Wednesday, October 12, 2011

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.


James Childs said...

Great Summary - on target.

mahesh berwal said...

This is a great summary, TV world is transforming at a very fast pace.

Marc Healy said...

great info cheers

kojo sarkodee said...

Brilliant summary. Gives good insight to the revenue models and the dependencies.

Joseph said...

Very interesting, thanks. OTT could also be used to transporting video streams in a walled garden configuration in a similar business model as PayTV.

Joseph Lord said...

I think it is a wrong assumption that the OTT service providers will take no revenue. Samsung, Sony, Apple and anyone else able to create a big enough scale platform will expect revenue share. If they are doing billing for the content that is likely to be about 30% (like Apple does). If the billing is directly done by the content aggregator the service provider share will be half to a third of that.

It will obviously vary depend on the relative power and importance of the service and the platform but don't assume that the service provider will expect nothing just because some of the first deals may have been revenue free.

For pure web plays there is obviously no service provider but don't underestimate the importance of placement particularly within limited and restricted user interfaces that are suitable for lean back remote control interfaces.

Patrick Lopez said...


service providers in the context of the post refer to network operators and MSOs, not OTT vendors.