q subscribers can access Netflix. But other PayTV platforms have decided that the way to drive OTT revenues is to incorporate Netflix in their mainstream offering, says Sappington. “Liberty Global is a high-profile example. In September, they announced that Netflix would be integrated into the usual TV viewing set up in more than 30 countries.

There’s no detail on the revenue breakdown of that arrangement but we can assume that it makes financial sense for both sides.” This view is partly based on the fact that Netflix is already integrated into Liberty Global-owned Virgin Media platform in the UK, adds Sappington.

Ampere Analysis research director Guy Bisson shares the view that Netflix is an OTT winner – but is more cautious about how to characterise PayTV’s prospects: “Netflix is on a strong course, irrespective of whether it is bought by a major studio or not. But with PayTV platforms, the situation is more that they have to shift in the direction of OTT to stay competitive.”

Like Sappington, he points to Sky’s Now TV and Sky Store figures and the integration of Netflix into cable platforms as indicators that PayTV players are seeking to remove the old distinctions between linear TV and online/on-demand. But how well they do in the long-term is still an open question: “If they play their cards right, there is an opportunity for PayTV players to remain as the key aggregators of content. But it would be naïve to suggest there isn't a threat to their business models.”

When we explore the OTT ambitions of the channel owners that sit within PayTV ecosystems, Sappington says the monetisation vs brand extension equation is more complex. “I think for the likes of Disney and Viacom, the future is all about sustaining the strength of their channel and content brands, so monetisation and brand extension are closely related.”

As with PayTV platforms, a potential downside for these players is that consumers switching to OTT services may mean a reduction in carriage and ad revenues. It’s interesting to note, for example, that Discovery and Sky are at war over the correct value of the former’s content. With a blackout of Discovery’s channels a real possibility at time of writing, CEO Jeremy Darroch released a statement in which he criticised Discovery for “misleading claims and aggressive actions”.

Explaining why Sky is unwilling to meet Discovery’s valuation, Darroch says Discovery’s share of linear viewing has been “down significantly now for an extended period of time. They asked the Sky Group to pay close to £1bn for their portfolio of channels, many of which are in decline. Sadly, we have now had to prepare for Discovery to take their channels away from Sky customers, as they have threatened to do.”

This dispute may yet resolve itself with a contract on contract price increase for Discovery. But even if it doesn’t, large companies with compelling content do have other options. Disney brands, for example, are popular with companies seeking to launch OTT skinny bundles into the PayTV market.

AT&T DirecTV recently signed up ESPN, ESPN2, ABC, Freeform, Disney Channel, Disney XD, and Disney Junior for its DirecTV Now OTT service, which launched in the US in November. In terms of programme sales, platforms like Netflix have also become important purchasers of Disney content (eg the current run of Marvel-based shows, such as Daredevil).

Bisson believes leading channel operators need to engage with OTT at multiple levels. “Linear channels still account for lot of the viewing market, but it is essential the main players introduce SVOD as part of their portfolio of services. That’s why we are seeing the launch of services like Disney Life in the UK. NBC Universal is also moving this way with services like Seeso (US comedy service) and Hayu (UK reality TV service).”

Bisson sees services like these as business units with monetisation targets. “But there is also a brand-building dimension to OTT which involves reaching young audiences through social video platforms like YouTube and Snapchat.”

Some major players have talked up the potential of dynamic ad insertion in the context of OTT, which makes it easier to swap ads in and out of the content to achieve better targeting. One is Disney CEO Bob Iger who told analysts in the autumn that: “There are (advertising) opportunities that ... will be new to us on OTT platforms because some of the technology platforms will offer dynamic ad insertion. We think that that has got real potential for the company.” Ampere’s Bisson, however, believes the industry has yet to address a “fundamental problem”, which is that audiences are getting used to content uninterrupted by ads thanks to the shift to on-demand.

While a lot of focus is on the way PayTV manages the emergence of OTT, Brightcove VP EMEA Mark Blair believes a more natural beneficiary is the free-to-air TV sector: “FTA broadcasters have historically been constrained by spectrum, so OTT changes that. Channel 7 in Australia recently simulcast 16 courts during the Australian Open, which suggests revenue models based around dynamic ad insertion or subscription.

By contrast, PayTV’s big challenge is to keep filling up their extra capacity to justify the large subscriptions they charge. So I’m not sure OTT is economically additive for them. They may do some upselling but it’s more about stemming cord cutting.”

Blair believes there is also scope for local challenger brands to Netflix and Amazon, such as Fairfax/Channel 9’s Stan in Australia “but not too many. Foxtel’s Presto closed down, suggesting a limit to what individual territories can bear.”

One big unknown in this OTT expansion phase is the scope of the revenue-generating opportunity for independent or niche content creators. Clearly, there is money to be made from selling individual shows to platforms and networks. But is there room for niche aggregators like Acorn TV, or content owners that want to sell their shows directly to consumers? Bisson calls it “extremely difficult”, stressing that the prevailing industry view is that the “low value, long tail won't work for many”.

Blair is more optimistic, anticipating that the market will move towards niche video services. “I can envisage yoga channels or property/DIY channels, available in your living rooms via connected TVs. But it might require new business models, for example, is sponsorship or memberships. A fitness channel might be made available to people with a gym membership.”

Brightcove does, however, recognise this market is tough. In a recent white paper, it stressed the need to reduce “cost and complexity”.It is working on a series of advances that it claims will improve user experience, increase revenue potential by up to 50% and reduce operational costs by the same margin.

Clearly, one big driver of OTT democratisation will be a shift from PayTV-centric set-top boxes towards agnostic STBs, connected/smart TVs and Google Chromecast-style accessories. Another will be simplified payment models for cord cutters.

Right now, consumers are reluctant to quit traditional PayTV bundles and replace them with multiple providers that offer disjointed user experiences, disparate billing arrangements and costs that add up fast.

Sappington says the likely solution is companies that can be ‘the aggregator of aggregators’. Amazon’s Streaming Partners Programme is an early example, allowing Amazon Prime members to add services like Showtime and Starz to their portfolio within a simplified payment model.

Clearly, there is a risk in all of the above that pursuing OTT revenues may have an adverse impact on existing revenue streams. But as the late Apple CEO Steve Jobs once observed: “If you don't cannibalise yourself, someone else will.”

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