PayTV vs. OTT part VII: 6 OTT Strategies

Pay TV vs. OTT:

Part I: The business models
Part II: Managed devices and services vs. OTT
Part III: CE vendors and companion screens
Part IV: Clash of the titans

Part V: Appointment vs. on-demand

Part VI: 5 MSO strategies

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

enter the discount code OTT_CORE here for a 20% discount

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.

PayTV vs. OTT VI: 5 MSO strategies

5 MSO strategies

If you haven't read the other posts in this series, you can find them here for context.

Pay TV vs. OTT:
Part I: The business models
Part II: Managed devices and services vs. OTT
Part III: CE vendors and companion screens
Part IV: Clash of the titans
Part V: Appointment vs. on-demand

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

enter the discount code OTT_CORE here for a 20% discount

There are a few strategies that have been enacted by MSOs to counter the erosion of their margin and viewership brought forward by OTT.

1.     Vertical integration

As control of the value chain shifts from distribution to content, it is only natural that some MSOs start to look upstream and concentrate channels, studio and production with distribution in order to regain a dominant position in the value circle. As an example, Comcast owns NBC Universal, which owns the MLB network (in a joint venture with MLB) and the Philadelphia Flyers. In one company you find premium content, production, channel and distribution.

This strategy allows to control the content, with either exclusive or preferential rights for distribution, which enables a captive audience and in return higher advertising revenues, as long as the content remains popular.

2.    Multiscreen

This strategy allows MSOs to offer a portion of the live and on-demand TV programming available to mobile devices (smartphones, Tablets, Phablets…) and hybrid devices (hybrid set top boxes, video game consoles, PCs,  smart TVs…). In this context, while the medium of delivery is still the internet, it is not a true OTT play. To access the content, the user must authenticate herself as a MSO subscriber. This strategy enables MSOs to “spill out” of the traditional TV screen and to offer programming on a growing medium that is favored by younger generations. Verizon’s FiOS is, for instance available on cable, internet, on ipad, on LG, Samsung TVs and on Xbox and Playstations. This strategy is one of retention, where, recognizing that consumers want to watch in a more flexible manner, it is made available on a variety of new devices, included in the regular subscription. This is about keeping people loyal to the MSO programming, countering pure OTT by offering an OTT-like experience. The strategy has not proven to increase revenue, as it is usually included in the regular subscription. It is used to reduce churn and increase loyalty.

3.    Social TV

As Facebook, Twitter, LinkedIn and other social media become part of our daily life, new usage patterns have emerged. Social TV is such a trend, where content success relies on recommendations, likes and sponsoring.

Popular content can, in days become viral and amass millions of views. Psy, a South Korean rapper became an overnight internet celebrity, with over a billion views in six months on its YouTube channel with the release of “Gangnam style”. The virality effect is hard to predict or influence, but live TV, particularly sports and game shows are well suited for audience social interaction. By creating interactivity, content becomes simultaneously more popular and more “sticky”, as consumers watch more and longer shows when there is an emotional connection. MSOs have started to try and integrate apps for social networks in their managed devices in order to reinforce this engagement with users. The lack of standards across platforms has hindered this integration to date and Social TV remains more an experiment than a service at this stage. The strategy relies on the assumption that engagement drives viewership, which drives revenue.

4.    Going OTT

If you can’t beat them, join them. There are a couple of sub strategies here. The first one is to create a web site to serve content exclusively over the internet. For instance, Hulu plus, the joint venture between Comcast (NBC Universal), Disney and News corp. (Fox) allows its customers to watch ad-sponsored current and back catalogue TV show for a monthly subscription.

A second strategy is to package a channel as an internet content provider. For instance, it was announced in October 2013 that Comcast is launching a new plan for cord-cutters and cord-nevers, offering Xfinity Streampix, HBO and HBO Go together with broadband for $39.99. A US Comcast customer will be able to watch HBO over the web on their broadband subscription without having to be a cable customer. The FCC (US regulators) mandates that premium channels have to be bundled with basic broadcast, so that's in it as well, but this is a clear tipping point moment. For the first time HBO is going head to head with Netflix, going pure OTT. The implications are profound and it is a floodgate moment. On one hand, Netflix has now more subscribers than HBO, which prompts Comcast to start the self cannibalization. If you are losing subscribers, you might as well lose them to yourself and a friendly content provider rather than a competitor.

Verizon’s Redbox instant is another example of a Netflix me-too strategy relying on monthly subscription.

5.    Cost reduction

The last strategy implemented lately has been about creating the infrastructure necessary to deliver a massive amount of video, securely with high quality. While MSOs have traditionally relied on third party infrastructure, Verizon has recently innovated with the acquisition of EdgeCast in January 2014. By purchasing the CDN, the MSO will be able to reduce its delivery costs, while controlling user experience and offering wholesale service to other MSOs and OTT alike.

What's in store for 2014: wholesaler or value provider?

First, happy new year to all my clients and readers out there in the blogosphere. Thanks for your continuous support, comments and readership.

For those of you who have been reading the news lately, we have seen a couple of events over the last months that, in my mind will amount to a watershed moment in the OTT video market space.

Consider this:

1. Comcast allows HBO to become fully OTT and to offer HBO Go to Comcast broadband subscriber WITHOUT a cable subscription.
2. Verizon buys Edgecast, rumors follow of AT&T in discussions with Akamai.
3. Netflix pilots new price models.
4. Comcast and Nielsen work together to monetize VOD with advertising insertion and audience measurement.

These are just but a few of the headlines that grabbed my attention. The market is changing fast and the quest for viable business models is accelerating.

Content providers, creators, aggregators:

OTT video content providers are reaching a stage of maturity where content creation / acquisition was the key in the first phase, followed by subscriber acquisition. As they reach critical mass, the game will change and they will need to simultaneously maximize monetization options by segmenting their user base into new price plans and find a way to unlock value in the mobile market.

Network operators:

I was recently conducting a workshop with a large tier 1 group of network operators and the problem was acutely perceived. On one hand, current video quality in mobile networks (even LTE) is not sufficient for video monetization, furthermore, the various regulators are enforcing unfair constraints under the cover of net neutrality, fundamentally misunderstanding the balance of forces between network operators, content providers and device vendors. On the other hand, video behaves differently from the rest of the data traffic and must be managed in order to provide a good user experience for most users.
Network operators have failed so far to provide an enticing OTT experience (video or voice or messaging) and are likely to fall into two categories in 2014.

Wholesaler or Value provider?

Our industry, with  its stiff regulations is ill-equipped to protect the value and the jobs provided by network operators worldwide. Companies coming from the web and the broadcast industry are more likely to succeed in mobile nowadays. They have the advantage of a more flexible range of business models, little to no barrier to entry, as the infrastructure is guaranteed and provided by network operators and have the control of the value and delivery chain as long as they control the content.

As a wholesaler, network operators can still offer a variety of services and value to content providers / aggregators (see my cartoon video here). But they have to accept and internalize their role as a network specialist, to provide value by categorizing traffic and consumers and opening up APIs to allow more control over the experience to content providers.Obviously, the game, here is to run the network as efficiently as possible, as close to capacity as possible and to generate margin on volume, rather than services.

For those network operators who want to have a more active role in the value chain, there is a path, but it requires some profound changes in its organization and mindset that I am not sure many can muster. It requires first forging relationship with content providers and aggregators. The mistrust between the entities is not lost on Verizon and it is a large reason why they are buying a CDN. Content providers have no issue letting CDNs package, encode, encrypt, ad insert their content but have huge objections letting network operators do so. Network operators have a fantastic opportunity, though, when it comes to tailoring content and services for their subscribers, according to their subscription, location, device, etc... The second step revolves around advertising. There is much that can be said here and I will expand on these themes in 2014.

I want my... I want my HBO part II

Our second story this week is local. Canada's regulator, the CRTC (Canadian Radio-television Telecommunications Commission), has started consultations to un-bundle TV channels for cable and satellite payTV. In essence, the regulator asserts that TV bundling of channels might be consumer-adverse and that forcing someone to pay for basic cable/satellite + digital channels + movie package + HD + HBO in order to watch Game of Throne is not in the consumer's best interest.
Already both sides of the discussion are engaging in strong arguments. On one hand, it is true that bundling has allowed consumers to discover new content that might not have been their initial choice when selecting their channel line up. In many cases, you are drawn to a new show or a new series by a combination of peer recommendation, preview / advertisement and pure chance. If you did not select the channel to start with, you are removing a large part of the discovery opportunity and I do not see how that can benefit the consumer , the programmer or the announcer. There are already rumors that some US channels could just pull out of Canadian airwaves rather than bend to Canadian pick-and-choose TV which could set a precedent in the US.
On the other hand, TV bundling and prices have gotten out of hand in Canada. It is not unusual to pay over 100$ per month for TV programming which is a high price if, when all is said and done, you watch in average maybe 15 channels in your fixed rotation. Unbundling could certainly cut dramatically in cost to the consumer if they are allowed to select their channel individually rather than in bundles. That's if the MSOs practice a fair price, which is a big if in Canada. Coopetition has been the operating model rather than aggressive competition and prices for unbundled channels could end up being more expensive than bundled, which would end up damaging the consumer's wallet, angering the US right holders and precipitate OTT exodus.

I am in favor of unbundling, but it has to be done in a very careful fashion. It can be beneficial to the consumer only if:

• It leads to more choice rather than less (US channels need to stay)
• It is easy to add and remove channels, with no subscription longer than month to month and no penalty.
• Individual channel selection is not sub-bundled (you have to subscribe to channel x in order to pay extra for channel xHD). I should be able to select only HD channels if I want and not have to carry both SD and HD. It is ok to pay more for HD than SD.
• Catch up TV, time shifted and a la carte one demand offering could be bundled with individual channels (for instance, AMC SD 1$, HD 1.5$ with on demand 3$...).
• It is ok to have public programming as a bundle part of the basic subscription package.

In this manner, the successful channels will reap the bulk of the consumer money, but special interest channels will still reach their audience. Channels that have no audience will not be artificially sustained by bundled package. Channels will be able to compete on a series by series, show by show, encouraging original programming and exclusive rights, allowing true competition for premium content.

These two stories illustrate perfectly the risks and opportunities of OTT vs payTV. The business models are not settled yet, major players are announcing new moves every week. It is an exciting time to work in this industry.

I want my... I want my HBO

Two pieces of news caught my eye over the last week that spell in my mind both a vindication and a perfect example of the seismic changes being experienced in OTT and payTV landscapes in North America.

The first story is in the US. As I was mucking around provisioning my new car's hard drive with my eclectic music collection earlier this week, my son stumbled upon an old time favorite and I was elated to witness his discovery of Dire Straits' "Money for Nothing". As we were happily singing I want my.... I want my MTV, I was reminded of a post I wrote two years ago, musing about when HBO would be able to go direct to customer in North America.

It seems my question was answered this week, with Comcast launching a new plan for cord-cutters and cord-nevers, offering Xfinity Streampix, HBO and HBO Go together with broadband for $39.99. A US Comcast customer will be able to watch HBO over the web on their broadband subscription without having to be a cable customer. The FCC (US regulators) mandates that premium channels have to be bundled with basic broadcast, so that's in it as well, but this is a clear tipping point moment. For the first time HBO is going head to head with Netflix, going pure OTT. As I am moving to my new house next month, This had me rethink my TV strategy and I am certainly going to wait and see what trickle downs in Canada. Increasingly, I am thinking of upping my broadband subscription and shaving as much as I can if not cutting outright my Cable / Satellite subscription.

The implications are profound and it is a floodgate moment. On one hand, Netflix has now more subscribers than HBO, which prompts Comcast to start the self cannibalization. If you are loosing subscribers, you might as well loose them to yourself and a friendly content provider rather than a competitor. 
You will read about the second story tomorrow.

Pay TV vs OTT part IV: clash of the titans

We have reviewed and discussed at length (here, here, and here) the fundamental changes that OTT is causing to the pay TV market. As consumer electronics vendors become content aggregators and as more screens get now directly connected to the internet, there is less and less value in a set top box that is an exclusive managed device from your MSO.

Service providers themselves are ambivalent about the box. It used to be the main tangible asset that MSOs marketed to "own" a subscriber relationship, with a safe environment allowing transactions, access control and digital rights management to monetize live and on demand programs.
Lately, it has looked increasingly like a ball and chain that MSOs have dragged, a costly installed base, slow to evolve and adapt to the latest technologies, incapable of competing against better services and cost structures evolved from OTT.

Microsoft, in the latest incarnation of its XBox Live service, has brokered deals with several dozens of content providers beyond existing Hulu and Netlix and  is launching today. More interestingly, Verizon FiOS, Comcast Xfinity and HBO are also part of the package... as OTT apps. The XBox is already a high-density, high-performance gaming and multimedia environment to play online games and stream video. Adding live TV and VOD makes sense and makes the set top box completely redundant. Microsoft innovates by integrating Bing, its search engine, the Kinect, its haptic motion recognition device and voice, with the EPG (Electronic Programming Guide) of the programmer. You can literally search y voice for a show, an actor, a director and see the results aggregated on your screen from various sources.

While you still have to be a Comcast or Verizon cable subscriber to avail of the services in the states, the writing (or rather the screen) is on the wall.

This experiment will no doubt cast a new light on the 35 million XBox live accounts, putting Microsoft firmly shoulder to shoulder with Google's TV efforts (and Motorola's set top boxes) and the next generation of Apple TV.


Soon will be a time when subscribers will buy access from their ISP independently from aggregation and content. Channels and MSOs will compete across new geographies on unmanaged devices, across unmanaged networks. New generation of apps will enable you to discover, access and curate content from your local media servers, the cloud and your traditional providers and present the result on the screen you elect. There is no technological or logistical barrier any longer. The business model of pay TV, subscription, advertising is undergoing changes of seismic proportions.