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John Barrett, Director of Research at the research and consulting firm Parks Associates, is advising Pay TV operators to integrate YouTube into their service and to at least think about partnering with online movie aggregator Netflix where the OTT service is available. Research by Parks Associates suggests the threat of cord cutting has been exaggerated and that this phenomenon is limited to extremely heavy Netflix users who are watching over 25 movies a month from the company. In other homes the biggest threat is ‘cord shaving’ and even then the impact of OTT is less than previously feared.
Barrett argues that what YouTube or Netflix offers cannot be replicated by service providers cost-effectively and that these services largely complement rather than compete with what Pay TV operators provide. He believes consumers will use them anyway, on or off the platform, and Parks research suggests that the services will not cannibalise Pay TV revenues, including premium VOD.
Barrett was speaking at the IP Cable World Summit this week and his views were backed by Nuno Sanches, Television Products Director at the Portuguese cable operator ZON TV Cabo. “We are pursuing a strategy of integrating OTT content, especially for YouTube,” Sanches noted. “YouTube is a no-brainer for operators because it does not risk any revenues.”
The case is not so clear for cooperation with Netflix, though Sanches revealed that his company wants to investigate how it could partner with the online VOD provider if it launches in Portugal.
The first question to Netflix will be whether they are going into what Sanches calls “our space’, meaning premium VOD covering blockbuster and early release movies. “If they want to remain a library business [offering a large catalogue of mid- and long-tail movies] then let’s do the deal and I will take a share of the subscriptions because I have the best broadband connection and can make the experience better than on OTT. If they can pay me I will do it, and if they can monetize it better than me, because they can sell a product – the library – that I cannot sell, then I will partner. But if they want to go into my premium VOD business, the one I want to take myself from the movie theatres, that is a different proposition.”
Sanches declared that nobody [Pay TV providers] is making money from the VOD archive today. “If you look at the percentage of your revenue delivered from non-premium or non-adult content, it is virtually zero. The number of people willing to pay on a transactional model for movies that are 4-6 years old is low. So today most operators are not monetizing the library. They offer it and invest resources in encoding and storage because they feel they have to provide the service but there is no money being made there.”
Barrett at Parks said service providers view online video providers as a hoard of barbarians attacking the TV industry with unsustainable business models. But through consumer surveys in the U.S., Parks Associates has analysed the real impact OTT is having on consumer behaviour and believes there is less to fear than previously thought.
Firstly, only three OTT providers have any significant traction in the U.S. in terms of the number of people watching and how often they are watching. These are YouTube (way above everyone else), Netflix and Hulu. “Then you are into the long-tail,” he revealed. Parks Associates asked consumers about all their viewing and discovered that for most people, broadcast TV is still their number one source of content.
For people who watch Netflix ‘Watch Instantly’, broadcast TV is the number one content choice for people using the service once or twice per week. For people using Netflix five times per week the VOD library was their number one source of content but they still had Pay TV services. There are still penetration rates of 90% for Pay TV in these higher consuming Netflix homes. “That figure remains constant until you get to extremely heavy Netflix users who are using the service over 25 times a month. Even then, 60% have Pay TV and even these heavy users are still watching a lot of broadcast TV,” Barrett revealed.
Parks Associates found that even the heavy Netflix users still watch lots of broadcast TV because they are heavy video consumers generally, watching content in lots of ways. The research and consulting company has concluded that overall, Netflix is not cannibalising broadcast TV. “They are still watching broadcast TV and they are still watching lots of DVDs,” he explained, referring to the 25+ per month users. But they are watching less recorded TiVo and DVR content.
“They are rebalancing their options,” he continued. “Maybe, rather than taking the deluxe Pay TV option they [the heaviest users] are opting for less channels or no DVR. So that is where we are seeing some of the cord shaving but only for the very heavy Netflix users.”
The picture is similar for YouTube. “Only the really heavy YouTube users consider it more important than broadcast TV,” Barrett told the London audience. “Pay TV penetration holds steady around this group. There is no impact on Pay TV however much you use YouTube.”
The conclusion for Parks Associates is that there is a range of content people want and YouTube and Netflix are largely complementary. “At one end of the spectrum is the premium content offered at premium prices and this has the most value, like movies that are released today and TV shows that are broadcast tonight. That is what Pay TV operators are good at and people are okay with that. This is content they value enough to keep on watching.
“At the other end of the spectrum is UGC on YouTube: very low value content but still important to people. In the middle is the slightly older content at discount prices. In a stroke of genius, Netflix plugged themselves right in the middle because consumers did not have this option anywhere else. This kind of catalogue at such low prices is very compelling.”
Barrett said that, when asked how TV can be improved, consumers consistently answer that they want more on-demand content. “Service providers have to flesh out their on-demand offering so it is not just premium content at premium prices and they need to cover the whole range of content that people want, otherwise people will find other ways to get it.”
According to Parks Associates, platform operators could try to replicate everything themselves, creating their own version of YouTube for example. However, the asset management and storage needed and the challenge of monetizing that content mean this strategy does not make sense. “So we are advising our clients to simply plug YouTube in because YouTube will not compete against you and will not take your market share. With Netflix, there might be reasons not to integrate them but if you don’t, you need to come up with something similar and do you want to do that yourself, with foreign language and other long-tail content people care about?
“The argument I am making to our clients is that there is a case – not in all circumstances, but there is a case – for taking OTT and plugging it into your service. And you can do that without worrying that your customers will build a relationship with another provider.”
Barrett added: “There have been so many hysterical writings about cord cutting and cord shaving but we have been explaining that this is not turning the market upside down. Netflix is a much bigger threat to HBO than to Pay TV operators because that is the real choice people make: ‘Do I go for HBO or Netflix?’. And the reason is that Netflix cannot deliver 200 channels of HDTV and unless you can do that you cannot threaten Pay TV. In the U.S. people are cancelling HBO and trying Netflix but they are sticking with their Pay TV operator.”