Australian OTT Video – Creating a New TV Market 18 November 2015 Contents Executive summary ................................................................................................................................. 4 Australian market evolution ..................................................................................................................... 6 Networked video in Australia: a snapshot ........................................................................................... 6 OTT video services .......................................................................................................................... 7 Pay TV and IPTV ............................................................................................................................. 8 Digital Terrestrial free-to-air TV (DTT) ............................................................................................. 8 Australian market evolution ................................................................................................................. 9 Managed and unmanaged television .................................................................................................... 11 New varieties of television service technology .................................................................................. 11 Pay TV networks ............................................................................................................................... 12 IPTV networks ................................................................................................................................... 14 OTT SVOD networks ......................................................................................................................... 15 Content delivery networks ............................................................................................................. 17 Implications for customer experience and network investment ............................................................ 18 This Ovum report was commissioned by nbn Executive summary nbn end-user data consumption increased by 51% over the March-September period Increase due to the arrival of mass market OTT video services Ovum forecasting 4.7 million OTT SVOD subs in Australia by 2019 – a 300% increase Booming OTT market will place increased strain on telco networks New investment will be needed to deliver required capacity increases The recent boom in subscription video on demand (SVOD) services, driven by the launch of Netflix, Stan and Presto in Australia, was accompanied by a sharp rise in network data traffic. Average monthly download usage on the nbnTM network was 73GB in March 2015 but was 110GB by September, a rise of 51% in just six months. Some capacity problems arose this sudden increase in demand. But video use in Australia is set to grow even further in the coming years, so further new capacity will be required as time passes. Ovum estimates that the number of SVOD subscribers in Australia will grow by a factor of 17 between the end of 2014 and the end of 2019. By that time, Ovum forecasts that there will be 4.707 million OTT SVOD subscriptions in Australia. Other forms of OTT video delivery such as downloaded video-on-demand (VOD) will also grow significantly. Many users of these services will be individuals rather than households, with the number of screens per household proliferating; already, there are 2.3 TV sets per household, and 1.6 tablets, not to mention smartphones. Video traffic is already the driver of overall household traffic. The capacity problems that were caused by SVOD video traffic in 2015 were addressed fairly quickly as telecommunications operators moved to add broadband capacity to cope with the increased data traffic. But the event raised questions about over-the-top (OTT) video, particularly where the responsibility rests for OTT service quality. There was also some confusion about the origin of the problems, which were not related to basic access speeds in the last mile, but to capacity in local and long-distance transmission that link up the last-mile networks. These questions will only become more pressing as more OTT service providers and new video business models emerge over the coming years. The Australian video services market will look very different in 2019 compared to 2014. The main difference will be the new variety of services available. In 2012, Australia was still in the throes of the analog FTA switchoff, and traditional FTA and pay TV were completely dominant. In 2019, they will share the market with IPTV and a dramatically expanded OTT video industry. OTT video is qualitatively different from more traditional video services such as free-to-air (FTA), pay TV and IPTV. FTA TV, pay TV and IPTV are all delivered by a single integrated service provider that can perform end-to-end management of service quality (or something very close). In contrast, OTT video is delivered by multiple service providers across a value chain that is only loosely coordinated. No single provider is ultimately responsible for service quality and stability. This arrangement has the undoubted advantage that it is low cost, and this makes OTT video services cheap to buy. It will allow the delivery of a “long tail” of niche content that would otherwise be uneconomic, and this will greatly increase viewer choice. But there is a price to pay for this. Service guarantees are limited, and service quality cannot reach the same levels as pay TV and IPTV unless OTT providers convert themselves into IPTV providers which would require major investment in new infrastructure. But investment on this scale is not going to happen, because it would undermine the prime attraction of OTT video to customers – its low cost and growing variety. The purpose of this paper is to explain the origin of the tradeoff between cost and quality that customers will need to understand to get the best out of OTT video. Customers need to understand the strengths and weaknesses of each mode of video delivery - pay TV, IPTV and OTT video – and what are reasonable expectations of the newly-minted OTT services. OTT video can deliver great customer benefits, but it also creates tensions between different players in the value chain that have erupted into open conflict in some markets. In the USA, this has manifested itself in a battle over net neutrality. In South Korea, it led to Korea Telecom briefly blocking video services to Samsung smart TVs to relieve capacity problems in 2012, prompting intervention by the regulator. More recently in Spain, Netflix and rival Totalchannel have complained that their OTT video offer is being constrained by incumbent Telefonica’s network policies, reducing picture quality and lowering streaming rates. Fortunately, these tensions are somewhat mitigated in Australia because of our (almost) unique tiered data allowances which sees data usage roughly aligned with prices. There is profit in traffic growth that network providers can reinvest to address customer demand. These tensions can be further mitigated, to the benefit of customers, if telecommunications retail service providers (RSPs) and OTT video players can cooperate to fund some focused infrastructure investment to manage the delivery of digital video content. This creates a better experience for OTT video customers, and also creates a wholesale revenue opportunity for telecommunications service providers. This is the strategy now being adopted in advanced video markets, and it can deliver benefits in Australia too. Australian market evolution Networked video in Australia: a snapshot The level of competition in the Australian video entertainment market has stepped up in recent years. The entry of Netflix into Australia in 2015 is just the latest example of a proliferation of video services that have challenged traditional free-to-air (FTA) and pay TV services. Analog technologies have been completely displaced in recent years by digital technologies. At the same time, demand is growing and personalized offers are emerging. Underpinning this trend is the proliferation of video screens in households. The average Australian household now has 2.3 televisions sets (42% Internet connected) and 1.6 tablets per household, along with multiple personal computers and personal devices1. This allows individuals within households to subscribe to their own content services, increasing the number of separate services. There are now four basic firms of video entertainment delivery competing in the Australian market: Traditional free-to-air terrestrial broadcasting, now using digital multi-channel technology since the closure of analog TV services in 2013. Traditional pay TV services delivered over cable and satellite, also using digital technology. IPTV services being delivered over the telecommunications network. Ovum defines IPTV as TV delivered over a closed IP network. Some Fetch TV services work this way, however many services loosely described as “IPTV” in Australia are delivered over the open Internet, and are classified as OTT SVOD services by us. Over-the-top (OTT) video services, including video-on-demand (VOD) and streaming video on demand (SVOD) services, using the open Internet. Superficially, all of these services are “television”. However, each of these services has a different underlying delivery architecture. This report looks under the hood and examines how these different architectures affect the viewer experience. Expectations of quality and stability