The Delta Perspective
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The Blockbuster moment for pay- TV operators is fast approaching Vincent Stevens - Associate Partner Irish Manipis - Senior Consultant April 2019 THE DELTA PERSPECTIVE THE DELTA THETHE DELTADELTA PERSPECTIVEPERSPECTIVE THE DELTA PERSPECTIVE The Blockbuster moment for pay-TV operators is fast approaching Authors: Vincent Stevens - Associate Partner Irish Manipis - Senior Consultant The rules of the media next five years to $183 billion1. game are changing, so While pay-TV is still showing the identity of pay-TV moderate growth in some providers must adapt emerging markets, they are on and evolve course to decline in the mid-term. Only a handful of pay-TV markets, The winds of change are blowing such as Indonesia, Mexico, for the pay-TV industry and they Vietnam, have seen double- are moving fast. It is expected digit annual subscriber growth that worldwide pay-TV revenues over the last two years, with will decline over the next five gains slowing over the last year. years largely due to lower cost However, most of this growth is and higher convenience content believed to have come from lower alternatives. Global pay-TV value subscriptions2. revenues will fall 11% over the 1 Digital TV Research – Forecast: Global pay-TV revenues to decline by 2023, subscriptions will rise 2 Nagra Kudelski, MTM – The global pay-TV innovation landscape 3 THE DELTA PERSPECTIVE Technology has exposed consumers to new TV transformed: Trends that are entertainment experiences, storytellers and shaking up the pay-TV industry programmes. Customers are spoiled for choice, having the ability to receive content where and 1. Change in video consumption habits when they want while paying less for it, legally or Though linear TV still dominates, media illegally. With millions of households cutting their consumption is shifting towards on-demand and cords or ditching them fully, the pay-TV industry is smaller screens. In recent years, on-demand viewing struggling to stem the bleeding. represented 42% of active viewing hours versus As Blockbuster failed to compete against the 58% for scheduled linear TV (global average). internet driven VOD disruption, the time has In 2010, on-demand viewing accounted for 3 come for pay-TV providers to re-invent themselves 30% . Users value the autonomy to choose what against the likes of Netflix, YouTube or TikTok. they want to watch, when they want to watch. Younger generations are leading the biggest media behaviour changes, spending 37% of viewing time on mobile versus 10% for the older people. Around 55% of younger viewers take-up on short form content against 15% for older generations4. 3 Ericsson ConsumerLab, TV & Media, 2017 4 Nielsen Global digital landscape survey Figure 1 - Pay-TV macro trends Global trend Emerging markets (EM) reflection Production Creators Network Distributor Infrastructure Devices Audience companies 4 3 1 OTT players driving up costs for “golden PayTV penetration high in most Video viewing habits content” and sports, driving a value shift developed markets but facing changing from distribution to content production challenges from “cord cutting” • Linear to non-linear Local content still king in emerging mkts. Some EM. Pay-TV provider showing • TV to mobile screen Local content production on the rise, incl. initial signs of topline pressure • Single to multi-screen by OTT • Weekly to binge 5 SVOD becoming mainstream, yet with current economics questioning sustainability (S)VOD models are unlikely to scale up significantly due to pricing and other challenges 7 Advertising spend under pressure for 6 TV. Value shift towards digital Piracy rampant, undermining the EM. still enjoys growing TV ad spend economics of TV and SVOD 8 Analytics and experience become a competitive differentiator 2 New content formats becoming mainstream (pro-am, eSports, Tik Tok, etc.) 9 Industry consolidation (ATT-Warner, Viacom- CBS(?), Comcast-Sky, etc.) 4 THE DELTA PERSPECTIVE 2. New content formats (e.g. pro-amateur, at least five videos online per day5. New content TikTok) becoming mainstream formats keep spawning, some at neck breaking speed. TikTok hits 500 million monthly active users The rise of the smartphone and 4G has made just two years after launch. T-series, an Indian new, direct-to-consumer, content platforms music label, has 140 million subscribers across its mainstream. The digital incumbents are the most multi-channel YouTube network, becoming the popular platforms for online video, not pay-TV most viewed YouTube channel since 2017. incumbents. 44% of polled consumers watch 5 Relevance – New report shows consumers prefer to watch content on Facebook vs YouTube Figure 2 - Overview of new content formats % who watch video content most often on each Other popular video content services include platform (2018, n= 500 consumers worldwide) • Tik Tok hits 500 million global monthly active users as China social media video craze continues • Tik Tok, Douyin's overseas version, was the most 47% downloaded non-game app in the Apple app store globally in the first quarter of 2018 41% • 650 million total global audience in 2018 • Average 9 billion monthly content views and average 3 billion video content views per month 8% • By 2018, Twitch reached a level where it had 2.2 2% million broadcasters monthly • 15 million daily active users 2% • Revenues rose to $160 million in 2018, largely thanks to the launch of its paid subscription service 1% • Paid subscribers grew 9% on the platform, with 952,000 members at the end of 2018 Source: 2018 PROMO Online Video-Watching Habits Survey 3. Cord cutting pressures South Africa, Venezuela and Peru2, are also showing signs of slowdown indicating the global It is well established that pay-TV penetration is inertia of the media disruption. under pressure in established fixed broadband and 4G prone countries. Often expensive, multichannel, In Asia, Singapore’s pay-TV incumbent suffered linear and advertising fuelled pay-TV packages are a decline in revenues due to a lower number of gradually being replaced by cheaper on-demand customers6, Thailand’s pay-TV incumbent saw its advertising-light SVOD, AVOD or skinny bundles. subscription revenues soften by 2.3% year-on-year Emerging markets, however, are not immune to and Malaysia’s pay-TV incumbent suffered a 3.7% this trend and places such as Malaysia, Philippines, year-on-year decline in subscription revenues. 6 3Q 2018 5 THE DELTA PERSPECTIVE 4. Rise in content costs driven by blockbuster respectively7. Indonesian ride-hailing provider Go- investments from OTT players Jek announcing entering the content business with VICE illustrates the remaining disruptive potential Disintermediation of the OTT value chain allows of the industry. OTT players to go directly to the end consumer, bypassing the need to abide by traditional As a result, production budgets multiplied infrastructure intense distribution channels. With drastically in the past few years. Game of Thrones more competitors vying for attention from the used to be produced at ~$3 million per episode same consumer, players are differentiating their in 2010, compared to a staggering $15 million offerings to survive. For OTT players like Netflix, recently. Amazon’s Lord of the Rings blockbuster is Amazon and Hulu, their strategies continue to estimated to spend ~$20 million per episode this focus on beefing up their content catalogue – with year9. It is a great time for content, less so for cable. a strong emphasis on original and local content. It’s a strategy that seems to be successful so far. With Costs for scripted content are not the only ones Netflix beating analyst estimates to add 29 million increasing, another major price hike is coming paid subscribers in 2018, a 33% y-o-y increase7, from sports licensing. For example, Facebook’s big on the back of an $8 billion content spend8. Tech leap into live sports, signing off a ~$257 million giants like Amazon and Hulu are also estimated to broadcast rights deal with the Premier League to be spending $4.5 billion and $2.5 billion on content broadcast live league games exclusively in Thailand, Vietnam and Cambodia. 7 CNBC – Netflix beats on subscriber growth, but misses slightly on revenue – stocks fall after hours 8 MoffettNathanson – Netflix spends more on content than anyone else on the internet 9 UBS Research – Production costs of super-premium dramas Figure 3 - Evolution of production costs of super-premium dramas Production costs of super-premium drama increasing (Cost per hour of first season of US premium dramas, $m) 2019 Lord of Rings 20 Game of Thrones (last season) 15 2017 The Get Down 12 Stranger Things 10 Westworld 9 Vinyl 10 2014 Sense8 9 Orange is the New Black 4 House of Cards 5 Game of Thrones 6 Boardwalk Empire 5 2010 The Walking Dead 3 Source: UBS Research, the Guardian, IMDB, company data, press reports; Delta Partners analysis 6 THE DELTA PERSPECTIVE 5. SVoD players face pricing and scaling up they are still running a $3 billion negative free cash challenges flow11. The scale versus profitability equation seems to have gotten lost or strategically deprioritized. In the quest to win subscribers, SVoD players have While Netflix reports their investments are sparked a content arms race that is fast becoming producing positive ROI, smaller SVOD players seem a financial burden to them. Netflix’s 2018 reported to be faring worse, with many high-profile services results shows a 26% year-on-year subscriber shutting down or struggling. growth, reaching 139 million subs10, however, 10 The Guardian – Netflix adds 8.8 million subscribers as its stock falls over spending fears 11 Motley – Netflix hits 139 million subscribers, negative free cash flow reported Figure 4 - News clippings on the sustainability of selected SVoD players 6. Rampant piracy poses monetisation rights. Globally, piracy hits yearly industry revenues challenges by around $7 billion (4% of revenues), with Asia Pacific losing ~$1.6 billion (6% of revenues)12.