Home Analysis The fragmentation, and potential re-aggregation, of premium content

The fragmentation, and potential re-aggregation, of premium content

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The post-OTT era is shaking up the content landscape. In sport, the presence of direct-to-consumer services from league rights holders, like MLB. tv (Major League Baseball) and NHL.tv (National Hockey League) in the U.S. suggests the potential for more competition, but so far nobody is seriously threatening the dominance of incumbent broadcasters.

The NFL (America’s National Football League) rights that Twitter acquired for 2016 season, and now Amazon Prime Video has acquired for 2017, covering the ten ‘Thursday Night Football’ games, were for digital distribution and complemented rather than substituted traditional broadcast (which remains on NBC and CBS). This changeover also indicates that the digital only challengers are not immune to losing rights themselves – everyone is affected by increased competition.

The impact of online challengers is being felt more keenly (up to now) in general entertainment. The growth of Netflix and Amazon, with global distribution and global budgets, means more competition for stories and talent, with serialised drama one of the obvious battlegrounds.

Two ‘programming events’ that seem to reflect the changing balance of power are the migration of Jeremy Clarkson and friends to Amazon for ‘The Grand Tour’ and the way Netflix won the rights to ‘The Crown’. Sky’s Managing Director of Content, Gary Davey, admitted recently: “There’s never been a more competitive time to be in the content business.”

If you look at content spend per subscriber, using the 2016 numbers from IHS Markit, Sky still towers above the SVOD providers with a spend of just over $350 per subscriber, compared to Amazon’s $150, and $50 at Netflix. Liberty Global, another of Europe’s multi-territory Pay TV giants, spends nearly $200 on content per subscriber.

This does not mean the SVOD providers cannot aim for leadership in selected genres, of course. Maria Ferreras, VP Business Development at Netflix, told an audience at OTTtv World Summit last autumn that her company has no interest in sport, for example, which accounts for two-thirds of the Sky content investment (based on the IHS Markit analysis).

Moreover, if you compare the SVOD giants to premium channel owners rather than to platform operators, their position appears much stronger. The 2016 IHS Markit studies show that Netflix spending was dramatically higher on a per-subscriber basis than either HBO or Discovery.

The 2016 figures for total budgets confirm the impact of global scale. Netflix spent just under $5 billion, Liberty Global close to $4 billion, Amazon close to $3.5 billion, and the BBC just over $3 billion. Sky and Discovery spent over $2.5 billion and HBO just over $2 billion. (Source, IHS Markit).

In a November analyst note, the research firm Ampere Analysis pointed out that, “Netflix’s content spend is now comparable to a premium channel group or platform.” Netflix’s Ferreras said in November that her company’s content spend will hit $7-8 billion (a year) in 2018.

One response has been for platform operators to invest more in production companies and regional content, with Liberty Global and Sky both pursuing that strategy. Earlier this year, Sky pledged to increase its investment in original productions by 25%.

It remains to be seen whether all the current spending on content is sustainable. IHS Markit showed that Amazon is spending close to 140% of its total video revenue on content compared to figures close to 60% at Sky, Liberty Global and Netflix. This has been interpreted as Amazon betting on a fast subscriber ramp-up or being ready to use content as the bait to drive non-video revenues. Either way, the near to mid-term picture is one where the best content is going to be spread among more places.

To some degree, premium content has always been fragmented by ownership, as it would typically be found across a wide range of different channels in each market. The key difference is that in the old model the channels were typically still aggregated into a single, unified Pay TV subscription – whereas now it can be spread across a range of different services and billing platforms.

There is no guarantee that all the premium content that has turned SVOD services, in particular, into attractive alternatives will stay in their new homes forever. Having encouraged the growth of the SVOD giants – and subsequent fragmentation – by signing large catalogue deals, some content owners are now changing their approach. Fox and Disney, for example, are reigning back their content from Netflix to focus distribution on their own channels and their direct-to-consumer OTT services.

From the start of 2019, the new Disney-branded streaming service in the U.S., announced earlier this year, will be the exclusive home of SVOD viewing for new Disney and Pixar movies. The deal with Netflix for subscription streaming of new releases will therefore come to an end, in an important example of the change in attitude.

Meanwhile, Fox has decided that the time is right for some re-aggregation. “Netflix delivered a fantastic experience at a fantastic price and Fox helped them in that by giving them our programming,” Brian Sullivan, President and COO, Fox Networks Group, said at IBC in September. “We still sell programming to Netflix, but we will look at it on a case-by-case basis. We won’t just do blanket deals. We want to get back to a place where consumers can follow ‘The Walking Dead’ from season to season from one provider.”

Pointing to the trend towards direct-to-consumer services, Sullivan said, “What these are doing is recreating the bundle – and pulling back from a total disaggregation of content. We went from a distorted business model that favoured [Pay TV] to a distorted business model that favoured the consumer. The old model didn’t work for the consumer and the new model doesn’t work for business. That is being rebalanced.”

Hamish McGregor, Analyst at Ampere Analysis, warns that most content owners currently have little experience of a direct-to-consumer relationship, particularly on an SVOD platform, and any individual studio will lack the catalogue breadth and depth to compete on a large scale with global platforms. This means studio platforms, where they are rolled out, are cheaper, smaller and more specific. Taking the UK as an example, DisneyLife is aimed at children and families, and NBCU’s Hayu is focused on reality content.

The fragmentation versus re-aggregation picture is currently mixed, as exemplified by HBO. In Asia and the Nordics, the company has been aggressively rolling out its own branded SVOD platform. In the Netherlands, HBO recently dropped its SVOD platform, HBO Go, in order to distribute its content exclusively with cable operator Ziggo, due to its large market share.

Potential new players in the market, in the form of social media giants like Facebook, Twitter, Snapchat, and video sharing services like Vimeo, are set to cause further fragmentation, with content owners complicit. Viacom and Turner, for example, signed partnerships with Snapchat parent company Snap Inc to create original content for Snapchat’s ‘Discover’ section. In Viacom’s case, the agreement also grants Viacom the right to sell Snapchat’s U.S. owned ad inventory.

“Social media players have the potential to spend significant amounts to quickly build catalogues,” says McGregor. “Significantly, they already have a global footprint allowing a quick rollout and easy marketing to their existing user base. However, this requires a business decision on the part of social media sites to move towards aggregation, and a change in their interaction with users.”

McGregor believes the fate of premium and exclusive content is likely to have a considerable effect on determining future winners and losers. “Major multinational platforms such as Netflix and Amazon need high-end, premium content to justify their market position. Moreover, given their presence worldwide, there is a strong focus on global rights, as this allows them to improve their services for all subscribers, rather than those in a specific country.

“Major local broadcasters are competing to control a large local market share,” he continues. “For many, therefore, securing exclusive rights to premium, localised content in a country is key when competing with the large multinational platforms.

“For both these segments of the market however, premium content is still key,” stresses McGregor. “It is only really when you get into cheaper, more targeted niche SVOD services that the focus on premium content becomes less pronounced.”

More reading

This is an excerpt from the new Videonet report, ‘How Pay TV can triumph in the post-OTT era’, which you can download here.

The report investigates who will control the best content in future, whether the online video market is ripe for some re-aggregation, and how the Pay TV user experience must evolve if operators are to triumph in the ‘post-OTT’ world. It also looks at the back-office innovations that will underpin the premium entertainment services of the future.

The report contains insights from Ampere Analysis, IHS Markit, NAGRA, Fox Networks Group, Vodafone, Liberty Global, TVNZ, Telefonica, Swisscom, ARRIS, Roku, Technicolor, xRoadMedia and others. It considers the opportunity to bring the best premium content offers under one roof again, why a one-size-fits-all UEX is no longer fit for purpose, and the role of AI and voice services, among many other things

Download here.

Photo: iStock/Daviles

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