OTT Streaming in the Limelight: Four Trends and Predictions for the Media Industry

As more people shift to online channels and companies join forces in a variety of ways, the challenge is to identify the offerings and partnerships that will maximize revenue and attract customers. Over-the-top video providers are in a hurry to exploit the best opportunities.

OTT Streaming in the Limelight: Four Trends and Predictions for the Media Industry 1 It’s no secret that content generation, distribution, and consumption are disrupting television. In fact, by the end of 2017, there were 120 million aggregate over-the-top (OTT) subscriptions in the United States alone, indicating that the Internet is gradually overtaking television as the standard.

Mushrooming partnerships and acquisitions are quickly reshaping the video media landscape. Potential partners, particularly among OTT video providers and traditional mobile network operators (MNOs), are vying for collaboration to capture the greatest market share, creating business alliances and product offerings that are constantly evolving. The ultimate challenge lies in knowing what offerings to create and whom to partner with to maximize revenue while gaining customers.

Four trends are transforming the global landscape and will play a crucial role in informing the strategy that ecosystem players must adopt to succeed.

1. Companies are Experimenting with New Models for Content Monetization

The digital on-demand content market is still evolving, and an array of companies are experimenting with alternate monetization models—the most popular being subscription video on demand (SVOD) and advertising (or ad-based) video on demand (AVOD). Consumers are spending more on SVOD such as Netflix and Amazon’s Prime Video than ever before, making it the single largest video services payment method at 51 percent of global spend (see figure 1). That said, transactional video on demand (TVOD), including electronic sell-through and digital rental, still provides more than half of all OTT services.

In fact, traditional media houses that conventionally owned vast archives of legacy movies and television content are reinvigorating and amplifying their growth through OTT-based distribution models. Many pay-TV operators are rolling out standalone subscription-based OTT

Figure Consumers are spending more on subscription video services than ever before

Global OTT video service and revenue split by service type,

, % AVOD % Electronic sell-through (TVOD) % Digital rental (TVOD)

% SVOD % %

% %

Video services Revenue ( billion)

Notes: TVOD is transactional video on demand. OTT is over-the-top. SVOD is subscription video on demand. AVOD is advertising video on demand. Sources: Ovum, Statista; A.T. Kearney analysis

OTT Streaming in the Limelight: Four Trends and Predictions for the Media Industry 1 services. Dish’s Sling TV and AT&T’s DirecTV Now are successful examples of affordable standalone services in the United States. Sky has launched OTT services in key European markets, including the United Kingdom, Italy, Germany, and Austria.

As subscribers show a willingness to pay for premium content, OTT players are coming up with “fremium” models that provide free access to a selected content catalog to acquire new subscribers along with premium content and services for paying subscribers to drive up average revenue per user. The business model for free content that is supported through an ad-supported revenue is a tough proposition, as seen by the global leaders in digital online music: Spotify, iHeartRadio, and Pandora. Spotify and iHeartRadio have adopted a “fremium” model. Spotify derives more than 90 percent of its revenue from subscription fees, touting 75 million paying subscribers out of its 170 million monthly users. Pandora, on the other hand, generates most of its revenue through ads, with its user base primarily using the free service. Today, Pandora is losing money and is making a big push for Pandora Plus and Pandora Premium services, which have nearly 6 million paid subscriptions.

A growing regional focus is developing via partnerships and acquisitions to deliver custom content.

With growth in subscription-based services, transaction-based services will also increase in the long run and are the best means to sell content for a high average selling price. For example, TVOD players such as Amazon Video, Google Play, and iTunes largely offer similar content but justify a higher price with new-release and blockbuster content and easy-to-use content- discovery tools.

2. Consolidations and Strategic Partnerships Are Changing the Ecosystem

With competition intensifying and greenfield growth becoming more challenging, the market is ripe with M&A talks and partnerships with companies seeking to expand into new markets or otherwise differentiate themselves. Notable examples include Verizon’s purchase of Yahoo, T-Mobile and Netflix’s streaming partnership, and Amazon’s Prime Video featuring content from HBO, Cinemax, and Showtime. Also, illustrative of consolidation trends are Disney’s bid to acquire Fox and the T-Mobile–Sprint merger dialogs.

Between 2011 and 2017, telecoms and pay-TV operators struck 332 deals with OTT service partners. Partnerships tend to focus on three strategies: marketing simply as a brand and sales tool, service integrations into tariff plans or technical integrations into the user interface, and commercial agreements with revenue sharing, carrier billing arrangements, and white-labeled or cobranded offerings (see figure 2 on page 3).

A growing regional focus is also developing through partnerships and acquisitions to deliver custom content. HBO is creating distribution alliances globally on its OTT platforms: HBO Now, HBO España, and HBO Nordic. Disney acquired all of Star India’s assets, including

OTT Streaming in the Limelight: Four Trends and Predictions for the Media Industry 2 Figure OTT video partnerships tend to focus on three strategies

Types of OTT video bundling deals and service partnerships, -

% Fixed broadband TV % % Mobile % % % % % % % % Brand and Service Commercial marketing integration agreement

Notes: OTT is over-the-top. Sample size is . Sources: Ovum; A.T. Kearney analysis

Hotstar, its OTT offering. Regional OTT video players are penetrating local markets by entering into strategic partnerships with MNOs. Examples of these partnerships are Vodafone’s endless data offerings in the United Kingdom for SVOD services, such as Prime Video and Netflix, and Shaw Communications in Canada offering its TV and Internet customers an integrated platform to watch Netflix.

Moving in the opposite direction to increase revenue via linear channels, OTT players are launching lite pay-TV services to offer linear channels at prices lower than those of traditional players. Hulu, an entirely online video service, launched its live-TV streaming services with more than 40 channels, including major networks CBS, Fox, ABC, and NBC as well as select sports and entertainment channels, such as ESPN, Food Network, and Cartoon Network.

We expect consolidation to continue, driven by the need for scale and resulting in three distinct clusters of content players: mainstream content, sports programing, and niche localized content.

3. The OTT Model Is Changing the Value Chain of Content Creation and Distribution

Streaming television is touching every corner of media, disrupting not only how content is distributed, but also how it is created and by whom. Today, about 50 million households have OTT video, and according to comScore, they consume it in the same time-of-day pattern as traditional TV viewers.

Even through more TV viewers are adopting Internet-based distribution, the clear majority of US households are still consuming TV programming through traditional bundles—often in addition to OTT offerings. In fact, consumers are spending more on at-home entertainment, a trend which is expected to grow.

Based on current viewing habits and untapped video segments, a big growth opportunity exists in live and linear OTT services, which are expected to be an integral part of the next generation

OTT Streaming in the Limelight: Four Trends and Predictions for the Media Industry 3 of OTT video. Pay-TV providers are in the best position to develop live streaming services that exploit content that is best experienced in real time, such as news, weather, talk shows, and sports. But this could change as the content owners begin to develop their own platform and OTT partnerships.

In an effort to optimize reach and maximize revenue, sports properties are exploring developing their own OTT services and partnerships with leading online video providers. Formula 1’s new owner, Liberty Media Corporation, plans to show races on its OTT platform in almost two dozen markets this season with unique feeds and multi-level personalization that is not available on any other platform. Meanwhile, Wimbledon Tennis Championships not only has an incredible spread of TV-broadcast rights but also has a social media presence with 157 million viewers on Facebook alone as of 2017. On the online video provider partnership side, Amazon signed deals to show the National Football League’s Thursday night games and the Association of Tennis Professionals tour highlights. Facebook has signed contracts with multiple sport properties, including Major League Soccer, the World Surf League, Major League Baseball, US college football, the UEFA Champions League for European football, and many more.

Mobile is quickly growing to become the dominant growth channel for service distribution.

While the traditional cable model focused on content unbundling, we expect content to eventually re-bundle in an OTT construct. Eventually, we expect more consumers to migrate most of their TV consumption to Internet-based distribution.

4. Mobile Is Surpassing TV to Become the Main Growth Channel for Content Delivery; MNOs Are Playing a Central Role in Distribution as Cord Cutting Accelerates

The mobile channel has become a widely accepted medium for video delivery, overtaking traditional TV as the leading growth channel. Even with TV billing arrangements and fixed broadband bundling, mobile is quickly growing to become the dominant growth channel for service distribution. As MNOs accelerate mobile broadband and LTE deployment, access to high-quality mobile streaming is growing, particularly in the emerging markets of Asia Pacific, Africa, and the Middle East. At the same time, the surge in MNO partnerships and bundling deals is incentivizing viewers to consume more content on their mobile devices.

While 79 percent of households still pay for traditional cable or satellite service, cord-cutting rates are continuing to accelerate in the United States. Total pay-TV subscribers declined 3.4 percent in 2017, and “cord-never” households that did not pay for any traditional form of TV service in the first place are at 13.5 million and growing (see figure 3 on page 5).

OTT Streaming in the Limelight: Four Trends and Predictions for the Media Industry 4 Figure The number of pay-TV subscribers is shrinking

household penetration

% % % %

Pay TV (–%)

OTT (+%) % % % %

Notes: OTT is over-the-top. Sources: comScore, MoettNathanson; A.T. Kearney analysis

MNOs are quickly realizing their growing importance as a vital sales and marketing channel for premium OTT video and other content services. As MNOs support growth in OTT video consumption over the next decade, they aim to encourage the use of mobile data plans and uptake of mobile-first consumption by offering higher-margin visual entertainment offerings. Mobile partnerships have surged to more than half of all recent OTT video bundling deals, validating the growing trend of consumers’ mobile adoption. This trend is expected to continue as more MNOs subsidize or bundle content at no additional charge to drive upsell and retention.

Racing Toward the Future

Taken as a whole, these four trends affect the media ecosystem’s participants in different ways. Where some see maturing markets, others see fresh opportunities to evolve their businesses to a new industry standard for product and service delivery. And yet all OTT providers are in a hurry to exploit the best opportunities, and agile ecosystem partners will join them in this pursuit.

Authors

Reuben Chaudhury, partner, New York John Gomes, principal, San Francisco [email protected] [email protected]

Ben Smith, partner emeritus, Arjun Bhalla, consultant, New York senior advisor, San Francisco [email protected] [email protected]

Laura Worsham, consultant, San Francisco [email protected]

OTT Streaming in the Limelight: Four Trends and Predictions for the Media Industry 5 A.T. Kearney is a leading global management consulting firm with offices in more than 40 countries. Since 1926, we have been trusted advisors to the world’s foremost organizations. A.T. Kearney is a partner-owned firm, committed to helping clients achieve immediate impact and growing advantage on their most mission-critical issues. For more information, visit www.atkearney.com.

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