We concluded the last blog with a suggestion of the complacent attitude of many TV companies that believe they’ll always be able to respond to disruption by investing in smaller players. But that didn’t work in other media sectors, and it won’t work in TV, either:
Traditional TV players are facing competition from a small group of hugely motivated and capable technology companies: Google, Amazon, Samsung, Verizon, Apple, Sony, Microsoft and Netflix. Just cash on their books exceeds the entire market capitalisation of the four major US TV networks! More importantly, these companies have already demonstrated their ability to create quality content, aggregate large reach and generate huge advertising dollars or huge subscription dollars in video. Even YouTube is now going to Pay TV.
These players have focused from day one on a global audience opportunity, in contrast with the national or regional limitations imposed on their traditional brethren. What’s more, as native technology companies, they have ridden the wave of viewer behaviour and technology-driven trends to their advantage. Those trends include:
1. New devices and improved UX both inside and out of the living room: Nielsen reports that time-shifted TV, mobile video and digital video are eating into traditional TV time spend.
2. These devices are made from ever-cheaper hardware (with the exception of Apple), with ever-increasing software value; and each device, as a potential unique access and control point, is becoming a battleground for ownership among the technology vendors.
3. New ways to engage viewers: New enhanced user engagement models are emerging via social media, recommendations and targeting.
4. New content providers: These producers have highly efficient Internet-age production economics and youth demographic targeting, such as Multi Channel Networks (MCNs) on YouTube, or online-native media companies like today’s version of Vice.
5. Fragmentation of audiences: Consumers have an increased choice in what and where to consume content. Hit TV shows today have no more than one-fifth of the audience levels they had just two decades ago. For example, Jay Leno’s late night shows drew 52 million viewers in 1992; by 2009, when he produced the final episode, only 8m tuned in. The big questions remain: How will advertisers get the reach they are used to? And will they pay the same amount for it?
6. Unbundling of content: From traditional delivery mechanisms (cable, downloads etc.) towards a seamless cloud, plus streaming experiences such as Hulu and HBO Go.
7. Big data platforms driving actions and decisions: A new reliance on viewing/consumption data insights that aggregates and inspects at much more detailed levels, to drive better content creation spend and content delivery/packaging decisions.
To quote Kevin Spacey’s Edinburgh 2013 address once again: “Studios and networks who ignore...the constantly shifting sands of technological advancement, will be left behind”. TV companies must embrace native technology skills to understand and leverage these trends.
TRADITIONAL TV FIGHTS BACK
Of course, it would be unfair to traditional TV companies to claim they have ignored all these trends. Indeed, they are all quite busy tackling the directly observed and obvious impact of digital on their broadcast TV/free TV business – i.e. on their advertising revenue. They’re doing so by launching strategies and solutions for Advertising Video On Demand (AVOD), and claiming content on YouTube (YT), or even launching channels and traditional content on YT. Where the battle is purely about distributing and monetising branded content through different (and now digital) channels, traditional TV, with its high quality and mass marketed programme brands, can hold its own.
But as we (now) know, the TV business relies on pay/subscriptions to build a quality content portfolio. As Spacey said in Edinburgh, in the US 146 TV pilots were made, 56 were chosen to air and only a few survived their first season. Content requires creative experimentation, it’s a question of having a big enough portfolio; but in the end the TV industry lives on a model of “upfront reliable cash to fund content creation”. The selling of bundled content (the portfolio play) has enabled the pre-funding of content, and in fact subscription revenues are bigger than advertising, at $80bn in the US (shared between delivery companies and media companies).
The big concern in sustaining this virtuous circle is whether digital’s impact on traditional companies’ subscription revenues will be greater than its impact on their advertising sales. This is especially true as the younger consumers age, and cord-shaving/cord-never behaviour moves into the mainstream.
IS CORD-CUTTING HYPE?
Cord-cutting is a very real threat. TV companies have been expecting this shift for some time, but have managed the timing of their response to balance the cannibalisation of their pay TV revenue. Still, the Rubicon has been crossed: the bundles have started to be unbundled online. So how have traditional TV players started to respond? The first step has been for content owners to reach audiences in new ways wherever the audiences are, even outside of the traditional pay TV bundle.
One transformative step came recently when Dish Network secured the rights to include ABC, ESPN, and other popular channels owned by Disney in a TV service delivered entirely over the Internet. At $20 to $30—less than half of what most American households pay for TV—Dish’s Internet TV service will target young adults who balk at the cost of most pay TV subscriptions. They are more likely to cancel their cable service, or never sign up for it at all. A personal TV subscription priced as low as $20 a month could actually start to make add-ons like HBO, for another $10 to $15, seem more attractive, and HBO might then reach customers outside of the roughly 100 million US households that currently pay for cable TV.
We also saw recently that both HBO and CBS are going OTT (over-the-top) in the United States. Perhaps the relatively high-price setting that they have adopted indicates that both companies are initially targeting incremental revenues. Or they may have a strategy of using this for price negotiation leverage over their cable partners. In any case, OTT is here to stay.
Still, industry consultants largely dismiss cord-cutting as hype. In the US market, which is about 70% of the global OTT market, industry insiders observe that monthly TV spend per household is actually increasing over the years (a 3% CAGR in 2009-13). With Netflix reaching a high 36% penetration in the USA of households according to Nielsen in March 2015, most of the industry is concluding that OTT is having its biggest impact on purchased or rented DVDs (-7% and -8% CAGR respectively).
That’s a misperception!
Some more granular insights are required from one of the most advanced video markets; the Nordic countries have been a test bed in OTT for HBO Go since 2012. They’ve also been one of the most competitive environments for Subscription Video On Demand (SVOD services, with Netflix launching early in its international rollout, and MTG’s Viaplay being live in the Nordics since 2007 (as Viasat OnDemand). Netflix’s Nordic penetration CAGR is in the high 90%+, and in Sweden penetration reached 25% in 2014 after a launch only 2 years earlier crucially with local content. Given this, if you look at TV viewing behaviour in Sweden and Denmark, it is now changing rapidly: The PUT (People Using TV) decline is significant, especially among young audiences (ages 15-24). The decline is accelerating, and it’s closely correlated with the launch of the above SVOD services, as well as more time spent on AVOD and YouTube. Undoubtedly this combination is driving cord-shaving as well as younger cord-nevers.
REVISITING BUNDLING – THIS TIME ONLINE
Of course, existing pay TV distributors have the best starting position to develop their own OTT platforms. They’ve got the brands, and they’ve got the content (if they smartly acquired it for online as well). But their need to balance their fear of cannibalisation against their desire to deliver what consumers want will always open the door for new players. In addition, just as the pressure of unbundling pay bundles forces TV broadcasters to deliver standalone services online, new online players are delivering online-only bundles – crucially designed for the younger online generation with nice digestible and user-discovery-friendly UX.
In Magine TV, Sweden (and Germany) already has a true online-only pay TV alternative. It offers a cloud-based, hardware-free OTT TV service, delivering live and place/time-shifted content, catch-up and on-demand programming, which consumers are willing to pay for. Traditional broadcasters such as Pro7 are already responding with their own full OTT TV service, with free-to-air channels included. But that also increases the cannibalisation threat – this time to their advertising revenues.
Telco and cable companies, the gorillas in the traditional content delivery business, are reinforcing their role as the gatekeeper to households by offering more bandwidth. In the process, they’re straining their relationships with the pay TV companies with whom they used to live in symbiosis. Can Comcast fully integrate streaming video services like Netflix, Hulu, and Amazon Instant Video? In this scenario, consumers even won’t have to switch between Google’s Chromecast and the set-top box on their large display sets.
That may sound like just a small UX improvement. But in fact, it will help more mainstream audiences adopt Internet-TV. And they’ll do so over a Comcast cable. How far delivery companies can push this boat out depends on their relative bargaining power. Comcast is of course a scale player. It has massive bargaining power compared with many other telco delivery companies, who still rely on the quality content from the TV companies to offer attractive pay packages to consumers. Furthermore, a net-neutrality stance does not seem to be a deciding factor in the US anymore. That opens the door for new preferred QoS solutions, from relationships such as Netflix/Comcast, to emerge.
Finally, the variable in this balance of power that may prove to be the most significant is the increasing popularity of new Internet-only content, not even available on traditional linear TV. If packaged well, this is content that consumers are willing to pay to subscribe for, such as Pluto.tv and soon YouTube. Additionally, if it leverages the power of digital targeted marketing and social marketing, it can become mass-market content itself online. In addition, it’s usually created with economics unheard-of in traditional circles. Traditional TV players’ Holy Grail of quality content plus distribution scale is no longer so exceptional. That’s what we’ll examine in the next blog.
The next blog post will show how technology has changed the very nature of a TV company.