Wednesday, March 12, 2014

PayTV vs. OTT part VII: 6 OTT Strategies

Pay TV vs. OTT:

More developments will be presented at Monetizing OTT services - London - March 24/26

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The internet is a perfect medium for content distribution. Storage, access, distribution is inexpensive, allowing the smallest content owners and producers to offer their wares with a small starting investment. For OTT vendors, this is both an opportunity and a threat. The long tail of the content usually find its audience through social media. Specialty content is at home on  the internet, thanks to the advances made in term of search and recommendation engine. The short tail content is pushed by advertising, rather than social interaction. The type of budget necessary to launch a new content can be staggering, as illustrated in the advertisement campaigns preceding new movies and video games. Content is king in OTT and there are a few strategies put in place by the different players in this segment to secure customers and revenue.

1.     Pay-per-view, rental, on-demand

Apple’s iTunes and Amazon on demand are perfect examples of OTT services. Without subscription, any consumer with a credit card can rent and stream content to almost any screen in minutes. Revenues are generated from the transaction. They are collected by the OTT player, which then apportion it to the studio / content owner and so on. It is the literal translation of the pay TV model on the internet. Here again, the control resides in the distribution. Apple and Amazon have been successful because they have an existing customer base that they had been able to convert. This captive audience is the equivalent of the MSO’s set top box.
Brands with a smaller footprint in term of device penetration have struggled to emulate this strategy. Sony’s “Video Unlimited”, available on its PlayStation and selected devices, has struggled to reach its audience, for instance.

2.    Subscription VOD

Inaugurated by Netflix, it has become the reference for OTT video. A monthly subscription allows consumers to watch as many shows as they want. Success in this model relies in both the depth and the range of the catalogue. Netflix had to have headline content to attract new users and enough of a long tail to keep them there. Most SVOD strategies are monthly subscription without commitment, so they traditionally experience high churn.

3.    Free to air

YouTube is the most successful OTT player with a free-to-air strategy. Acquired by Google in 2006, the web phenomenon attracts over one billion unique users each month [2]. Monetization of this strategy has been slow. Advertising is currently the main contributor, using Google ad platform, but YouTube has recently launched premium channels, allowing any channel with over 100,000 followers to go premium for as little at .99c per month. It is not yet apparent whether that strategy will be successful.
Adult content is the second largest OTT player in this category, monetizing premium content through subscription. A small percentage of their viewership base subscribes to premium and generates close to 4.9 billion dollars revenue globally.

4.    Securing content

If content is king, content rights are the crown’s jewel. Securing content that will attract and retain consumers is the principal occupation of OTT players. Studios and content producers now have new avenues for the distribution of their content, but as traditional Pay TV weakens in viewership, it still dwarfs OTT revenues. The most popular content can spur a viewership addiction synonymous with subscription and advertising revenue. It has become necessary for the likes of Netflix to secure access to content. In 2012, Netflix lost rights of diffusion of Starz, Encore and Sony catalogues over broken negotiations. Clearly, having your core value (content) submitted to third party control and threatened on a regular basis by the whims of negotiation is not a very good strategy for long term success. Increasingly, OTT players and channels have started acquiring and producing content exclusively in order to guarantee access, control and ultimately monetization of popular content.
HBO has, for instance, developed the series “Game of Throne”, which became an overnight critical and popular success, drawing fans to the network and becoming one of the most pirated series of 2012 [4].
Netflix has secured later a deal with Disney, valued at close to $300 million per year for Disney. This deal sees Netflix get exclusive access to Disney’s movies after their theatrical release. In 2013, Netflix doubles down and sign a follow on deal for exclusive Disney content “Agents of S.H.I.E.L.D”.

5.    Favoring binge watching

Consumers buying habit have changed durably, we have seen, but their viewing habits are also undergoing transformation. With the availability of whole back catalogue seasons of a series, binge watching has become a solid trend. Many viewers, when watching a streaming TV show are increasingly watching more than one show per seating. Detecting the trend early, Netflix strategy for the release of “House of cards” has been to release the full season at once, as opposed to a fixed schedule, favored by traditional TV. Netflix has since released a survey with Harris interactive showing that 61% of Netflix series viewers are binge watchers.

6.     Costs reduction

In the same vein as Verizon, Netflix has undertaken to control its delivery network. Unlike Verizon, it is not an acquisition but organic development that sees Netflix launch its own CDN called Open Connect in 2012. Recognizing that delivering massive amounts of video over the internet can be costly and unreliable at scale, major OTT players look at controlling the end to end user experience and leverage economy of scale from a dedicated network infrastructure. Common CDNs are perfect for general purpose internet content but their business model and quality start to be stretched to their limit when it comes to massive video delivery.

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