Pay TV is still growing but OTT is growing faster â€“ much faster. And that fact sums up both the threat and the opportunity that OTT video presents to platform operators.
As a result, many operators are now moving beyond TV Everywhere (authenticated multiscreen viewing for existing set-top box subscribers) to provide their own standalone OTT services that target different consumer segments, either with SVOD (Subscription VOD) or Pay TV Lite (generally a sub-set of the full Pay TV offer, made available on short contracts and with more a la carte freedom) or both. In some cases it is becoming possible for operators to use the same headends for all their multiscreen and OTT distribution, making operations easier.
Other Pay TV operators are integrating third-party SVOD, like Netflix and Maxdome, into their set-top box platforms to expand their role as an â€˜experience providerâ€™ and to help keep customers on-platform. We are also seeing OTT used instead of satellite or IPTV to make full-flavour Pay TV bouquets available to customers who could not previously get them for technical reasons.
Earlier this year, NAGRA commissioned the research and strategy consultancy MTM to explore the opportunities for Pay TV operators in the OTT market and this included a look at operator strategies and rationale for investment. The company surveyed 90 senior executives worldwide and included a programme of in-depth interviews with operators, premium OTT providers and Pay TV broadcasters.
MTM found that the performance indicators executives wanted to most improve, using OTT, were increasing customer satisfaction, reducing churn, enhancing brand and image, and growing ARPU. Other drivers, rated in importance between 1-5 (and with the average rating shown here) included: Attract new audience segments (4.3), capture viewing share across mobile devices (4.2) and provide a new channel to market (3.7).
In simple terms, Pay TV operators are focused on TV Everywhere, off-net services that target new customer segments and OTT services that â€œsuper-serve customers on set-top box platformsâ€ over the next three years. According to MTM, 80% of the respondents think Pay TV operators will increasingly use linear premium OTT services to offer higher quality content formats like 4K and additional services that supplement their linear broadcast.
MTM also lists the success factors for OTT video according to their level of importance. The top five are: Offer a service through a mobile/tablet app; Provide an integrated user experience across devices; Provide innovative pricing options like day passes; Appeal to a broad range of audience segments; Bundle third-party OTT services with your own service.
We are already seeing the results of this thinking. DISH Network, as one example (the US satellite Pay TV operator) has integrated Netflix onto its STB platform and given the SVOD giant a channel slot on its EPG. It has also launched Sling TV, its standalone Pay TV Lite OTT offer. DISH was the first of the Pay TV Lite providers to explicitly describe its service as â€œa viable alternative for live television to the millennial audience,â€ which is how DISH President and CEO Joseph P. Clayton introduced the service.
Clayton added at launch: â€œThis service gives millions of consumers a new consideration for Pay TV. Sling TV fills a void for an underserved audience.â€
Simon Trudelle, Senior Product Marketing Director at NAGRA, which provides a range of multiscreen and OTT solutions to the Pay TV industry, says there is an appetite among Pay TV operators for targeting a new consumer segment that up until now was hard to convert into subscribers. â€œThey are mostly younger people without families but with a passion for some kinds of content. They are not signing up for Pay TV but getting their content somewhere else.â€
Eric Abbruzzese, Research Analyst for TV & Video at ABI Research, says Pay TV Lite presents a very promising market opportunity, although it is immature. â€œEven so, being early to market will be beneficial in the long run, by allowing a product the opportunity to grow along with the changes in the market, rather than spend a long time in R&D and miss a lucrative launch window.â€ He adds: â€œAny provider looking to capitalise on a younger – on average – demographic should look towards Pay TV Lite.â€
There are a few concerns about Pay TV Lite, most notably the need to avoid cannibalizing the full-flavour Pay TV offer. And in May, Jeff Heynen, Research Director for Broadband Access and Pay TV at IHS warned that the net result of operator OTT services aimed at cord-nevers and cord-cutters â€œwill be slower revenue growth globally, as OTT services carry a lower ARPU.â€
Whether true or not, that does not reduce the strategic imperative that some operators are attaching to Pay TV Lite. This business model feeds a desire for a more a la carte approach to buying content that can only be accommodated up to a certain point on the full-flavour services.
With its new Stream offering (announced this summer as a Beta product), Comcast will provide an example of Pay TV Lite that is only available to your own broadband customers. In Europe it is more common to use Pay TV Lite services to reach out to anybody, regardless of whose broadband service they take.
Typically the European Pay TV Lite pioneers own their own Pay TV channels or content rights. The Belgian cable operator VOO provides a good example. The company owns the Pay TV channel â€˜Be tvâ€™, originally distributed on the VOO network and via partners in Belgium (like cable operators Telenet and Numericable) and also in Luxembourg (with Orange). Now there is an OTT version of the service, free to existing Be tv subscribers and available as a standalone offer to non Be tv customers.
Anyone in Belgium can sign-up to â€˜Be tv Goâ€™ and get access to live and on-demand content including exclusive US and European series and movies. There are 24-hour passes for sports. The service can be viewed on PCs, iOS and Android tablets, as well as the Microsoft Xbox One. Manuel Hannart SÃ¡nchez, Product Manager Pay TV at VOO/Be tv, says the company wanted to give everyone in Belgium the chance to subscribe. â€œWe wanted to make Be tv available everywhere.â€
Sky in the UK was early to market with a Pay TV Lite offer, called NOW TV, which also includes 24 hour (and weekly ) sports subscriptions. The company said at launch: â€œNOW TV is a very, very important means for us to talk to a new audience and so plays an increasingly important part in our distribution story and in the way we monetise our content investments.â€
Simon Trudelle at NAGRA first talked publicly about the trend for finer Pay TV market segmentation last autumn. He said then: â€œWe have reached an inflection point in the Pay TV industry where OTT delivery and connected devices are opening the way for more granular segmentation of the viewing population, according to what they are willing to pay and what their interests are.
â€œThis segmentation is becoming a broad reality and it is probably time for every service provider to join the fray and launch [OTT] services and monetise new consumers and new experiences. Sometimes this means going off-net. It definitely means creating more targeted content bundles and presenting them to consumers who are movie-centric or sports-centric, and so on.â€
Sky Deutschland is perhaps the best example of a Pay TV operator going down this road. The company has full Pay TV and its Pay TV Lite service called Sky Online (launched in October 2014) but also its own SVOD service, Snap. This is viewed as a direct alternative to Netflix, with thousands of titles including box-sets.
According to Richard Broughton, Research Director at research firm Ampere Analysis, the market for Pay TV lite is growing and one of the aims for operators is to capture an audience base that in the past was unwilling to pay for a full Pay TV offer. â€œAnother incentive [to launch] is to capture audiences that might be thinking about migrating away from Pay TV in favour of lower cost alternatives, or who have already migrated away.â€
There are health warnings attached to Pay TV Lite offers. Eric Abbruzzese (ABI Research) points out that churn rates are expected to be higher than for full Pay TV because of shorter contracts. There will be some higher marketing costs â€“ though offset by a reduction in OpEx for this kind of offer (no truck rolls, for starters). And you risk your brand name if you produce an unpopular product.
There is not just the risk, but the certainty that there will be some cannibalisation, he reckons. â€œHowever, those that drop subscriptions in favour of Lite were likely to drop their subscription in the near future anyway, so losses should not be substantial. It will not be as negative as losing the customer outright.â€
This is an excerpt from the new Videonet Report, â€˜How OTT is changing the shape of Pay TVâ€™, which goes on to discuss how to prevent avoidable cannibalization when operating Pay TV Lite services, and the likely impact on long-term ARPU of offering them, and whether the presence of successful SVOD services in a country should prevent Pay TV Lite launches or simply â€˜warms upâ€™ the market for them.
The report as a whole investigates how Pay TV operators are harnessing OTT distribution and using operations paradigms from the IT and Internet worlds to defend their existing businesses, reach out to new markets and make themselves more agile.
This report describes, with numerous examples, how different OTT strategies are evolving including Pay TV Lite, the integration of third-party OTT services into STB platforms (onboarding) and the use of OTT as a substitute for satellite and IPTV. It considers the impact that virtualisation and cloud models are having on the ability of Pay TV operators to compete with the likes of Netflix and Amazon.
The report includes insights from VOO/Be tv, Vodafone Group, Sky, Canal+, KPN, Unitymedia, Liberty Global, TalkTalk, Maxdome, ABI Research, Ampere Analysis, NAGRA, Elemental Technologies, Harmonic and many others.
Like all Videonet content, the 8,000 word report is free and you can download it here.