With the demand for over-the-top (OTT) services these days, it’s easy to forget that OTT has been a part of the industry for quite some time – going back to the early days of online access and popular subscriber services such as Prodigy.
Today, OTT refers to the growing trend of more people accessing more content through direct Internet access, often at the expense of traditional managed pay-TV video. Consumers are flocking to services such as Netflix, Amazon Prime, and Hulu (the “Big 3” with two-thirds of viewers between them), YouTube, Spotify, Apple Music, and others – while enjoying them in very traditional, over-the-top ways.
Creating value from the disruption
Network Service Providers (NSPs) initially reacted with some trepidation to this development, much the way those in the music industry first viewed Napster before calmer heads prevailed. It’s understandable given the loss of customers as they adopted OTT services at an alarming rate – siphoning off revenue streams and indicating a disturbing trend in content consumption unlikely to reverse course. As history has taught us, to remain relevant in the face of change and disruption, we must avoid positioning ourselves as “us or them” and find ways to create more value together – just as the music industry transformed to embrace the streaming digital music revolution.
Though no one truly enjoys these kinds of disruptions, they often lead to great improvements in technologies and services. This in part explains why consumers have become more comfortable with OTT video providers, to the point where the needs of cord-cutters – and cord-nevers – cannot be ignored.
This is absolutely a situation where NSPs can work with OTT aggregators to deliver better solutions for consumers – at the same time reducing churn and providing more revenue-sharing opportunities for all stakeholders. While OTT companies stand to gain access to many more eyes through NSPs, service providers will be generating revenue they were missing out on, as they gain a larger piece of the global OTT services market – valued at $925 billion in 2016 and projected to reach an astounding $3.54 trillion by 2025 (Transparency Market Research, Global OTT Services Market Report, March 17, 2017).
The cross pollination of content and distribution strategies
To see more clearly the enormity of the OTT opportunity, we need only look at the major players in the industry who are making the news with headline-grabbing content and distribution strategies – and turning the disruption to their own advantage.
On the content side, Apple has budgeted $1 Billion for the procurement and production of original video over the next year (The Wall Street Journal, August 16, 2017). Using original content to bolster movie rentals and other offerings on iTunes, Apple aims to double its annual services revenue, which also includes App Store sales, Apple Pay, and Apple Music, to about $50 billion by 2020. At the same time, Apple must avoid jeopardizing the 15% cut of subscription revenues its app stores take in for services such as Netflix and HBO GO —money that is a growing contributor to its services business.
For their part, Netflix plans to spend seven times that – $7 Billion – on content and licensing in 2018, according to Netflix Chief Content Officer Ted Sarandos (BGR, August 16th, 2017). As Netflix increases its spend to advance its platform leverage, taking multiple deals away from the networks, there will be a further fragmenting of content driven by OTT technology. A prime example of this is television hit-creator Shonda Rimes’ move from Disney-ABC to Netflix, in a new multi-million dollar production deal.
This news comes amidst another highly-publicized announcement featuring the same players, as Disney revealed it would be pulling its content off of the Netflix platform and launching its own streaming service (The Wall Street Journal, August 8, 2017), betting on a strong consumer brand and some of Hollywood’s most beloved stories and characters to launch a direct-to-consumer OTT channel in 2019. Disney also exercised its option to spend $1.58 billion – upping their stake from 33% to 75% – on BAMTech, the streaming media platform company founded by Major League Baseball. Disney’s ESPN plans to launch a direct-to-consumer sports network using BAMTech.
As Disney CEO Bob Iger said on the company’s Q3 2017 earnings call: “You have to consider global trends in the direction of…app-based media consumption over direct-to-consumer OTT services, which gives us the ability to improve our fortunes in terms of how we monetize the great IP and the strong brands that we have – whether it’s in increased advertising revenue; whether it’s in the value creation proposition of knowing the consumer better and mining data more effectively; whether it’s in basically creating stronger bonds or stronger brand affinity.”
Another major announcement was Facebook’s introduction of “Watch,” a new platform for streaming shows (Facebook Newsroom, August 9, 2017). Original video content – more short-form than the scripted dramas and comedies people are used to watching on traditional television – will be produced exclusively by partners, who will earn 55% of ad break revenue to Facebook’s 45%.
As ad load reaches saturation point for its Newsfeed, Facebook is clearly looking for new ways to attract advertisers to the platform and keep current users spending time in the app. Facebook is also trying to become a home for video consumption, where people come to view specific shows – including mini-documentaries, reality shows, and sports coverage. If it can drive enough viewers to these shows, thanks to its 2 billion total users, Facebook could offer significant revenue-share payouts, attracting premium content creators and more advertising dollars to the platform.
So what does all this mean for NSPs today and the opportunities moving forward?
The growing and changing OTT landscape
James Taylor, Senior Director of Product Marketing with Technicolor Connected Home, notes that, “After initially viewing the rise of OTT as a threat, service providers are now adopting strategies to embrace these services along with their existing offerings.”
Whether cable, satellite, telco or mobile provider, the first step that most everyone has taken is making their content available across platforms with login credentials. This approach is known as TV Everywhere, and it enables customers to enjoy the TV they already pay for when, where, and how they want.
The second approach is partnering with leading OTT aggregators, such as Netflix and Amazon. Partnerships add value by complementing customers’ existing service offering. The strategy is similar to what AT&T did with DIRECTV prior to acquiring the company; that is, if you bought AT&T’s bundle, you would get DIRECTV as part of the package.
While partnering works especially well for smaller operators, larger NSPs are taking the next step toward integration. What we are seeing more of now are NSPs integrating access to OTT services into their existing ecosystems of traditional managed TV video. This is exactly what Comcast has done with Netflix, for example, making it possible to log-on to Netflix through the Comcast Xfinity user interface. Integration makes it much easier for consumers to get all the content they want in a seamless experience.
In fact, from a user experience and engagement perspective, integration is recognized as the main driver for many customers making the transition to OTT. Hub Entertainment Research (The Hub Reports: Decoding the Default, July 2017) specifically identified key consumer benefits for each platform, which break down as follows:
- Live TV: Breaking News (71%); Local TV (71%); Local Sport Events (69%)
- Streaming: Binge Viewing/Past Season Viewing (39%); Viewing (34%); Watch on the Go (24%)
- DVR: Catch-up Viewing (27%); Specific Show (16%); Full Attention (16%)
The last option is pure Standalone OTT. This TV subscription alternative, often referred to as a “skinny bundle,” offers streaming access to OTT services over a broadband connection. The strategy provides a gateway service for the cord-nevers, similar to what DISH has done with AirTV. While NSPs are meeting consumers where they want to be met, they’re also able to leverage their brand proposition and open a path to more traditional pay-TV services.
Taking the OTT opportunity to the next level – and beyond
The truth is, NSPs come to OTT strategies from a position of strength, with sophisticated ecosystems and often owning the remote that is the household’s main means of accessing TV services. In any OTT situation, NSPs have always held the high ground. Look for instance at TiVo. Though they talked about revolutionizing TV, consumers were required to buy a separate box and go out to another input with a different remote to access the benefits. It was not until NSPs started integrating digital video recording (DVR) into their existing ecosystems that the whole category of DVRs took off with consumers.
Therein lies the opportunity with OTT – and taking it to the next level is where the competitive advantage of NSPs will play out. In situations where people will pick up their XFINITY or Liberty Global remote long before they will pick up an OTT remote, NSPs can offer OTT providers a truly integrated environment – with not only video but personalized media.
In this regard, one may look at OTT as simply another service to be integrated into their overall platform. But it’s one that brings great leaps forward in terms of technology, content, and overall user experience. As a technology platform for delivering content and services, OTT supports open innovation as well as faster deployment, time to market, and scale to consumers. As such, it not only has the potential to aggregate content, but to offer new types of content directly to homes and devices. Specifically, OTT is a potential platform for the delivery of VR, AR and other groundbreaking forms of immersive entertainment.
From a user experience perspective, the technology plus the wide range of content it makes available enables OTT to provide personalization and create individualized experiences for a more engaged audience. Next generation devices are built to optimize this OTT capability, and user interfaces are designed to make discovery of ever-expanding content choices more streamlined and consumer-friendly.
“We see this getting a lot of headway initially,” says Taylor. “We can bring that service with the CPE into the subscriber’s home in a really efficient manner. As time goes by, other platforms may emerge. As a technology enabler, we’re always looking at what might be next and keeping our finger on the pulse of what is coming along.”
Case in point: the success of the Android platform. Google has been focused not only on bringing these services to cellphones and other devices – but on making things simple for both NSPs and consumers.
Delivering these services may require NSPs to shift some investment into their content delivery networks, or possibly into a cloud platform that’s more agile. As we move toward open standard platforms, instead of putting money into integration – with testing and qualification of each device with each service – more investment can be shifted to the technologies that help NSPs deliver a wider range of content.
As a company at the forefront of managed video innovation, Technicolor has navigated this evolving industry for four decades. Partnering with Technicolor brings experience and know-how that enables NSPs to avoid the pitfalls of integrating OTT video services into their existing offering; to understand new video consumption and usage models – from an OTT standpoint, an immersive standpoint, and a quality control standpoint; and to prevent or reduce churn that threatens the bottom line.
As a leader in CPE, Technicolor is also in a position to strengthen the adoption of next-generation devices. NSPs working with Technicolor can continue to offer the great service and content their customers have come to expect, while adding the OTT content and upgradable, personalized experiences they now expect as well. By bringing these experiences together in a single device, Technicolor enables NSPs to provide seamless and frictionless experiences in an integrated and secure environment. This builds deeper relationships with consumers while establishing NSPs as forward-looking providers – essential to the home content experience.