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Taking Pay TV Channels OTT Direct: Four Reasons to Launch Standalone Service Now | Page 1 Taking pay TV channels OT T direct: F o u r reasons to launch standalone service now Author: Colin Dixon, Founder and Chief Analyst, nScreenMedia | Date: December 4, 2014 INTRODUCTION In the last few months the unthinkable has What could be inducing cable stalwarts to happened. A cable TV channel, one that has been This paper presents four reasons that potentially put the billions of dollars they earn with pay television from the beginning, one widely from pay TV at risk by going direct to consumers explain why any cable TV channel held as an anchor tenant of the franchise, has OTT? This paper offers four solid reasons why decided to launch a standalone OTT service. HBO they are taking the risk. can, and should, launch their own will begin signing up Internet customers in 2015 Taken together, these four reasons explain why OTT TV service now. without requiring that they have a pay TV subscription. any cable TV channel can, and should, launch their own OTT TV service now. The move by HBO has been greeted with raised eyebrows by some in the industry. NBC Universal Though it may be challenging to avoid head Steve Burke said of the HBO move that “it’s cannibalization of pay TV revenue streams, it is going to be a challenge for them to not cannibalize not impossible and may lead to growth in both what is already a really, really good business.”1 viewers and revenue. Despite the cautious industry reception to HBO’s announcement, others have decided to follow the lead. CBS launched a $5.99 per month OTT This paper was made possible by the subscription service called CBS All Access. And generous sponsorship of Showtime has said it will also launch direct to consumer Internet service in 2015.2 Others have decided to keep their content safely ensconced behind the pay TV wall. Chase Carey, COO of Fox, said the company has no imminent www.schange.com plans to offer its own content direct to consumers over the Internet. Taking Pay TV Channels OTT Direct: Four Reasons to Launch Standalone Service Now | Page 1 REASON 1: IT’S ALL ABOUT DATA Discussion Standard Richard Quest, the CNN International News Anchor, described the predominant model of media delivery products“ to passive today as “standard products to passive recipients.”3 It is becoming increasingly clear that the key to success recipients in an IP world is anything but standard and passive. ” Inside the pay TV bundle, neither HBO nor CBS gets much data on how the content is consumed by viewers. Richard Quest, CNN International News Lack of viewer data limits their ability to tailor the experience to each individual. Yet that is precisely what Anchor, describing an increasing number of viewers are coming to expect. By tracking how, when and where viewers are traditional media today watching content, HBO and CBS will be able to create an experience closely attuned to the needs of customers. This data will inform every part of their business. For example, Netflix uses its extensive user data to figure out what type of content to create, and even the impact of a new show on subscriptions. Internet natives already know this and are riding the data to huge viewership. Michelle Phan, the YouTube make-up queen, interacts with her audience constantly through social media. She uses this interaction to find out what her audience wants her to cover and creates content to fit. And it works. Her YouTube channel has 6.4 million subscribers, driving 18 million monthly views and 2.8 million average views per video.4 HBO and CBS need the audience data to commission content much more accurately targeted to their audience. In the case of CBS, this also allows for more accurate targeting of advertising. And better targeted ads are more likely to be watched by viewers and, as a result, are more valuable. There is already ample evidence in the market that viewers are increasingly comfortable with being more actively involved with what they watch. Ericsson forecasts that by 2020, 50% or more of what people watch will be on-demand. In some market segments we may already be passed that point.5 Mr. Quest is exactly right in his characterization of old media as standard products to passive recipients. Audiences are becoming increasingly active in their viewing. If content providers stick to their mass- market standard product ways they will find themselves relegated to the sidelines by content companies that leverage the full power of the user data they obtain from their OTT services. Taking Pay TV Channels OTT Direct: Four Reasons to Launch Standalone Service Now | Page 2 REASON 2: GO FOR INCREMENTAL REVENUE Discussion All in, there are 80 HBO growth inside the pay TV package is stalled. Every pay TV subscriber that wants HBO under the current million “ homes that do not business terms has it. Numerous marketing approaches have been tried, from free weekends to broadband have HBO and we will use bundles, yet the company simply can’t push much beyond the 30M subscribers it currently has. Further, the company has seen Netflix blow passed this number of subscribers in the last year, with no signs that things all means at our disposal are going to slow down. to go after them. ” The company is clearly aware it needs to do something new to ignite growth. Mr. Plepler (HBO’s head) said: Richard Plepler, CEO, HBO “All in, there are 80 million homes that do not have HBO and we will use all means at our disposal to go after them.”6 This is why the company decided to go direct to consumers in 2015. Going direct over the Internet for traditional media companies is certainly nothing new. Sky, the UK satellite company, decided to take the same approach in 2011 with its OTT standalone product Now TV. UK consumers can buy access to all 7 Sky Sports channels for £6.99 a day or subscribe to a movie package on monthly basis for £14.99. This approach appears to be working with company officials crediting Now TV with helping lift subscriptions 70,000 in the first quarter of 2014.7 Sky’s Now TV offers premium sports a la carte to Internet users Taking Pay TV Channels OTT Direct: Four Reasons to Launch Standalone Service Now | Page 3 REASON 3: BE READY TO “FLIP THE SWITCH” Discussion We’re well- While no one wants to rock the pay TV boat, it’s also becoming clear consumers are increasingly enamored positioned“ to go direct with the web approach to media. If a large number of pay TV subscribers were to decide to disconnect pay to the consumer if the TV, it just makes good sense to be ready to react. As Bob Iger said: “We’re well-positioned to go direct to the consumer if the marketplace demands it, but we don’t feel a need to do that now.”8 marketplace demands Is this likely to happen soon? Apparently not. The number of US pay TV subscribers has been static at a it, but we don’t feel a little over 100 million for the last 5 years. However, there are some worrying signs for the future. The need to do that now.” young do not seem to have the same affinity for traditional TV as older age groups. Bob Iger, Chariman and CEO, Disney Millennials put considerably less stock by pay TV than the rest of the population. Just 63% of 18-29 year olds with broadband report also have pay TV.9 That is 11% below the average ownership and 14% lower than the 30-49 year olds. This substantial difference is probably due to the 19% that have never subscribed to the service, since cancellation rates amongst millennials are identical to the 30-49 year olds.10 And it is with the 19% that have never subscribed to service that operators have the biggest challenge. Just 2% of that group say they are considering subscribing in the next three months.11 Simply put, there is no better way to be ready for a mass migration away from pay TV than to have a standalone OTT service already in market. Pay-TV Subscription Status by Age Group 50+ 78% 14% 8% (n=364) 30-49 77% 18% 5% (n=389) Millennials 63% 18% 19% (n=247) © nScreenMedia, 2014 Average 74% 16% 10% (n=1000) Current subscriber Cancelled service Never subscribed Taking Pay TV Channels OTT Direct: Four Reasons to Launch Standalone Service Now | Page 4 REASON 4: LOOK FOR NEW ONLINE OPPORTUNITIES Discussion There are 10 million The web is already bringing disruption to some areas that have traditionally been pay TV strongholds. homes“ that have With disruption, comes opportunity. That is what Disney’s purchase of Maker Studios is all about, and what broadband only. They CBS is up to pitching CBSN into the volatile world of online news. As Les Moonves, CBS President and CEO, said: “There are 10 million homes that have broadband only. They don’t have cable, they don’t have don’t have cable, they satellite. But they do want CBS content.” don’t have satellite. But they do want CBS US HOUSEHOLDS WITH AND WITHOUT content. PAY TV - 2008 TO 2014 ” © nScreenMedia, 2014 Les Moonves, President and CEO, CBS Corp. Pay TV HHs Non-Pay-TV HHs 22.6 19.9 17.8 17.4 19.6 20.7 21.6 96.9 99.4 100.1 100.4 100.4 100.9 100.7 2008 2009 2010 2011 2012 2013 2014 Mr.
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