Last week two landmark announcements signalled the pace of change in the pay TV industry is accelerating. Disney unveiled the forthcoming launch of its new direct to customer streaming service DisneyLife, and YouTube announced its new subscription service YouTube Red.
While at MIPCOM earlier this month talk of around OTT and its potential impact (along with the biblical floods) dominated the agenda in a way that would have been unimaginable just three years ago.
So what’s changed? We’ve seen mass market OTT services (most notably Netflix and Amazon Prime Instant Video) as well as genre-focused services (like WWE Network and Hopster) scale internationally and prove there is demand for well executed customer offers.
These success stories have fuelled a gold rush with a plethora of new OTT services now coming to market covering every imaginable genre from sport, comedy to natural history. Prices for well known content franchises have spiralled, with new OTT platforms trumpeting eye-catching investments in original programming (Amazon reportedly paid £160 million [US$245 million] to win the Top Gear team and Netflix paid around £100 million for royal drama The Crown to name just two). Consultants with projects to sell and venture investors with cash to burn have fuelled the hype, pitching the story that the $300 billion global pay TV industry is going to get disrupted.
Is this hype really justified, given how many digital media innovations over the past 20 years (interactive TV, enhanced TV and mobile TV channels) have failed to take off?
The good news for content owners is that they have the chance to play a more central role in the industry
While crystal ball gazing is a dangerous game, this time the disruption potential does exist. The ingredients for change are there. Consumer behaviours, in particular growing consumptions of video online, which now accounts for over 10% of total viewing in the UK, technology developments such as the penetration of superfast broadband and connected devices, have changed the landscape.
Over the next three years the battle to own pay TV customers will heat up. However, the destiny of the pay TV industry will be determined by how well incumbent platforms and new entrants intent on disruption play their hands, as well as the key role content owners will play.
New OTT platforms that successfully bid for needle-moving rights, aggregate live and catch up services from leading terrestrial networks (as Amazon is rumoured to be working on) and continue to outpace the market in the quality of product and user experience, will lay foundations for cord cutting to reach a tipping point.
However, to get to this point, platforms will need to overpay for rights, fuelling a bubble in content prices, and risk leaving themselves financially exposed. Netflix’s announcement earlier this month of slowing growth shows that success is not assured.
Pay TV incumbents that expand their content offering, hanging onto key rights while at the same time moving from a channel-focused proposition to one that offers a competitive on-demand offer and improves user interfaces and content discovery, will equip themselves to fight off the disruptors. They’ll need to pick up the pace of innovation, acquire new capabilities and scale up internationally to compete in an increasingly global rights market.
We’re seeing evidence of the organisations that are positioning themselves to win the fight – note Sky’s 10% increase in EBITDA and one million customer additions in latest annual results – and those that are lagging behind such as MTG, which has just sold its Russian pay TV interests and is facing a hotbed of competitor OTT activity in Scandinavia.
Content producers and rights holders will ultimately be the kingmakers in this battle. OTT and pay TV services with the best selection, packaging and pricing of ‘must-have’ content will always have an advantage. Owners of this content can choose who they give this advantage to. The decisions they make now will influence the future shape of industry and pace of disruption.
Content owners need to think carefully whether it is in their best interests to see OTT streaming services more dominant at the expense of traditional pay platforms, and whether to play new and old platforms off against each other in the hope that a mixed economy will develop. They also need to consider what mix of content and windowsing they should be offering to different platforms. Those that take a more strategic approach to content licensing will be more in control of their destiny, and will more likely get the industry structure they want in the future.
The good news for content owners is that they also have the chance to play a more central role in the industry.
Going forward the most valuable companies will not only originate and distribute media content IP. They will capture more of the value associated with their IP by developing direct-to-consumer businesses, brands that can live and breathe across every medium and customer touchpoint, and the capabilities to acquire, monetise and create relationships with digital customers.
This is new territory for many content owners, but in a world where the most popular digital distribution channels are accessible to anyone and brands matter more than ever, they have a great foundation on which to build.
Producers that have the appetite to take advantage of these opportunities will do so from a position of strength and with strong underlying financials, demand for their product and no immediate threats to their business model. This fortunate set of circumstances won’t be with us forever, as unusually high demand for content, and the associated high prices, will not continue indefinitely.
While most content producers will no doubt ‘stick to the knitting’ and carry on operating in the same vein, those that grasp the potential of the new digital world can shape their destiny and build bigger and better businesses. Sophie Turner Laing, the new CEO of Endemol Shine summed it up nicely by quoting Kermit the Frog in her MIPCOM keynote: ‘Life is like a movie. Write your own ending.’
Daniel Winner has held senior roles at companies including Amazon, Lovefilm, Sky, BBC Worldwide and Vodafone