So called over the top services have been a huge success among consumers over the past 2-3 years. Catch-up TV services like the BBC iPlayer set new viewing records every month and paid services like Netflix, NOW TV and Lovefilm drive consumers to pick up and use new connected devices. In this article we explore why pay TV operators have been hesitant to invite these OTT services on their pay TV platform and why they need to change this strategy.
Cord cutting hasnâ€™t emerged
Everyone in the TV industry has seen the emergence of over the top delivery as a parallel distribution channel to traditional pay TV. Consumers have been able to download attractive apps on new connected devices, which open up an on-demand offering from TV channels and premium video providers. Despite a worry of so called cord cutting, consumers have largely stayed loyal to their pay TV subscriptions, and we havenâ€™t seen any major impact on revenues or profitability for pay TV operators around the world. TV operators have stayed true to the traditional tiered pay TV business models, and have added functions, such as integrated PVR and TV Everywhere as new values for consumers.
Next generation pay TV technologies
When IPTV was introduced as a TV technology about 10 years ago, the importance of the â€œinternet aspectâ€ of the technology was touted as truly revolutionary and a new way of watching TV. In truth, todayâ€™s IPTV is little more than cable TV provided with IP technology. In most of todayâ€™s deployments, the STB has no direct connection to Internet and the entire offering is completely controlled by the pay TV operator, just as it was with prior technologies. More than 10 years after the introduction of IPTV, Accedo estimates that less than 5% of the worldâ€™s pay TV subscribers have an STB that can actually connect directly to the Internet.
What weâ€™re seeing now is the emergence of new TV technologies, which offer an Internet connection directly from the set top box. In addition, these next generation devices offer modern application development technologies like HTML5, Android or Adobe AIR. Important examples include UPCâ€™s Horizon, Orangeâ€™s Live Box Play and Virgin Mediaâ€™s TiVo devices, which have all been received well by consumers in their respective markets.
Pay TV operators are conservative
The large Pay TV operators have one of the most resilient business models in any industry. Customer loyalty is high, margins are high, the level of recurring revenues is high and the main vendors (the TV channels) donâ€™t have any options. Itâ€™s natural that Pay TV operators are very conservative and are very careful when they do any changes in business models or packaging. This has proven to be the right strategy in an industry where new technologies have been immature and have caused more challenges than opportunities. The most profitable customers have been the least innovative consumers, who just keep subscribing to a basic channel package and keep their old STB year on year. Operators who have focused on reliability and loyalty have been more successful than the innovators in each market. Product innovation has largely been seen in new products in each market like the IPTV offerings from the telecom operators. With the exception of a few markets like France, the emergence of IPTV hasnâ€™t made a huge impact on the Pay TV market.
True living room competition
It is my firm belief that Pay TV operators will finally see formidable competition. Historically, Pay TV operators have had limited competition, maybe being the only available Pay TV provider in a certain area and main competition for TV content was a limited selection of free to air broadcast channels. Now, weâ€™re finally seeing true competition for the living room. In some markets, we see innovative Pay TV operators going off their traditional target market and offer OTT services to non-subscribers, directly competing with other operators. In addition to this, we see VOD offerings like Netflix and LoveFilm increasingly offering better and more TV-centric content, rather than just movies. Finally, Accedo forecasts that many TV channels will extend their catch-up services with a paid or ad-funded on demand section with extended offerings that go head to head with traditional pay TV subscriptions. For the first time since the emergence of pay TV we will see a major shift in the market to new players and new consumption models.
External innovation on Pay TV platforms
Of course, this change will not happen overnight. Consumers are tied to existing subscriptions, OTT offerings donâ€™t fully replace live TV distribution, and awareness is still low among consumers. Net churn will initially be low, but ARPU will suffer more with fewer subscribers choosing the top tiers and instead spending money on a complementing OTT service.
I believe that the way for a Pay TV operator to meet this challenge and avoid the hit on ARPU and subscriber numbers is to embrace innovation on their next generation platforms. Today, most Pay TV operators that are launching a powerful new device are using this device to enhance the traditional content offering. They add more movies, more channels, PVR functionality, second screen functions, gaming and so on. This is all good, and every function will add value for some users, but it doesnâ€™t really remove the threat of OTT services. It is just a too attractive offering for consumers for them to be satisfied with just the operator services. Instead of fighting these initiatives, operators should invite all OTT services to launch apps on the operator platforms as well. This includes VOD services, catch-up TV services and other seemingly competitive offerings.
Pay TV operators can still control the overall consumer experience
The role of the Pay TV operator in a world where they invite all broadcasters, content providers and VOD providers to launch services on their platform is to guarantee the consumer experience. In the same way as Apple carefully controls the experience on an iOS device, the operator should be the consumerâ€™s main contact point until the consumer chooses to enter a third party application. Operators are perfectly suited for running such TV application programs, with integrated billing solutions, knowledge about content marketing and promotions, skilled customer support and possibly the best knowledge of consumer behaviour in front of the TV of anyone in the value chain. They should of course provide guidelines and clear terms and conditions to application providers, but if an application provider follows those guidelines and shares some revenues with the Pay TV operator, they should be allowed to launch even if they are a competitive VOD service.
I believe that Pay TV operators who embrace the concept of strong third party video apps on their platform, will be able to better face the competition, have lower churn and even though they might take a hit on their VOD revenue initially, they will long term have more revenues since the total spending via their platform will be higher. The losers will be the Pay TV operators who keep going with a close platform with only apps and services from themselves.