Home Analysis Connected TV Smaller pay content owners could lead Pay TV breakaways

Smaller pay content owners could lead Pay TV breakaways

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There is a certain breed of pay content owner that might benefit from pioneering the direct-to-consumer OTT distribution model in Europe, particularly in smaller Pay TV markets like the Netherlands and Belgium, according to Guy Bisson, Research Director for Television at IHS Screen Digest. They are characterized as having high quality content but relatively limited reliance on Pay TV operators in terms of their revenues (so especially those with few channels) and one of the best examples is HBO.

The research and analyst firm has been analyzing how many subscribers HBO and other important content owners would need for their own OTT pay services to make up for losing carriage and content revenues from Pay TV operators if they spurned traditional distribution partnerships. In the UK, HBO would need 500,000 subscribers paying £5 a month (EUR 6), the company estimates.

IHS Screen Digest is not suggesting that content owners should turn their back on Pay TV platforms and it notes the obvious difficulties in building standalone subscriber bases. But the company has modeled the tipping point at which various studios would start making more money by going it alone.

Having considered the major U.S. studios and other major and smaller pay content owners, and taken the value of rights and carriage agreements for movies and entertainment content that they would lose from Pay TV, IHS Screen Digest has produced an average subscriber target needed for Pay TV revenue replacement, but it depends on what you charge. So the ‘average’ subscriber requirement starts at 2.8 million subject to pricing, and goes as high as 8.9 million (average requirement) depending on pricing. The UK was used as a benchmark for the modeling as a strong Pay TV environment. (Note, the modelling does not factor in new costs for content owners, and the report says these could be potentially onerous for small content owners).

The modeling is found in the latest of three IHS Screen Digest reports that consider the potential for a migration from broadcast distribution to OTT. The research company has previously reported on when it would make sense for channel owners to switch to OTT streaming instead of broadcasting. That report focused on delivery mechanisms, so included the possibility of channels streamed within a Pay TV OTT bouquet. This latest research looks at whether content brands can afford to go OTT but also walk away from their Pay TV marriages.

The conclusion seems to be that starting life again, on their own, will be difficult for pay content owners but probably not impossible if you consider all European markets and not just the Pay TV powerhouses like the UK.

Bisson says: “The variable factor in the tipping point is the current channel carriage agreements. In the UK, content groups that have a large number of channels and are more entrenched with Pay TV providers get more revenue so need more subscribers [from a replacement OTT offer]. For HBO in the UK, their sole income is from the rights to Sky Atlantic and the company is well positioned and has a strong brand and great content that people want to watch, so at £5 a month they could get by with half a million direct subscribers. Some content owners are in a position to seed the market and start to build that base of people that are willing and able to pay online.”

So the content owners with the least to lose will move first, and HBO is considered one of those. “And bear in mind that the UK is the most lucrative Pay TV market outside the U.S.,” adds Bisson, “and it would be easier for any content owner to do this in Belgium or Sweden, for example.”

If a number of major studios were to pursue this route, then consumers would have the option to effectively construct their own pay content packages, paying each content provider like HBO, Disney and Discovery proportionate fees to access their current and archive content independently. So an expansion in the direct-to-consumer model would also point towards a more ‘a la carte’ world but also more consumer-led content discovery and less third-party aggregation. Bisson talks about approximately 20 content owner OTT services in total.

The money involved could be surprisingly small per subscriber – down at the £0.50 and £1.50 per month kind of prices to access some content owner OTT services. After all, you have to take the television related ARPU from a Pay TV operator, ignore the money they make from sports and consider only the movies and entertainment part of their package, then divide that income by what will now be 15-20 separate services.

Bisson does not make light of the efforts that would be required to build such direct-to-consumer OTT services. Building subscriber bases counted in millions is no easy task. And of course, if they turn their back on a current Pay TV relationship at the next round of negotiations, content owners will have to go from X viewers today to zero tomorrow, and then start from there. Bisson points out that it would be hard to build a parallel service with scraps of archive material that are outside existing deals and it would also lead to difficult relationships with their current partners if they did so.

Are the major content owners going to do this in the near-term? Definitely not, according to Bisson. Will consumers buy into a new content model that dispenses with aggregator platforms? Not yet, he says, and the report outlines the efficiencies and benefits of platforms as a way to watch content. Is this a threat to the current Pay TV operator model? “If you are talking about the next 5-10 years, then no, but the technology is there now to enable this and it could be done.”

Bisson says the modeling is designed to show when it would be worthwhile for a content owner to take a bet on using direct-to-consumer OTT distribution in place of Pay TV partnerships. So while the modeling includes the pay channel behemoths who have done well from the current set-up, the real message seems to be aimed at the smaller content owners.

“For a small producer without channels and limited Pay TV revenues they could think about a 2-3 year ramp up for a new OTT service if they thought it would double their money,” Bisson says. “But if you are a Disney or a Viacom you are unlikely to consider this anytime soon. If you look at markets outside the UK, where they [Pay TV platforms] are far less valuable to content owners, then it might be sensible for some owners to start thinking about it, like in markets such as the Netherlands and Belgium.”

So if this is going to happen, look out for it first with smaller pay content owners who have compelling content in smaller markets, launching with their best content from day one.


Editor’s comment

Based on this analysis, what HBO has done in the Nordics with a standalone OTT service could be a bellwether rather than a one off. But it strikes me, looking from a consumer perspective, that to make this work as a content owner you have to be an early mover and then remain one of only a few major companies to do it. If HBO went direct-to-consumer in the UK for example, I might make the effort to go and watch their content separately, as I do today for Netflix (though it might have to be cheaper than £5). But if every major pay channel brand then did the same it would become annoying, and I would want someone to keep it all in one place as an aggregator.

This direct-to-consumer model dispenses with the role of a super-aggregator, as Pay TV platforms are today, so the big question is whether consumers would find that a good alternative or whether something very clever pops up that becomes a virtual-aggregator for multiple services you have already subscribed to separately (e.g. I could have seven separate OTT accounts with channel owners I like, but someone presents all that content in the same place and I can just browse all the content together and then click on what I want to watch, and the authentication and billing is taken care of…I just get to see the content and can move seamlessly between the different brands).

Even then, where would all the powerful free-to-air channels fit? These still account for a large proportion of all viewing, so if someone aggregates them they are immediately making our viewing simple. So do we watch a free-to-air platform (which would not be weakened by this process) and take multiple pay OTT subscriptions separately, or does a Pay TV operator provide us with the FTA channels plus sport, and let us find the rest of our preferred pay content on our own, or do they try to do some deals to become that virtual aggregator that presents the third-party OTT content without necessarily billing for it?

If the content owners did decide to go this route it would be a huge disruption. IHS Screen Digest has previously modelled the point at which it makes sense to start streaming rather than broadcasting and now it is looking at how many individual subscribers content owners need to sign up in order to replace Pay TV relationships with direct-to-consumer services.  They are clearly preparing for a much more streaming/OTT centric television world, however the business models work out in the long-term.

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