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TV Everywhere & TV Everywhere & OTT Preserving the Pay TV Model March 2013 Executive Summary • Cable/pay TV remains one of the great cash cows of the modern media and communications industries, but in a maturing market that faces a growing threat of disruption, real service innovation is needed • Innovation is coming as content is being repurposed to support a growing array of digital services and parallel wireless and broadband networks are being synchronized to move content freely among all devices − Over-the-top (OTT) and TV Everywhere (TVE) services are now mainstream, and − The seamless movement of video between devices and turning the “second screen” into a useful adjunct of the television is becoming more real as consumers demand control of their media experiences • Software is fast becoming as important as content in determining the user experience, and there is no shortage of tech companies working to unbundle the content that sits at the core of the cable/pay TV business • While Cable/pay TV have ample time to work on these issues, as evidenced by early advances, it is apparent that real and meaningful innovation must take a higher priority than it has previously • For SPT, a clear case can be made to support investment in our ‘digital’ infrastructure to ensure that we remain competitive, can adapt multiscreen solutions and support pay TV operation initiatives, thereby sustaining subscriber fees, keeping our brands cutting edge and offering what consumers want 2 Pay TV still Strong • Pay TV satisfaction remains high among consumers − Reported 86% of U.S. pay TV consumers are satisfied with service(1) • Despite rapid growth in OTT, pay TV still holds commanding revenue advantage − OTT revenues are just 3% compared to pay TV • Cord cutting has not yet impacted the pay TV subscriber base Global Pay TV Subscribers(2) Subs (MM) Annual Growth 1,000 10% 900 9% 800 8% 700 7% 600 6% 500 5% 400 4% 300 3% 200 2% 100 1% 0 0% '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Global Pay TV Subs Growth (1) “2nd Annual Online Video Survey,” Morgan Stanley Research February, 2012 3 (2) SNL Screen Digest Over-the-top (OTT) and TV Everywhere (TVE) Defined • OTT: Services that ride on top of your Internet connection but have no relationship with an MVPD or the ISP that provides the connection • Variations of OTT services: Standalone aggregators • TV Everywhere: MVPD-controlled VOD on TV service MVPD-hosted through website or mobile/tablet application 4 OTT Market Continues to Expand • The U.S. OTT market continues to expand rapidly, with total revenues forecast to grow at a 24% CAGR through 2017 ‒ Global OTT market expecting a 29% CAGR over the same period ‒ Despite rapid growth, OTT represents low near-term risk to pay TV − Total OTT revenues are just 3% of pay TV, expected to remain below 10% through 2016 • Subscriber levels are approaching Pay TV, but the majority are non-paying − Of Hulu’s total 31MM estimated U.S. subs, 28MM-29MM subscribe to the free service − Over the long-term, with an appropriate mix of programming and pricing, OTT could pose a significant threat to traditional pay TV model • Pay TV operators could avoid / lessen potential impact of OTT through improvements to and better marketing of TV Everywhere − Higher adoption rates of TVE would increase value to consumers and support the pay TV pricing 5 Global OTT Revenues 2012 to 2017 (figures in $ millions) 2012: 2012: $1,614 $95 2017: 2017: $7,174 $1,174 2012: $7,929 2017: $23,414 2012: $842 2017: $4,561 2012: 2012: $86 $0 2017: 2017: $807 $110 $11BN Growing to $37BN by 2017 Source: Informa Telecoms & Media 6 Global OTT Forecast • Revenue is forecast to grow at a 29% CAGR through 2017 • Advertising is expected to remain the largest revenue category for the foreseeable future ($BN) Global OTT Revenue 40 $37 35 4.7 $30 30 4.3 25 $24 14.0 3.3 20 $18 9.5 3.1 8.0 15 $14 $11 2.5 6.0 10 $8 2.0 4.5 18.5 16.0 2.0 3.5 12.5 5 2.5 9.2 7.0 3.5 5.1 0 2011 2012 2013 2014 2015 2016 2017 Advertising Subscriptions Transactions Source: Informa Telecoms & Media 7 Connected device growth • Expected growth in the number of connected devices will continue to provide opportunities for multiscreen services U.S. (MM) Western Europe (MM)(1) 617 548 53 560 83 465 26 494 77 26 45 24 426 69 378 24 128 149 22 35 67 119 100 22 334 19 93 287 71 65 65 25 19 240 14 209 201 42 36 238 226 15 197 57 209 14 9 190 21 181 16 134 9 157 9 158 9 122 129 132 114 121 98 99 85 101 69 62 43 36 9 22 2011 2012 2013 2014 2015 2016 2011 2012 2013 2014 2015 2016 Tablets Smartphone Owners TV’s/Blu-ray Players Standalone SetTops Game Consoles (2) (3) (4) Source: SNL Kagan, September 2012. (1) Western European Smartphone forecast assumes ‘U.S. ‘10 – ‘11 growth rate of 35% applied to 2010 installed base and ‘12 – ’16 growth rates per Saffron Digital. (2) Includes the subset of TVs and Blu-ray players that are connected to the Internet. (3) Includes installed base of Internet-connected standalone set-tops designed for online video viewing such as AppleTV, Roku, Google TV, Boxee, standalone TiVo and other devices. (4) Includes the subset of game consoles that are connected to the Internet such as Sony PlayStation, Microsoft Xbox and Nintendo Wii. 8 TV Everywhere Use in the U.S. • All six major U.S. MSOs offer some form of TVE services as an extension of their existing linear pay TV service • Current usage remains low, as less than half of U.S. pay TV subscribers have tried the service • Despite low usage to date, analysts expect TVE revenues to catch up and pass OTT in the near future as operators improve the consumer experience and implement more comprehensive marketing campaigns – In the next 2-4 years, U.S. TVE is expected to contribute an additional $12BN in annual revenue to U.S. TV ecosystem.(1) The majority (85%) of this amount is expected to result from additional advertising opportunities, while 15% will be from incremental pricing of new digital offerings • To realize these new revenue streams, operators and programmers must work together to: – Innovate their ecosystems and focus on the consumer experience – Reward teamwork and preserve the symbiotic nature of the business model – Consolidate nationally and internationally to effectively compete with the challenge of OTT(2) (1) “TV Everywhere Could Create $12BN in Annual Revenue for TV Industry,” The Hollywood Reporter, Jan 20, 2012 9 (2) “TV Delivery Evolution: Hybrid TV, OTT and TVE,” September 2012 TVE is also Evolving Network hosted Multichannel Operator Controlled • 5MM+ mobile app downloads(1) (28MM subs) • ~5MM active users (21MM subs) • Defensive tactic against standalone svcs • Aggressively securing rights from ntwks • Testing web-only HBO GO svc in Nordics • Offers Streampix up-sell / bundle(2) International • 36 operators in 20 int’l markets instituted TV Everywhere strategies by 2012 Roll-out Next Generation • Operators considering moving niche linear channels to captive SVOD Strategies platforms (e.g., Streampix) to combat pure-play OTT providers Financial • Debate surrounding financial contribution of various TV Everywhere initiatives Contribution and whether it will be incremental or cannibalistic (1) Time Warner Q2 earnings call as of 8/11. (2) Streampix free to Comcast triple play and other select packages and includes +800 films and +1,500 TV episodes. 10 (3) Source: Needham Research, January 2012. U.S. TVE Players Provider TVE Application / Website Any Play, Streampix, Xfinity.com, HBO GO, Watch ESPN TXC TV app, HBO Go, Watch ESPN HBO GO, Turner App, epixhd.com Optimum TV to GO, Turner App, HBO Go, Watch ESPN Nomad, DirecTV Everywhere, HBO GO, Max GO Dish remote Access, HBO GO, Max GO, Starz Play Source: Morgan Stanley Media and Cable/Satellite December 11th, 2012 11 UK TVE Players Provider TVE Application / Website Sky Go Virgin TV Anywhere SVOD and TVOD through BT Vision+ STB available; apps currently in development 12 Latin America TVE Players and Penetration Subscribers Moviecity Telecine DirecTV Country (in '000s) ESPN Play Play Muu HBO Go HotGo Play Fox Play Sports Premiere FC Argentina 7,850 74.3% 12.3% --% --% 0.2% --% 28.4% 22.1% --% Brazil 14,640 36.0% --% 35.6% 4.6% --% 6.1% --% --% 6.2% Chile 2,130 55.3% 11.2% --% --% 0.2% --% 12.0% 12.0% --% Colombia 4,110 39.6% 6.9% --% 2.1% 0.1% --% 13.8% 13.8% --% Mexico 12,320 35.4% 5.3% --% --% 0.2% --% --% --% --% Peru 1,250 78.5% 1.5% --% --% --% --% 10.1% 10.1% --% Venezuela 2,950 72.9% 10.4% --% --% 0.1% --% 45.7% 45.7% --% Total 45,250 47.3% 5.4% 11.5% 1.7% 0.1% 2.0% 10.0% 8.9% 2.0% 2.0% 8.9% 10.0% 2.0% 0.1% 47.3% 1.7% 11.5% 5.4% ESPN Play Moviecity Play Muu HBO Go HotGo Telecine Play Fox Play DirecTV Sports Premiere FC 13 Source: “TV Everywhere in Latin America,” Dataxis, 2012 Case Study: HBO GO Nordic (OTT vs. TVE) HBO Nordic launching in Denmark, Sweden, Norway and Finland this month • First stand-alone HBO GO service that does not require MVPD subscription • €10 per month for streaming only or as an add-on to standard pay TV subscriptions • Will compete with Netflix's planned service • Launch delayed, originally planned to go live in late 2012 14 Virtual MSO Sky has launched a TVE service offering to non-pay TV subscribers • Service does not require concurrent linear pay TV subscription first voluntary decoupling of TVE from traditional pay TV model • Sky Go offers four TVE packages ranging from $23-$60 per month, with additional amounts for ESPN • Content viewable on Android, iOS and PCs Sky Go Package Details Sky Entertainment Sky Sports & Entertainment 5 live channels All 6 Sky sports channels Additional channels on-demand 5 on-demand entertainment channels £15 per month 20 live channels (additional £13 per month for ESPN) £35 per month (additional £10 per month for ESPN) Sky Movies & Entertainment Sky Movies, Sports & Entertainment 11 movie channels All 6 Sky sports channels Hundreds of movies on demand 11 Sky movie channels 20 live channels 5 on-demand entertainment channels £32 per month 20 live channels (additional £13 per month for ESPN) £40 per month (additional £10 per month for ESPN) 15 Second Screen Market Trends U.S.
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