Pay TV vs. OTT part I: the business models

I have been working for the last few months on the Pay TV, OTT and connected TV market. It is a space I find fascinating, with a lot of new trends and activities, very similar to the mobile handset market before the mobile broadband revolution. I figured I would share with you some of my findings about its dynamics and challenges.


Market size and dynamics
 Pay TV

Pay TV is defined as the market space where service providers (Time Warner Cable, Comcast, BBC, Canal Plus, Sky...) sell subscription access to TV content (channels) and services (pay per view, video on demand, electronic programming guide, catch up TV...) to subscribers and advertising to announcers.


TV content is created by studios and content creators and sold to channels and content aggregators.
In 2010, according to Strategy Analytics, it is a market that generated nearly 400 billion dollars globally, about half from advertising and half from subscription and services in 2010. These $400B were split approximately 1/3 to service providers, 1/3 to content aggregators and 1/3 to content owners.


 Over -The-Top

Recently, many content owners and aggregators have surfed on the wave of technological advance spurred by the increase in fixed broadband, mobile consoles, web boxes and connected devices penetration.
These content owners distribute their content on the web, directly to the consumer. Netflix, Hulu, Youtube,  HBO, BBC, NFL, etc... are the better known brands but there are new global and local players diving in every day. 


The fundamental difference in this model, is that the content owner just needs the consumer to have a screen (TV, mobile or PC), a connection (mobile or fixed broadband) and if the screen is not connected, an access gateway (set top box, router, net box, game console) to sell its content and services.
While this market is much smaller  (only about $8 billion in 2010), it is growing fast and threatens the revenue model of Pay TV in the sense that in this model, revenues are split approximately 60/40 respectively between content owners and aggregators. Nothing for service providers!


As you can imagine, the fear from service providers is that OTT starts cannibalizing their legacy revenue, as their current suppliers turn into fierce competition. In the next posts, I will look at the dynamics and competitive field in the ecosystem (devices, operating systems, app stores), as well as new trends in standards and consumer behaviors together with a few vendors and service provider strategies to take advantage of or mitigate these new threats and opportunities.