Ovum believes a new era of OTT entertainment is upon us. The competitive dynamics of the industry have changed and intensified.
- The emergence of pay-TV OTT (skinny bundles) from pay-TV (DirecTV Now) and digital media (YouTube TV, Hulu TV).
- Go-to-market strategies evolving as OTT service aggregation (Amazon streaming partners, Hulu/CBS) and bundling (AT&T/DirecTV Now) accelerates.
- As US and European SVOD markets mature, Asia-Pacific is becoming the key battleground. Vigorous competition from services such as iFlix, Hooq and Viu make Asia-Pacific a markedly tougher region for Netflix, Amazon, and local pay-TV operators to build OTT audiences.
- The improving capabilities of fixed and mobile networks to deliver live streaming video at scale, although this is an ongoing story for cellular networks which will continue to evolve with the launch of 5G networks.
- SVOD catalogues are improving, and not just Netflix’s. SVOD competition for content in the first pay window is intensifying in both mature markets (US) and in evolving regions (Asia-Pacific).
- Games streaming viewership is scaling, with e-sports attracting skyrocketing levels of sponsorship and starting to appear on traditional TV.
- Piracy has improved. OTT sports streams, Kodi boxes preconfigured for illegal content sources, and the quality of pirate hardware have all improved markedly in quality and in their ease of use for audiences who are not even slightly technically inclined.
The challenges contenders face:
Pay-TV service providers have already started segmenting their customers more effectively by introducing low-cost OTT pay-TV services and, in some cases, higher-end services to drive ARPU. OTT pay-TV market potential is constrained given that these services tend to address customers who have never spent with pay-TV previously, rather than convince existing subscribers to trade down (which would be a commercial disaster). The services are low cost in order to appeal to value- conscious customers who tend to churn aggressively and offer low to negative margins.
Broadcasters and channel owners face challenging traditional TV market conditions with widespread concern over the sustainability of commercial broadcast in the face of declining live audiences. There are opportunities in OTT and mobile from content licensing and, although challenging to realize, direct-to-consumer OTT services.
Flourishing on a long-term basis is dependent on production and ownership of original IP, using the reach of terrestrial broadcast to build audiences for these shows then distributing via OTT, exploiting as many release windows as possible. Commercial broadcasters must also determine their positioning for addressable advertising deployments by pay-TV service providers.
Telcos and operators are looking to address the cost of data transport for streaming entertainment across cellular networks. This is slowly being resolved through bundling and zero-rating (AT&T/DirecTV Now), however, this will remain an issue in many markets for some time to come. Addressing the constraint of mobile data charges for video is critical to driving usage and spending. Subscriber spending levels and the network economics thus enabled will ultimately determine the video monetization strategies available to the operator and partnered video services.
Online streaming service providers continue to proliferate globally with competition intensifying across Asia. Netflix and Amazon enjoy scaled economics way beyond what companies operating in single markets can muster. Looking ahead, SVOD services are examining aggregation strategies, bringing multiple OTT services together into a single consumer proposition, and partnering with telcos and operators to be bundled with broadband and mobile services. AVOD is a tough market which tends to be dominated by YouTube in many markets. There is growth potential in ad spending on commercial broadcaster catch-up services as measurement standards are increasingly addressed, but this has been a slowly growing segment. The challenge of encroaching meaningfully on TV advertising spending has yet to be realized.
Content owners are divided into those whose wares drive purchasing decisions and everyone else. Potential licensees are multiplying as services proliferate in all release windows and distributors emerge from telcos (BT, Telefonica) and mobile operators (Telkomsel, ASI), social networks (Facebook), and digital media (Amazon Prime Video). There are more potential licensees available, however, rights pricing outside TV continues to be way below what rights owners have become accustomed to.
For sports rights owners, the issue is exacerbated by premium sports channels increasingly being excluded from basic pay-TV channel bundles across both traditional pay-TV services and OTT pay-TV (skinny bundles). The eternal struggle to balance reach and revenue is becoming harder- the more so if the rights are being sold exclusively to distributors lacking either. Hybrid licensing strategies are likely to become more prevalent with rights owners keeping contract lengths short to allow for flexibility in the face of a fast-evolving marketplace. E-sports constitute long-term competition for the hearts and minds of young viewers (mostly male, especially in Asia) and should be taken seriously. As well as Twitch and YouTube, e-gaming broadcasters are striking carriage deals with pay-TV service providers (Sky UK, Orange France). Competition for sponsorships from e-sports will likely increase over time as well.
Ed Barton is TV practice leader and principal analyst at Ovum