OTT video: 'First to scale wins

Karim Taga & Clemens Schwaiger/Arthur D. Little
12 Sep 2012

Over-the-top (OTT) video services, such as Hulu, Lovefilm and Netflix, have experienced tremendous growth in subscribers and revenues over the last few years. OTT services are expected to grow from a mere $2-3 billion market in 2011 to $15 billion by 2016. OTT video services provide a non-linear TV experience, allowing the viewer in theory to watch any program or film any time, anywhere, or on any device. These services are called OTT as they focus on the service component and piggyback on a broadband provider's network for delivery.

The growth in OTT services is being spurred by the availability of ever-faster broadband, changing TV viewing habits and the increasing popularity of personal screens, such as the iPad. These devices allow consumers to watch content outside the typical living-room setting and are also used as a second or third screen in a household.

Given the high growth of OTT, a variety of market players, including content providers, broadcasters, internet players, consumer electronic manufacturers and pay-TV operators are moving quickly to claim their space on the value chain.

Global vs local

The single most important factor for success in OTT video is an attractive content library. However, OTT video rights form an entirely new category and the value of these rights is still being determined. Consequently, content rights are negotiated on a piece-by-piece, market-by-market, business-model-by-business-model basis, which is a challenge for OTT providers.

For rights owners, granting OTT players the rights would mean abandoning a proven distributor for a yet-to-be proven new partner with a volatile audience. In addition, OTT players are not typically in a financial position to outbid regular pay-TV players.

Due to the complex content rights procurement, international expansion of leading OTT video players, such as Netflix and Hulu, and aspiring ones, such as Apple and Google, is progressing slowly. The challenges to the rapid globalization of leading OTT players leave a window of opportunity for strong national and regional players, such as broadcasters, telecom operators, pay-TV operators and local OTTs.

As long as rights remain territorially defined, local players will always attach a slightly higher value to a given piece of content than global players, as the financial risk to their own business is higher than the revenue opportunity for new entrants. They also have a better understanding of and relationship to local content "golden nuggets". Finally, local players can tie-in an OTT video offer to their existing offering and use tested marketing channels to drive adoption and critical mass.

The OTT sector is largely still in its early stages and a race to scale is currently under way. The profitability of an OTT video business will depend on a large subscriber base and the highly efficient operations of a large-scale technical platform. However, most other players have only one of the two ingredients, resulting in a plethora of partnership types and business models.

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