The Value of Content Report

THE VALUE OF THE VALUE OFCONTENT CONTENT

NEWS

THE VALUE OF THE VALUE OFCONTENT CONTENT TABLE OF CONTENTS TABLETABLE OF OF CONTENTS CONTENTS FOREWORD 5

KEY MESSAGES PART 1 THE ROLE OF CONTENT IN THE CURRENT TELEVISION 6 INDUSTRY

EXECUTIVE SUMMARY 12 24

PART 2 PART 3 THE ELEMENTS OF SCENARIOS FOR CHANGE WITHIN THE INDUSTRY EVOLUTION TELEVISION INDUSTRY 42 64

PART 4 IMPLICATIONS FOR KEY INDUSTRY PARTICIPANTS 78 BLE OF CONTENTS ABLE OF CONTENTS

PART 1 THE ROLE OF CONTENT IN THE CURRENT TELEVISION INDUSTRY Two traditional ecosystems ...... 27 Different markets, different rates of evolution ...... 32 The value of content: Two-thirds of the $500 billion global TV market – and growing ...... 34 The strategic role of content in the value chain ...... 35 Changes, not disruptions – until now? ...... 39

PART 2 THE ELEMENTS OF CHANGE WITHIN THE TELEVISION INDUSTRY The major forces at work ...... 44 Significant industry changes ...... 50 First-order implications for key players ...... 60

PART 3 SCENARIOS FOR INDUSTRY EVOLUTION Scenario 1: Gradual evolution within the current industry structure ...... 66 Scenario 2: Disruption driven by the rise of multiplatform navigation ...... 69 Scenario 3: Disruption driven by exclusive entertainment content ...... 72 Scenario 4: Disruption driven by the direct-to-consumer strategies of content creators and broadcast networks ...... 74 Scenario 5: Disruption driven by online content aggregators moving into linear streaming of broadcast networks ...... 76

PART 4 IMPLICATIONS FOR KEY INDUSTRY PARTICIPANTS Implications for content creators and rights holders ...... 80 Implications for broadcast networks ...... 81 Implications for infrastructure-based subscription TV distributors ...... 83 Implications for online content aggregators ...... 85 Tuning in to the future ...... 86

GLOSSARY OF TERMS ...... 88 FOREWORD FOREWORDFOREWORD This report is intended to stimulate discussion and debate about the fast-changing dynamics in the video industry. Our focus in the pages that follow is on “television”. In 2016, of course, that term needs deﬁning, as content is increasingly consumed on computers, tablets, and mobile phones (along with television sets) thanks to the advancement of online and mobile content delivery. A more accurate deﬁnition is “professionally produced long-form video content* that is delivered across a variety of traditional and digital or mobile pathways and consumed on devices from television sets to smartphones, tablets, and PCs, both in - side and outsideFW the home”. This is an industry made up of three key segments: content owners, and rights holders; FTA and Subscription TV channels; and distributors and aggregators. Our report is focused on the nature of change in the industry and primarily focused on the potential implications of these changes for the channels, distributors, and aggregators.

We are publishing this report as the industry is facing a higher degree of uncertainty about its future than at any other point in history. Our goal is to stimulate discussion among industry decision-makers, inﬂuen- cers, and academics. We hope this work challenges conventional wisdom and provides a valuable contri- bution to the ongoing industry discourse.

* For example, television programming versus either user-generated video or two- to three-minute professionally produced video segments.

5|4 KM KMkey messages KEY MESSAGES KEYKEY MESSAGES MESSAGES

The emergence of a new online-content value chain is threatening the history of Three key forces have enabled the emergence of the new online-content value chain that is driving incremental change, and is changing roles, this threat of industry disruption: relationships, and value capture. Over time, » The development of technology infrastructure (streaming network topology, connected this might be as disruptive as the changes devices, and software) capable of delivering experienced by the music, newspaper, a high-quality video experience directly to the TV; by 2017, 74 percent of the European Union and magazine industries. and 96 percent of the U.S. will have access to “video ready” ﬁxed broadband » Increased availability of high-quality online content, including professionally produced television entertainment Until recently, the nature of change in the » New and cheaper models of online content video industry (FTA and Subscription TV value creation that are driving large audiences chains) has been evolutionary as opposed to dis- assisted by a new breed of industry player, the continuous; with every new development, most multichannel network; the most successful players were able to gradually modify their strate- YouTube series, for example, have a given gies and business models in order to continue to be “episode” reach several million viewers for a successful. cost well under $50,000

The emergence of a new online-content value These forces have led to signiﬁcant change chain is threatening that history of incremental in consumers’ viewing behaviors, in particular the change, and is changing roles, relationships, and following: value capture. » Whilst overall viewing time still grows, consumers’ content viewing habits are shifting to These changes might, over time, be as dis- the online value chain increasingly at the ruptive as those experienced by the music, news- expense of FTA and Subscription TV viewer- paper, and magazine industries. ship (by 2020, the average global viewer is expected to watch 24 hours of online content $530 billion (U.S. dollars) are at stake for per week) the incumbent actors across the content, broad- » Driven by serialized entertainment, consu- cast networks, and distribution and aggregation mers are increasingly viewing time-shifted, segments of the value chain. non-linear content (by 2020, half of all entertainment viewing in the U.S. is expected to Content – its ownership, aggregation, and be non-linear, with the Europe Union trailing monetization – is at the center of these changes, closely behind) and $530 billion will be redistributed in large part on the basis of which players are able to retain content as a key control point. KEY MESSAGES Key Messages KEY MESSAGES

These forces are also showing early impacts » Players across the value chain are diversifying on the traditional FTA and Subscription TV value their portfolios to position themselves around chains: key content assets to drive future value, » An increasing share of TV ad money and manage content cost, or both consumer spending is moving into the online value chain Disaggregation of value from the traditional » Content value is shifting away from commo- ecosystem driven by the emergence of the online ditized, second-run content to compelling value chain has created a speciﬁc set of risks for mass entertainment and sports and high- incumbent actors: engagement niche programming entertainment » Distributors and aggregators, to prevent a and sports and high engagement niche pro- decrease in the value of their physical video gramming infrastructure and protect video content » Content creators are capturing a slightly larger revenues, are being forced to adjust and percentage of industry value with enhanced diversify their video offerings and make up bargaining power for revenue losses over multiple platforms

Exhibit 1.0 ONLINE/MOBILE DRIVING VIDEO CONSUMPTION GROWTH GLOBALLY Nr. of hours per week spent Mobile video Online video TV per media type

Nr. of hours per week spent per media type

60 6

45 18 1 1

38 37 15

0 1940 1960 1980 2000 2020

Source: Carat insight media survey; European Technographics Benchmark Survey; emarketer; Gallup TV meter; SKO; MMS; BARB AdvantEdge; Mediametrie; CIM TV; Eurodata TV, The Nielsen Company; BCG Analysis

9|8 KEY MESSAGES

» Broadcast networks will face more pressure » Exclusive content, where platform-exclusive in passing along their increasing content costs high-proﬁle content (for example, sports or to distributors and will see TV advertising original entertainment content) are the key con- revenues erode as monies move online and tent assets acquired exclusively by distributors non-linear; potential unbundling, as consu- to differentiate in a multiplatform world and mers buy content from a variety of available drive customer acquisition à la carte offerings, will necessitate a greater » Direct-to-consumer service, which bypasses emphasis on direct consumer relationships infrastructure-based distributors, content, and and content that appeals strongly to a mass or broadcast networks with high-quality content very niche audience and strong channel brands » Content creators and rights holders, which » Linear streaming aggregation, which is online have relied on strong TV buyers to grow content aggregators’ ability to obtain streaming revenues and promote their content assets, content licenses from key FTA and Subscription will gain new buyers and new business TV channels, is the key asset-disrupting facili- models to monetize their content over an ties-based aggregation and distribution increasing number of platforms and forms of content usage The implications of each scenario lead to distinct actions across incumbent and new players: There are a number of future industry sce- » Content creators continue to be advantaged n arios, centered on content ownership and aggre- across all scenarios, particularly those that own gation, that together bound the range of outcomes must-have content that drives signiﬁcant audi- from gradual, evolutionary change to one of the ences or small, loyal fan bases following potential disruptive changes: » FTA channels with mass content will also be » Multiplatform navigation with cross-platform well positioned if they can manage the shift content-navigation capability as the entry point from traditional, live TV viewing to multiplat- to all video and the key asset to acquire form, time-shifted viewing customers Key Messages

» Subscription TV channels will face erosion of market share depending on the degree to which they are able to access differentiated and engaging content » TV distributors and aggregators with scale and well-developed video and broadband infrastructure are well positioned to compete; smaller players or those without well-developed video and broadband capabilities will need to quickly expand capabilities, either through partnerships or M&A activity » Online video distributors and aggregators will face a unique set of issues that determine the size of their value capture, particularly whether to migrate their platforms from non-linear to live content, whether and how to expand internationally, and how to balance their business models between consumer pay services and ad-supported revenue streams

The scenarios above are not mutually exclusive. Many markets are expected to develop into hybrids. Which scenarios play out in which markets will be inﬂuenced by market maturity, key player moves, and the regulatory environment.

10 | 11 ES ESexecutive summary EXECUTIVE SUMMARY EXECUTIVEEXECUTIVE SUMMARY SUMMARY

The television industry has a long history of roles, shifting control points, and effecting enter- change – from the way content is captured (first prise value? on film, then videotape, and later, digital media) to the way it is delivered (via live broadcasts, then As there is and will continue to be cable, satellite, and online platforms) to the way a lot of uncertainty, another key question it is consumed (via television sets, computers, becomes crucial: What actions should tablets, and mobile phones). These changes have current players contemplate taking to brought new players with new business models chart a successful path into the future? to the landscape. But through all of these changes, the fundamental structure of the industry has These questions lie at the heart of this report. remained relatively constant. To address them, we look back at the evolution Until recently, the most fundamental change of the industry to date, identify and evaluate in the history of the television industry was the the key trends that are affecting the industry evolution from one value chain, free to air (FTA), to day, suggest several alternative scenarios for to two value chains, FTA and Subscription TV. But how the industry might evolve, and finally, discuss despite these changes, the fundamental struc- high-level implications for different types of players ture of the industry remained relatively constant. as they look forward across these potential scena- Content rights and content creation has remained rios. Understanding this is crucial for every player core to value creation, as have the relative roles of at every stage along the value chain, for it is a pre - creators (such as studios), broadcast networks, requisite to knowing how best to act and how to and distributors. Content creators and rights move forward as the industry moves forward in holders provide programming to broadcast net- new and perhaps disruptive ways. works; the broadcast networks, in turn, program and package content into channels for linear consumer viewing; and distributors then deliver it to television sets and other viewing devices. Each PART 1: THE ROLE OF CONTENT IN of these roles within the value chain has, for the THE CURRENT TELEVISION INDUSTRY most part, retained its key relationship to others and has thrived in the face of all of this change. Two traditional ecosystems The television industry began with just a single But now, there are a number of new changes business model: free to air, or FTA. Content was affecting the industry – changes introduced by the broadcast over the airwaves in unencrypted form development of an online television value chain. and revenue was derived from either advertising The question is whether this and a number of related (in the U.S.) or public tax levies (in many European changes – discussed in more detail below – will markets). However, by the 1980s (in the U.S.) continue to be evolutionary. Will industry players and the 1990s (in the European Union), another continue to adapt to them successfully, or will they, ecosystem, Subscription TV, emerged. The Sub- for the first time in the industry’s history, create scription TV value chain – including cable, direct- significant disruption, changing the nature of these to-home satellite, terrestrial, and the IPTV networks EXECUTIVE SUMMARY Executive Summary EXECUTIVE SUMMARY

of telecom companies – enabled the delivery of accounts for some 65 percent of the direct revenues dozens to hundreds of channels through a single earned by content creators. infrastructure. Under the Subscription TV model, new commercial broadcast networks developed News has more strategic than economic value that generated revenue not only from advertising for broadcast networks and content creators. In fact, and public tax levies but also from consumer sub- it accounts for only about 2 percent of direct pay- scriptions. ments to creators (and rarely creates sustainable profits for networks). But it can help channels offer Both the FTA and the Subscription TV models a full range of programming and, while it can take relied on the same overall structure for creating, varying forms, some more premium (for example, aggregating, and delivering content, with players investigative journalism) than others, it is generally at each stage along the chain assuming a well- not as expensive as sports and entertainment. defined and well-understood role. Significantly, the emergence of the Subscription TV ecosystem did Entertainment programming drives the lion’s not harm the FTA model. Competition did increase, share of network profitability; broadcast networks but with more viewing pathways available, viewing rely heavily on it (in the UK, for example, entertain- time – and revenues – increased, too, and every ment content accounts for 74 percent of all broad- element of both ecosystems thrived and grew. cast hours). And within the Subscription TV ecosystem, entertainment content accounts for the bulk of Content was at the center of these ecosystems. overall carriage fees distributors pay networks. But In 2014, 36 percent of total industry value went to entertainment content also has a unique risk com- content creators and rights holders, and 34 percent ponent: from idea to development to production, went to broadcast networks. Content creation and more shows fail than succeed, and even those that curation drives two-thirds of the industry’s revenue. get on a network’s schedule have just a 41 percent chance of making it to a second season. However, The strategic role of content hits – the shows that run for multiple seasons – can While all content has been, and will continue to be highly lucrative for a network and studio. The be, critical to the evolution of the television indus- risk profile of entertainment content is also reflected try, different types of content play different roles. in the level of the licensing fees of that content. Each of the three main genres of content – sports, news, and entertainment – triggers a unique set of Changes, not disruptions – until now? roles, relationships, and economics. Clearly, the video content industry has seen great changes over the past half century. Yet the nature Sports, particularly must-see events, in many of these changes – in most markets, at least – has markets is a significant differentiator among been evolutionary as opposed to disruptive. Players broadcast networks and distributors, and vis-à-vis have adapted. With every new development, most the new online value chain. Not surprisingly, those players were able to gradually modify their strategies that control the rights to top sports events can typi- and business models in order to continue to be cally sell them at premium prices. Although sports successful. accounts for only 15 percent of all viewing, it

14 | 15 EXECUTIVE SUMMARY

However, the last few years have seen the The question is: Will this scale ad- emergence of several new trends that may lead to a vantage remain in place as mechanisms greater degree of disruption. One of the most critical are developed by online video players to of these is the emergence of a third value chain: replicate that impact in the online video the online content ecosystem. Its appearance – and value chain? increasing embrace by consumers – has started to raise questions about whether the industry’s history of incremental change is likely to continue, or whether this time, the changes will be as disruptive PART 2: THE ELEMENTS OF CHANGE as those experienced by the music, newspaper, WITHIN THE TELEVISION INDUSTRY and magazine industries. Through all the changes the industry has expe- There are key reasons to believe that this new rienced, the relationships among the different types value chain might create disruptive change. The of players were well defined. online and mobile ecosystem supports new viewership patterns – particularly non-linear viewing, Today, significant new trends – triggered by the where content is watched “on demand,” and not ac- emergence of the online ecosystem – raise the cording to a schedule fixed by a broadcast network. prospect that perhaps the industry’s history Moreover, online video does not require channels of incremental change will, in fact, be history. The or other content aggregators (such as the emer- music, newspaper, and magazine industries have ging wave of online video aggregators, including already been disrupted by online pathways. Is YouTube and Netflix) to own or operate physical television next? infrastructure – the cable networks, broadcast towers, or satellite fleets that have traditionally Three key forces – all emerging and acting in delivered content to consumers. Instead, video can unison – are driving the changes now being travel over any broadband Internet connection. seen in the television industry:

Finally, the online landscape has led to signifi- 1. Advances in technology. cant changes in the advertising market. In the U.S. Widely available high-speed networks – both and the European Union, TV advertising spending fixed and mobile – have enabled consumers, en is beginning to come under pressure as ad spen- masse, to access video content independent of tra- ding is following the shift of viewers into the online ditional infrastructure-based pathways. Program- value chain. Historically, it has been the unique ming now comes directly over the Internet to PCs, ability of FTA and big-event Subscription TV pro- mobile devices, and most critically, televisions. The gramming to deliver large audiences, which remain Internet now has the technical capability to delivery in high demand among marketers seeking to reach video content reliably, with high-quality results, on dedicated audiences at a specific point in time. an enormous scale. By 2017, 74 percent of households in the European Union will have access to such “video ready” fixed broadband. Executive Summary

2. The increased availability of high-quality These forces, in turn, are spurring the trends online content, including professionally pro- that are reshaping the industry today. Speci- duced television entertainment. fically, they have led to six key developments While user-created videos may have once been that, together, are leading to significant change the mainstay of Internet-delivered content, today’s in the structure and relationships that have long lineup is largely professionally produced and inclu- defined the video content business: des new-release television shows as well as cata- logs of past seasons. Even live TV is being made Online viewership is becoming significant – available over the Internet via services such as increasingly at the expense of FTA and Subscrip- Sling TV and PlayStation Vue in the U.S. and Sky tion TV viewership in several markets. While over- Go in the UK. all viewership is increasing, the growth in several markets is coming from online viewing – a pattern 3. New models of original content creation that is more pronounced among younger viewers. Emerging, too, are new low-cost production By 2020, the average global viewer is expected models for creating professional – and in the most to watch 37 hours of “traditional” TV each week, successful cases, profitable – content for online essentially the same as the 38 hours watched channels. Assisted by a new breed of industry player, in the early 2000s. But online viewing will have the Multichannel Network (MCN), content creators increased from a couple of hours a week to approx- are challenging the long-held assumption that imately 24 hours. quality content is expensive to produce. While an episode of a top broadcast network series might Viewing is undergoing a major shift to non- attract 14 million or more viewers and cost linear consumption. On-demand viewing – where up to $5 million to produce, a top YouTube viewers choose when to watch programming in- series might see an episode reach several million stead of being locked into a schedule set by a viewers yet cost well under $50,000. And with the broadcast network – isn’t a new concept. But the MCNs (whose ranks include the likes of Collective new online aggregators and VOD providers are Digital Studios and Vevo) providing production and making this a particularly compelling experience. promotion support, the path to content creation By 2018, nearly half of all entertainment viewing has been simplified as well. in the U.S. is expected to be non-linear, and many European countries are quickly following. At the same time, the lines are blurring between content creators and aggregators. Companies such Online value capture is beginning to follow as Netflix and Amazon, both of which initially viewers. Three primary business models have licensed the rights to distribute content, are com- emerged within the online ecosystem: advertising- missioning their own high-quality, mass-market supported video on demand (viewers watch for free), programming: TV series that in every way resemble transaction-based video on demand (viewers pay the programming found on traditional broadcast for individual units of content), and subscription- networks. based video on demand (viewers pay a monthly fee

16 | 17 EXECUTIVE SUMMARY

to access a content library). While value capture is gators and infrastructure-based distributors are still in its early stages, all three of these models are expanding into content creation, whether by com- expected to experience significant growth. missioning original programming or acquiring their own production capabilities. Meanwhile, content The profile of valuable content is changing. creators, FTA and Subscription TV channels, and With online pathways, there are now more ways distributors are expanding into online via internal than ever to access content. With nonlinear vie- development or external acquisitions. For many wing, there is now more flexibility in when that of these players, the rationale for these moves is content is viewed. Together, these factors are simple: to improve the access to content (and having an impact on what content is considered improve the terms of its acquisition) and to stay valuable. Top-tier entertainment – for example, live relevant in an increasingly online-centric world. events and original scripted and unscripted programs – and compelling niche content have gained These trends are already having some an audience; second-tier “filler” content – for initial implications. But this is just the be- example, entertainment reruns that fill time slots in ginning. The current trends are not static a linear world – is seeing its audience erode. and they will continue to develop. And if the changes they spark do prove in- The distribution of value across the supply creasingly disruptive to the structure and chain is relatively stable, but it is slowly shifting business models of the industry, what will to content creators. While the industry’s value – that mean? the sum of the subscription fees, advertising revenues, and so on – continues to grow, we are starting to see a shift in how it is being divided. Content creators and rights holders are the benefi- PART 3: SCENARIOS FOR INDUSTRY ciaries here at the expense of broadcast networks EVOLUTION and distributors. This is not surprising, perhaps, given the many new players on the scene com- With so many significant and simultaneous peting with traditional players for the most in- changes taking place, it is impossible to predict demand content. their ultimate impact, but we believe that no single industry structure will emerge across markets. In- Key industry players are diversifying their stead, in looking at the current trends and the spec- business portfolios as they seek to get ahead of trum of outcomes, we believe that five scenarios in shifting control points. Already, there are signs particular are possible and that most markets will that in the emerging content landscape, some in fact be a blend of two or three of them (depen- players may be able to structure profitable busi- ding on factors specific to each market). Each of nesses without relying on their traditional partners. these scenarios will have its own implications for As a result, we are seeing the beginning of a battle players along the content value chain – and for the for key content assets along the value chain – a strategic value of content itself. battle reflecting a “make or buy” dilemma in view of spiraling content-licensing costs. Online aggre- Executive Summary

Scenario 1: gradual evolution within the platform-dependent. A Subscription TV guide, for current industry structure. example, generally does not direct users to online This scenario represents the base case: the in- content. More recently, social recommendations dustry continues to evolve in a natural and gradual and referrals have also played a role in the disco- process. Nonlinear viewing continues to grow, but very of content, but this is an incremental evolution cord cutting is limited; most consumers will use rather than a wholesale change in the way consu- online services in addition to – not in place of – mers find content. their existing TV service. For this to happen, incumbents will need to home in on ways they can take The opportunity is clear – consumers watch advantage of the new distribution pathways. But content from far more sources than ever before, in gradual evolutions of the past, this is exactly but there hasn‘t been a single platform to offer full what incumbents did: make adjustments in order navigation and curation of that content. As some to remain healthy and maintain their relevance traditional infrastructure-based distributors invest within the value chain. in extending their navigation into the online ecosystem – covering content they provide through Under this scenario, the growing array of view- the traditional set-top box as well as content ing opportunities will increase the downstream they don’t – they are attempting to deliver value of desirable content (such as the serialized a single interface through which to access all of dramas that work so well in a non-linear world). the programming that interests them (and access This will boost the importance – and the bargaining all of their subscriptions as well). The traditional power – of those that create or hold the rights to distributors would remain consumers’ “front door” that content. Infrastructure-based distributors, on to video content. the other hand, will be impacted by the cord cutting that does occur. And because of multiplat- Distributors who can make this transition will form competition, their infrastructure may not be be well positioned to preserve their standing as the quite the crucial content asset it once was. But primary gateway to content. They will likely gain a initiatives such as TV Everywhere, which lets strong position, too, in their negotiations with net- consumers access subscription content across works on carriage fees. Content creators and rights multiple platforms and devices, will help them holders also stand to benefit, since their content remain attractive partners for content creators, will now be easier to find and access. But online broadcast networks, and aggregators, who – now content aggregators may see their power diminish. more than ever – will want to make their content Traditional distributors will now have the primary seamlessly and broadly accessible. relationships with viewers as well as visibility into their cross-platform viewing behavior. This could Scenario 2: disruption driven by the rise of give them a significant competitive advantage over multiplatform navigation. online-only rivals. Historically, the key mechanism for content discovery has been the electronic program guide. These guides, however, have been and remain

18 | 19 EXECUTIVE SUMMARY

Scenario 3: disruption driven by exclusive these players will no longer have certainty about entertainment content. revenues, and viewer acquisition efforts will add In this scenario, both traditional distributors and to their costs. Then there is the matter of investing online aggregators invest in exclusive sports and in Internet connectivity for reliably delivering video entertainment content. Under this strategy, they content – critical since that content will no longer utilize high-profile content available only via their be delivered by traditional distributors. Yet for those service to differentiate themselves and drive custo- who do take this route, there may be an oppor- mer acquisition. Already, infrastructure-based dis- tunity to capture more value from their viewers, as tributors, such as British Telecom and DirecTV, content-related revenues will not need to be shared have made high-profile deals with sports leagues with distributors. to carry exclusive content. And online aggregators, such as Amazon and Netflix, are increasingly If this scenario succeeds and enough con- creating their own original programming. tent creators and broadcast networks can deliver their own content, the impact could be severe for Clearly, this scenario will have a positive im- traditional distributors. They would likely see cord pact on the owners of sports and entertainment cutting accelerate and their importance in the value content. With distributors and online aggregators chain diminish. Online aggregators will likely lose battling for exclusive content – and competing, subscribers, as well, since users may be able to too, with other players who want it – the prices for cherry-pick enough direct-to-consumer offerings top content will rise. For smaller distributors and to make their services unnecessary. Yet even for aggregators, this doesn’t bode well: if they can’t content creators and networks, the impact of this afford enough exclusive content, they risk losing scenario will vary. Those that have enough strong market share. But for larger players, the benefits – content and a strong brand – the HBOs – will have if they invest in content wisely – can greatly out- the best chance for success. Those that don’t will weigh the costs, increasing their subscribers, and struggle with this model, having to invest too much with them, their importance in the value chain and to attract viewers or having insufficient content their bargaining power with networks. with which to woo and retain them.

Scenario 4: disruption driven by direct-to- Scenario 5: disruption driven by online consumer strategies of content creators and content aggregators moving into linear broadcast networks. streaming of broadcast networks. One of the key characteristics of the online ecosys- Even as online viewing has gained traction, tradi- tem is that traditional delivery pathways – terres- tional distributors have enjoyed one key advantage: trial, cable, and satellite – are no longer necessary live television. Many viewers who would otherwise to get content to viewers. In this fourth scenario, cut the cord don’t, because despite all of the ori- content creators and broadcast networks take ginal series and past TV seasons they can stream advantage of that fact and deliver their program- online, consumers’ desire to watch live programming directly to consumers via the Internet, bypas- ming (whether the premiere of a new TV episode, sing infrastructure-based distributors. Doing so, a newscast, or a sporting event) remains robust. In however, isn’t without risks. Among other things, this ﬁnal scenario, leading online aggregators ﬂip Executive Summary

that advantage by licensing network content from PART 4: IMPLICATIONS FOR KEY key FTA and Subscription TV channels and com- INDUSTRY PARTICIPANTS bining it with their own nonlinear offerings to offer the best of both worlds. For industry participants, the crucial task is to consider what these potential scenarios mean for If online aggregators succeed in this endeavor, their path forward. What steps can they take to they could potentially replace traditional distribu- help spur the most favorable scenarios? What actors in the content value chain (hence, this is the tions should they be taking to prepare for possible worst case scenario for infrastructure-based play- future outcomes? While the answers will vary, we ers, especially those without strong broadband or see a speciﬁc set of implications – and responses – nonvideo businesses). Smaller online aggrega tors, relevant for each type of content player. however, will be less likely to play this game, and they run the risk of disintermediation, too. Sports rights holders that own “must have” content of high strategic importance across all Market-speciﬁc factors will play a key role scenarios will continue to be in an advantaged in the likelihood of these scenarios. The more position. The value of their rights will almost cer- mature video markets, such as Germany and the tainly increase, even dramatically. That same con- UK, where broadband is readily available and tent, moreover, may enable them to create their non-linear viewing already has become popular, own compelling direct-to-consumer offerings. They are much more likely to see direct-to-consumer should continue to put their increased bargaining offerings and disruption from online aggregators. position to work, mining incremental value from Yet markets where online video capabilities are their rights negotiations and splitting these rights less developed and consumers are still largely across formats and pathways. watching linear TV are a quite different story. They provide traditional players with an opportunity to Entertainment content creators and rights proactively shape the market, and solidify their holders will also be in a strong position, and those own standing, by pursuing a navigation or exclu- with a critical mass of in-demand content – and sive content advantage. strong brands – have the potential for generating added value through direct-to-consumer offerings. Even without taking that path, however, the growing array of distribution pathways will increase “windowing” opportunities, where rights are split across platforms, geographies, and time periods, maximizing the value generated by a single unit of content.

20 | 21 EXECUTIVE SUMMARY

FTA broadcast networks are already compe- Infrastructure-based distributors that have ting on the basis of hit content – a dynamic that well-developed video and broadband infrastructure will serve them well in all scenarios. Yet in a non- will be well positioned going forward. They have linear world, a key advantage that these players the customer relationships and navigation experi- have – the ability to use a highly rated series or ence that can help them develop – and differentiate sports event to generate awareness and viewer- – via multipathway content curating (creating the ship of other programming – will decrease. This entire video experience through their “front door”). makes it important to embrace that nonlinear Larger players – with their larger budgets – will also world and develop online products and services be in the best position to differentiate via exclusi- that maximize the reach of their content (as many ve content. Smaller providers that lack the scale FTA networks have already done, for example, by to build integrated navigation layers and the bud- making content available on iTunes, Hulu, and TV gets to buy sufﬁcient exclusive content will need to Every where apps). expand their capabilities. That won’t be easy, but smartly crafted partnerships, mergers, and invest- Subscription TV broadcast networks tend to ments can help. be much more content- and genre-focused than FTA networks, and among them, brand and con- Online content aggregators, some of whom tent strength vary widely. Those with strong con- are already thriving, face a strategic choice: protect tent and brands are well positioned for pursuing their position in nonlinear viewing or directly attack direct-to-consumer offerings. A savvy approach is traditional distributors by licensing linear content. to develop these in parallel with more traditional The optimal path will depend on several factors: partnerships with infrastructure-based distributors their competitive position and ﬁnancial strength, and online-only aggregators. All of the scenarios, the status of the infrastructure-based providers in however, present a less promising outlook for chan- their market (household penetration, network qua- nels that provide “second tier” content – the pro- lity, level of customer satisfaction, and market po- gramming that either does not have mass appeal wer), and regulatory frameworks. Online aggrega- yet or does not draw a dedicated niche audience. tors face tactical choices, as well: Do they pursue Unless these players can tweak their programming subscription-based or advertising-based models mix, they almost certainly face declines in viewer- – or a combination of the two? There is still much ship, advertising revenues, and carriage fees. debate – and much to be resolved – about which is the best approach. In the meantime, aggregators should keep a close eye on how the various models perform. They should think, too, about whether – and how – to expand internationally. Executive Summary

Up until now, the history of the television industry has been one of steady evolution. But its future – to some degree, at least – is more likely to be revolutionary. Along the value content chain, roles and relationships will change. And to stay relevant – and continue to thrive – industry participants will need to change, too, often in fundamental and unfamiliar ways. Tweaks and adjustments aren’t going to cut it anymore. But one thing is certain: content will be at the center of where the industry goes from here. And those who own and control the content will help steer the direction.

22 | 23 P1 part 1 THE ROLE OF CONTENT IN THE CURRENT P1TELEVISION INDUSTRY IN THE CURRENT THETELEVISION ROLE OF CONTENT INDUSTRY

THE ROLE OF CONTENT IN THE CURRENT TELEVISION INDUSTRY

Almost since its inception, the television indus- and types of value chains have grown. So, too, has try has seen continuous technology-driven change. another key characteristic of the industry: content Content that was primarily distributed live and over rights and related production have been at the core the airwaves would, in a steady stream of develop- of value creation – and the center of a complex ments, be captured on film, videotape, and digital series of relationships among the different elements media and be delivered via a growing number of the value chains. of platforms: cable, satellite, the IPTV services of telecom operators, and more recently, online. Each of those elements – content creators and Content came to look differently, too. Initially, rights holders, broadcast networks, and the aggre - shows were in black and white, then in color, then gators and distributors that deliver content to in high definition and even 3-D, and now, with the consumers – has remained more or less focused emergence of new standards such as 4K, in ultra on its key role in the chain. Indeed, outside of high definition. publicly funded broadcasters, examples of integra- tion across roles have traditionally been rare. And Along the way, new players came on the scene, each type of player has, in general, thrived as the as did new content value chains – ecosystems industry has evolved, driving growth in revenue, for getting programming to viewers. The original earnings, and value. public and commercial free to air (FTA) model was joined by Subscription TV and now is being joined The question is this: Will this still be by online video. The new pathways brought more the case in the future? content to more viewers. They spurred innovation. And they brought increased competition to every It is a question many in the industry are – or stage of the business. should be – asking. The emergence of the online value chain, of nonlinear (or “on demand”) viewing Yet even with all of these changes, the core patterns across large segments of consumers, and structure and nature of the industry hasn’t changed of new approaches to content creation with new all that much. Content creators and rights holders players and business models holds the potential for provide content to broadcast networks that, in turn, triggering significant changes. This time, the scale get it to consumers through distributors (tradition- of the changes may be such that they do prove ally, infrastructure-based providers such as cable disruptive to the historical evolution of the industry. and satellite providers). Although the relationships among content producers, rights holders, and broadcast networks are changing, the general dynamic has held constant even as the number IN THE CURRENT Part 1 TELEVISION INDUSTRY

Already, some broadcast networks are starting The FTA model operated under a structure that to break free of downstream distribution partners is still in place in today’s television industry – a and deliver their programming directly to consum- structure defined by the roles the different players ers. Some content creators and rights holders, at the different stages of the value chain played. meanwhile, are starting to bypass their network In the U.S., content was created primarily by partners and also go direct to consumers – or even independent studios – postfinancial interest and create their own channels. Aggregators and distrib- syndication rules – that licensed their content to utors – companies that traditionally relied on other broadcast networks that, in turn, distributed their elements of the chain for their content offerings – analog video stream through local TV stations. All are increasingly investing in content creation. And three key elements of this value chain ran as inde- then there are the big-footed players from outside pendent businesses, with successful value capture the television ecosystem: companies such as at each stage. Apple, Amazon, and Google are starting to enter this business with objectives that may not be In the European Union, the model was similar, aligned with the traditional flow of value. but it had a few differences driven by the regulatory environment and the role of governments. In these These trends and their potential implications markets, funding for much content stemmed from will be explored in detail in this report. In this first government tax levies, which supported quasi- part, our objective is to establish the context for public content production entities that were inte- examining the current trends and what their future grated into broadcast networks – such as the BBC (and indeed, in some cases, very near future) impact and ITV in the UK, ARD and ZDF in Germany, and may be. We do this by describing the industry as TF1 in France. Unlike their U.S.-based counter- it evolved into its current state, how it has been parts, FTA channels in the European Union were defined by roles and relationships that have taken distributed by third-party infrastructure providers, form over the past half century, and how the role of whose broadcast repeaters operated on a pure content in shaping industry structure and value has services basis, with revenue coming from fees paid developed along the way. by the FTA channels.

The FTA model had the television landscape Two traditional ecosystems to itself until the 1980s (in the U.S.) and 1990s (in the European Union), when the Subscription At its start, the television industry had a single TV value chain emerged as an alternative. A new “free TV” value chain. Under the FTA model, content distribution infrastructure – beginning with cable was broadcast over the airwaves in unencrypted and evolving to include telecom IPTV and direct- (or “in the clear”) form and revenue was derived to-consumer satellite – now enabled the delivery of either from advertising (in the U.S.) or from public multiple channels through a single service: initially tax levies (in many European markets). dozens of channels and eventually hundreds.

26 | 27 THE ROLE OF CONTENT

Exhibit 1.1 FTA VALUE CHAIN

Content Content Aggregation Aggregation Access / Display Production & Rights & Channels & Distribution (HW / Navigation)

FTA channel Channel aggregation & distribution FTA / Broadcast FTA

Within the Subscription TV ecosystem, the roles revenue, the distributors sold subscriptions to of the players largely mirrored the FTA model. consumers, earning monthly fees in return for Creators and rights holders licensed their content to access to the channels they bundled and delivered. broadcast networks that, in turn, programmed and delivered the content to cable-, satellite-, or IPTV- Yet even if the basic structures of the value based distributors such as Comcast and DirecTV in chains were similar, changes were afoot. The the U.S.; CLTUFA in multiple European countries; development of a richer multichannel environment Kabel Deutschland, Unitymedia, KabelBW, and spurred both competition and innovation. New other regional cable providers in Germany; and content creators emerged to serve the larger number Ziggo in the Netherlands. As in the FTA model, of channels that could be distributed over these revenue for content creators came from either tax new platforms. New broadcast networks emerged levies (when the content was carried by public with new business models. In the European Union, broadcasters) or commercial broadcast networks. Subscription TV accelerated the development of The broadcast networks, in turn, derived revenue commercial, advertising-supported channels – from advertising and from carriage fees they independent entities that weren’t owned or funded received from distributors. To generate their own by the government. New premium subscription Part 1

Exhibit 1.2 THE FULL VIEW OF THE TWO VALUE CHAINS: FTA AND SUBSCRIPTION TV

Content Content Aggregation Aggregation Access / Display Production & Rights & Channels & Distribution (HW / Navigation)

FTA channel Channel aggregation & distribution FTA / Broadcast FTA

Premium channel Subscripton TV

channels, such as HBO in the U.S., Premiere in and Subscription TV alike – thrived and grew. To Germany, Canal+ in France, and BSkyB in the UK, be sure, new Subscription TV services did capture emerged as direct consumer-pay services on top a large share of viewing and advertising revenue. of government-funded and commercial broadcast Whereas once – when FTA was the only player in networks. town – 100 percent of households with televisions watched FTA channels, over time, most markets As the Subscription TV ecosystem innovated saw Subscription TV take between a 20 and 70 and grew, one might think its rise would mean a percent share of viewing and advertising revenue. fall for the FTA value chain. But as competition increased and new business models gained traction, every element of both value chains – FTA

28 | 29 THE ROLE OF CONTENT

Exhibit 1.3 SUBSCRIPTION TV WAS FORMERLY A NEW ECOSYSTEM, THAT EVOLVED TO CREATE INCREMENTAL VALUE AND STEAL SHARE FROM INCUMBENTS

100

Viewing share 75 of FTA and Sub TV Subscription TV in the U.S. 50 FTA TV 25

0 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013

% Sub TV FTA TV 100

Advertising 80 share of FTA and Subscription 76 75 60 81 81 81 80 80 80 79 77 78 78 77 77 TV in the UK 89 87 85

20 24 25 19 19 19 20 20 20 21 23 22 22 23 23 11 13 15 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: SNL Kagan; Magna Global

However, with so many channels now available, revenue in both value chains – with subscription presenting so many more “viewing opportunities,” dollars burgeoning – translating to expanding the time individuals spent watching TV increased. revenue, proﬁt, and enterprise value for players at Combined with a growing consumer economy in each stage of each chain. the U.S. and European Union, this spurred rising Part 1

Exhibit 1.4 MATURITY OF AD AND SUBSCRIPTION REVENUES OVER TIME IN THE U.S. AND EUROPE

U.S. growing at 4,9 % p.a. Europe growing at 4,4 % p.a. Subscriptions Advertisement Subscriptions Advertisement

Total funding Total funding in $ (billions) in $ (billions) 4,4 % 94 179 90 4,9 % 173 87 168 90 86 81 158 78 160 152 80 76 74 141 140 69 140 134 70 65 126 61 54 117 46 48 51 111 113 41 120 104 109 60 34 36 99 30 38 94 28 100 83 88 50 25 69 77 63 80 57 40 60 30

42 42 40 20 37 39 37 40 40 39 39 40 64 64 66 36 54 55 57 57 58 52 58 59 20 10 0 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

CAGR '04-'14 7 % 2,1 % CAGR '04-'14 7,8 % 1,3 %

Source: SNL Kagan 2015, MAGNA Global 2015, iDate

30 | 31 THE ROLE OF CONTENT

Different markets, different rates of fee-based premium channels – varies widely across evolution the world. In Switzerland, for example, more than 97 percent of households with televisions held TV sub- Within these overall trends, the tele- scriptions in 2014. Yet in Spain, just over 19 percent vision industry developed differently in did. Subscription TV spending can differ greatly from different markets and is still at various region to region as well. While it accounted for 7.2 stages of development today. percent of median household disposable income in Australia in 2014, the ﬁgure was just 1.3 percent in Subscription TV penetration – the percentage of the Netherlands. households that have any kind of TV subscription, from basic cable with hundreds of FTA channels to

Exhibit 1.5 SUBSCRIPTION TV SPEND VARIES IN A LARGE SPECTRUM ACROSS THE WORLD

Share of Subscription TV spend of median household disposable income across geographies

7,2 %

3,8 % 3,3 % 2,8 % 2,9 % 2,9 % 2,3 %

1,5 % 1,3 % 1,3 % 1,3 %

Sub TV 98,8 % 63,7 % 91,8 % 97,3 % 69,7 % 30,8 % 19,4 % 54,3 % 69,4 % 85,8 % 28,7 % penetration1

Sub TV 21 22 21 31 34 34 38 53 48 85 107 ARPU ($)2

Note: 2014 figures; Household income adjusted for purchasing power parity; PayTV refers to basic access and premium payTV subscriptions 1. Penetration ofpPayTV HH in total TV HH per country; 2. Among payTV subscribers in the country; nominal USD Source: iDate, 2014, OECD, Luxembourg Income Study Part 1

Viewing habits also vary – significantly – A look across geographies further highlights across geographies. In Switzerland, the how around the world, the television industry average viewer spent 152 minutes per is at different stages of evolution. Emerging day watching television in 2012; in Italy, regions such as Latin America and the Middle viewers averaged 257 minutes; and East are growing the fastest, while in the viewers in the U.S. watched even more: European Union, the pace is decidedly an average of 283 minutes a day. slower. Meanwhile, North America remains the largest television market – and with nearly 40 percent of total global funding, it should hold onto that title for yet some time.

LINEAR TV VIEWING VARIES ACROSS THE GLOBE Exhibit 1.6

Linear TV viewing across geographies, excluding online/mobile

Minutes/person per day

300

283 Ø 221 200 257 241 246 222 226 206 214 191 196 100 152

Note: Figures on actual viewing in 2012 Source: iDate, 2014

32 | 33 THE ROLE OF CONTENT

The value of content: 36 percent went to content creators and rights Two-thirds of the $500 billion holders and 34 percent to FTA and Subscription global TV market – and growing TV networks (the remaining 30 percent was paid directly to distributors for content access and Content creation and aggregation have played navigation). key roles in both the FTA and Subscription TV value chains – and in their economics. Globally, While regional differences can be significant, subscription fees, advertising revenue, and public the overall balance is clear. In most markets around funding amounted to $530 billion in 2014 – more the world, content creation and curation – taking than the gross domestic product of Norway, Austria, individual units of entertainment, news, and sports or Taiwan. More fundamentally, approximately content and aggregating them in TV channels – two-thirds of that total was directly tied to content: drive the bulk of the industry’s revenue.

Exhibit 1.7 70 % OF INDUSTRY VALUE FALLS IN CONTENT

Share of overall industry value add in %

Σ = 70 % $ 530B

30 %

34 % 100 %

36 %

Content Content Aggregation Aggregation Total Production & Rights & Channels & Distribution

Source: BCG analysis Part 1

The strategic role of content in the This might seem like a formidable task; after value chain all, video programming comes in many forms, from the police procedural to the reality TV show In all markets, content has played a crucial role in to the championship tennis match. But in fact, all defining industry structure and creating value. Over of these forms fit broadly into one of three content time, this has led to a complex set of interdependent archetypes: sports, news, and entertainment. The and complementary approaches to monetizing characteristics of these genres – and more im- content across the value chain. To understand this portant, their strategic impact – differ and in quite fully, however, we need to go a level deeper and significant ways. look at the different genres of content, as each triggers a unique set of roles within the industry and different underlying economics.

Exhibit 1.8 WITHIN ECOSYSTEM, WIDE VARIETY OF CONTENT FITS THREE MAIN GENRES

Wide variety of ...which can be grouped in three main archetypes with content types… distinct characteristics

Share of Share of cost1 viewing1 Sport Live events Captive produced time filler 3 % 10 % Studio programming Limited cost burden, but also Documentaries limited profit potential ... News News Breaking news Huge differentiator for networks/ 60 % 16 % Magazine style aggregators; explains imbalance .... between cost/viewership Scripted entertainment Leverage/control with rights Film Sports holders Serialized drama Procedurals Comedy Largest share of viewing 37 % 74 % ... and value Reality Emergence of new buyers and Shows time-shifted viewing moving Events power upstream to content ... Entertainment producers

% of viewing % of cost 1. Representative of the UK Source: Ofcom, SNL Kagan, BCG Analysis

34 | 35 THE ROLE OF CONTENT

SPORTS » Impact on the Balance of Power. Sports rep- » Key Characteristics. Sports accounts for just resents “killer content.” Broadcast networks 15 percent of all viewing but a far larger and distributors will often use it as a “loss share of broadcast network programming cost. leader” because its unique ability to garner The most popular sports events are “must-see” live viewership – and its halo effect on marquee content that can reliably be depended subscriber acquisition and retention – can on to draw an outsize audience (even viewers drive audience exposure to additional who don’t follow the sport watch because programming. Indeed, over the years, sports everyone else will be watching and talking content has been used strategically, and about it afterwards). Not surprisingly, sports successfully, to build or renew franchises. content has been used strategically by both Examples include Fox Network’s acquisition broadcast networks and distributors – in both of NFL rights to help establish Fox in the the FTA and Subscription TV value chains – as U.S. and DirecTV’s acquisition of NFL out-of- a key mechanism for driving market share and market game rights to drive consumer building the brand. Moreover, because sports – subscriptions. The multisided beneﬁts sports unlike sitcoms and dramatic programming – is can deliver have led to its premium pricing. But almost always viewed live, the top events are it is a price programmers are willing to pay. extremely attractive to advertisers, since there are few other ways to reach such a broad audi- NEWS ence in one fell swoop. » Key Characteristics. News content has rarely created substantial profits for broadcast net- » Role Within the Value Chain. Rights hold- works and represents only about 2 percent ers sell FTA and Subscription TV channels – of direct payments to content creators. News and increasingly, distributors and pure-play does take varying forms, of course, with digital services – the right to air games. some more premium iterations – for example, Typically these are sold at premium prices, investigative journalism – than others. But on often exceeding the direct revenue – from a relative basis, it is far more inexpensive than advertising, carriage fees, and consumer pay- sports and entertainment. It also serves both ments – associated with sports programming. regulatory and strategic purposes; for example, Those that acquire the rights produce their by helping the broadcast networks offer a own broadcasts of the games, usually through full range of content offerings. in-house production units. Part 1

» Role Within the Value Chain. Generally, ENTERTAINMENT broadcast networks that provide news services » Key Characteristics. Entertainment program- to consumers produce their programming in- ming – most of which has traditionally been house. So there are few third-party content created by independent content creators or costs associated with news. As a result, it is the internal production arms of public not a meaningful genre to independent tudios broadcasters (such as the BBC) – has three and the content creation industry; it also key characteristics: it is responsible for represents the smallest portion of content differences in viewership (which help broad- creation costs. For instance, in the UK, news cast networks differentiate themselves); accounts for 10 percent of broadcast hours but it drives the lion’s share of broadcast net- only 3 percent of content spending. work profitability; and it drives the bulk of carriage fee increases paid by distributors » Impact on the Balance of Power. While to broadcast networks in the Subscription news provides limited direct economic value to TV value chain (while the fees paid to the broadcast networks that create it, it plays individual sports channels may be greater several important strategic roles. In many than those paid to individual entertainment markets, networks have a public service obliga- channels, the sheer number of the latter makes tion, which they can meet by providing news. And this genre a larger contributor to overall by rounding out their range of content services, carriage costs). news helps some channels become a one-stop destination for viewers, driving engagement and » Entertainment also has a unique risk com- loyalty. Yet with the advent of 24-hour news- ponent – one that sports and news do not only channels, and the increasing ubiquity of share. From idea sourcing to concept digitally distributed video-news sources, both development to on-air pilots to produc tion, the regulatory and consumer drivers for news there is more failure than success. And content are beginning to decline in many even the shows that make it into production markets. have a high failure rate. Just 41 percent of series make it to a second season, and fewer still will run for three seasons – the point at which a show is generally considered a hit. Indeed, the “hit rates” of major U.S. content creators (such as ABC Studios, Fox Studios, and Sony) are less than 10 percent post pilot.

36 | 37 THE ROLE OF CONTENT

Exhibit 1.9 ENTERTAINMENT PRODUCTION: A LONG AND COSTLY JOURNEY LEADS TO A SUCCESSFUL SHOW

“Success”: Idea sourcing Concept Pilot process Production three-plus development years

1 180 48 12 3 success pitches scripts pilots shows

Studios continuously Scripts will be Pilot will be shot for best/ Top pilot will make it to actual approaching networks with developed for the best/ preferred scripts production ideas for new shows preferred ideas Many pilots rejected Once shows are on air, failure before airing rates are still high Only 41% make it to a second season

Source:BCG Analysis

» Role Within the Value Chain. Entertainment significant premiums – particularly once a is the key driver of profitability for broadcast show is successful – from broadcast networks networks, typically accounting for the lion’s that need top-rated programming to attract share of earnings. Not surprisingly, networks large audiences. In the Subscription TV model, have come to rely heavily on the genre. In the networks then pass these costs on to the UK, for example, entertainment program- distributors in the form of increased carriage ming accounts for 74 percent of all broad- fees. This is a key reason why in most markets cast hours. As a result, it is the key source of around the world, the content creation indus- negotiations along the value chain. Successful try is both independent and highly fragmented, studios, actors, and producers command with intermediaries – such as Creative Artists Agency, ICM Partners, and William Morris En- deavor – auctioning access to key content- creation talent and organizations. Part 1

» Impact on the Balance of Power. With enter- Changes, not disruptions – tainment, the power dynamics are complicated. until now? Given the high uncertainty surrounding a show or idea in its early stages of development, Clearly, the video content industry has seen content creators are often at the mercy of the great changes over the past half century. Yet the broadcast networks that fund that develop- nature of these changes – in most markets, at least – ment. Once a show is successful, however, has been evolutionary as opposed to disruptive. the balance of power shifts, frequently to Players have adapted. With every new develop- the individual actors, writers, and producers ment, most incumbents were able to gradually who can hold the show up for ransom to the modify their strategies and business models in broadcast networks. The broadcast networks, order to continue to be successful. in turn, exploit the strong viewership position a mix of successful shows gives them – larger However, the past few years have seen the audiences and market share – to win richer emergence of several new trends that may lead fees from both advertisers and the distributors to a greater degree of disruption. One of the most that carry their shows and to cross promote critical of these is the development of an emer- other programming on their channels. And gent third value chain: the online video-content the studios, of course, turn a significant profit ecosystem. Its appearance – and increasing licensing the show in the downstream embrace by consumers – has started to raise syndication market to buyers across all three questions about whether the industry’s history value chains. of incremental change is likely to continue or whether this time the changes will be as disruptive as those experienced by the music, newspaper, and magazine industries.

38 | 39 Exhibit 1.10 THERE ARE NOW THREE INDUSTRY VALUE CHAINS: FTA, SUBSCRIPTION AND THE EMERGING ONLINE VALUE CHAIN

Content Content Aggregation Aggregation Access / Display Production & Rights & Channels & Distribution (HW / Navigation)

FTA channel Channel aggregation & distribution FTA / Broadcast FTA

Premium channel Subscripton TV

Digital TV channel Aggregation ISP Online

On the surface, the online value chain has much Yet there are key reasons to believe that this in common with key aspects of the traditional FTA new value chain might create disruptive change. and Subscription TV value chains. It is comprised The online ecosystem supports new viewership of the same major elements: content creators and patterns – particularly nonlinear viewing, where rights holders, broadcast networks, and distributors. content is watched on demand, and not according And it is supported by both advertising revenue to a schedule ﬁxed by a broad cast network and consumer subscriptions. or distributor. Moreover, online video does not require networks or distributors to own or Part 1

operate the physical infrastructure – cable lines, broadcast towers, or satellite ﬂeets – that has traditionally delivered content to consumers. Instead, video can travel over any broadband Inter- net connection.

The trends that online video are sparking are the focus of Part 2 of this report. Understanding them is essential, because in doing so, we can better understand where the video content business is headed and what the future may hold both for consumers and for the industry’s players. But already these trends have shined a spot- light on one thing: the role of content as a key strategic variable in the ways the industry may change.

40 | 41 P part 2 THE ELEMENTS OF CHANGE WITHIN THE TELEVISION PINDUSTRY2 WITHIN THE TELEVISION THEINDUSTRY ELEMENTS OF CHANGE

THE ELEMENTS OF CHANGE WITHIN THE TELEVISION INDUSTRY

Several key forces are beginning to change the The major forces at work nature of the television industry. These include the emergence of new high-speed digital pathways Like a perfect storm, three key forces are simul- and related video-enabled devices, the increasing taneously driving change in the TV industry. availability of traditional television programming through these pathways, and the development of Advances in technology. The emergence of new lower-cost models for the creation of profes- broadly available high-speed ﬁxed and mobile sionally produced content – content that in the broadband is enabling large numbers of consum- most successful cases is drawing mass audiences. ers to access video independent of traditional infrastructure-based pathways – on mobile devices, In turn, these changes have led to PCs, and potentially most important, TV sets. several significant trends that are changing industry dynamics and beginning IP networks – the backbone of the Internet – to have an impact on traditional players have long had the technical capability to deliver and roles – as well as leading to new video content to consumers. What they lacked was “attacker models.” the ability to do so well, without the delays and fuzzy images that frustrated viewers. The emer- In this part, we discuss these three key forces, gence of a streaming-ready IP infrastructure along the trends they are spurring and the impact they with advancements in video compression tech- are having on traditional players, and the initial re- nology – capable of reliably delivering high-quality sponses we are seeing. video – has changed that. By 2017, 74 percent of TV households in the European Union will have access to highenough-quality ﬁxed broadband (in the U.S., almost all households – some 96 percent – will). At the same time, Wi-Fi hotspots and high- speed LTE mobile networks are proliferating, with deployments increasing at a rapid rate. WITHINTHE ELEMENTS THEOF CHANGE TELEVISION Part 2

Exhibit 2.1 STREAMING-READY FIXED BROADBAND INFRASTRUCTURE IS IN PLACE TO SUPPORT ONLINE VIDEO DEMAND

North America is almost fully OTT ... and the European Union is enabled ... following quickly

Mio broadband lines Mio broadband lines 160 250 +4 % 236 229 221 212 +3 % 202 140 131 127 200 211 123 119 194 115 120 125 177 120 114 150 161 108 145 100

100 80 2017: 96 % of TV HHs 2017: 74 % of TV HHs streaming enabled streaming enabled

60 50 2013 2014E 2015E 2016E 2017E 2013 2014E 2015E 2016E 2017E

Total broadband Broadband lines > 2Mbit

Note: Absolute minimum bandwidth requirement for OTT TV of 2Mbit is assumed Source: OECD 2014, Bernstein Research 2013, iData 2013, FCC

Meanwhile, devices are doing a better job of directly to televisions (so-called Smart TVs, which rendering video content – even in high definition – have the necessary software built in and therefore thanks to advances in microprocessors and dis- can stream without any additional hardware). plays. And a growing array of hardware – gaming These aren’t niche products, either. By 2017, an consoles such as Sony’s PS4 and Microsoft’s estimated 160 million streaming devices and 250 Xbox One, along with a new generation of set-top million connected consoles will be installed across devices from the likes of Amazon, Apple, Nvidia, the globe – on top of the 900 million tablets and and Roku – are able to stream online content 850 million Smart TVs that are expected.

44 | 45 THE ELEMENTS OF CHANGE

Exhibit 2.2 GLOBAL NUMBER OF TABLETS AND CONNECTED/SMART TV’S IS EXPECTED TO APPROACH ONE BILLION DEVICES IN 2017

More devices used to watch video content Estimated installed base in 2017 Devices shipped yearly (Mio) 400 361 333 900M tablets3 301 300 261 850M connected / 219 221 smart TVs1 188 200 151 250M connected 144 114 consoles1 100 82 55 54 64 60 33 160M streaming 25 26 26 57 devices1 10 14 18 37 0 2012 2013 2014 2015 2016 2017

Connected/Smart TV1 Streaming devices1 Gaming consoles1 Tablets2

Note: Forecasts do not take into account the launch of $35 streaming sticks such as Chromecast Sources: 1. Informa 2012, 2. IDC 2013, 3. Forrester Research 2012

The emergence of these connected devices, Online pathways have achieved critical combined with wireless distribution of data in mass. They have the technical ability to the home, is enabling online content delivery to effectively deliver video content, and they the existing installed base of ﬂat panel and HDTV are widespread enough to do so for a vast sets to compete directly with traditional infrastruc- audience. ture-based TV delivery. And growth has exploded over the past few years. In the U.S., for example, The increased availability of high-quality, the aggregate number of households with a TV professionally produced television entertain- connected to the Internet is now more than 50 ment. The development of these new pathways percent of total homes. In the UK, the ﬁgure is would have no impact without the availability of north of 25 percent. content that consumers want to watch. Over the past several years, the quantity and quality of professionally produced new-release television shows, along with catalogues of past season high- value content, have increased tremendously. This THE ELEMENTS OF CHANGE Part 2

change has created the opportunity for seamless, time to market for launching online products and on-demand time shifting of recent TV shows, as services. The numbers are reflective of the trend: well as the ability to go back and pick up prior- according to recent estimates, as many as 460 season episodes of favorite shows. unique OTT services were available globally by mid-2015. Regional and global online aggregators, such as Hulu and Netflix, offer thousands of hours of New models of original content creation. original content. Hulu has carved out a niche Finally, these new pathways are leading to new in offering content between one and seven days approaches to creating professionally produced after a program’s “live” television airing; Netflix has television content – content created specifically for exploded in part due to its unique “content online distribution. Particularly significant is the stacking” of multiple seasons of high-value content development of lower-cost models for producing from FTA and Subscription TV channels, often content that is, in the most successful cases, both offering every season of a given series. profitable and attracting mass audiences.

Increasingly, live linear content is also being New digital studios are challenging the indus- made available over the Internet. The recent try’s long-held belief that producing quality content launches of Sling TV and PlayStation Vue in the must be expensive. An episode of a top series on a U.S. have joined existing players such as Sky broadcast network might attract 14 million or more NowTV in the UK. And third-party players have viewers but cost up to $5 million to produce. Yet emerged to lower the barriers to entry for tradi- a top series on YouTube can reach several million tional players. Zattoo, a Swiss company whose viewers at a per-episode cost often well under technology can transmit live TV programming over $50,000. Content from PewDiePie, the Swedish the Internet, is one such vendor, offering mobile producer and host of YouTube’s “Let’s Play” videos, telecom companies, smaller cable operators, and is estimated to have gained some 9 billion total other providers a white-label solution for deliver- views by June 2015 – and to have generated for ing TV channels over their broadband networks – his company, PewDiePie Productions, $7.4 million without having to build a platform from scratch. in revenue in 2014, according to the Swedish Such products reduce the complexities, costs, and newspaper Expressen.

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Exhibit 2.3 NEW AND CHEAPER CONTENT PRODUCTION MODELS ARE EMERGING AND WINNING AUDIENCES

Broadcast model Cable model New digital model (MCN)

FTA channels have huge reach Subscription TV channels have Online content is driving mean- and subsidize costly top-tier series dedicated audiences and sub- ingful viewership at a fraction of with high advertising dollars sidize costly content via subscrip- the production cost tion fees

14M1 2M1 3,1M4

~$5M2 ~$3M3 ~$30-50K

Viewers in M Cost / Episode in $M

Digital studios are challenging a long-held belief that quality content must be expensive

1. Blended average over all seasons; 2. Estimated cost in the first season; 3. First season: approx. 3M per episode, last season: approx. 3,5M per episode; 4. Average number of viewers of the last 10 episodes – on January 13, 2015, the 10 episodes in question were published between January 6 and January 13 2015; MCN = Multichannel Network Source: Press search, BCG Analysis

This “YouTube model” has spurred the emer- In return for this assistance, some measure of gence of yet another type of content player: the revenue – and sometimes even intellectual property Multichannel Network, or MCN. These ﬁrms – rights in the content – go to the MCNs. The contract which include Vevo, Machinima, and Collective terms will vary. The creator and MCN might jointly Digital Studios – provide production and promotion own the content, the MCN might own it 100 percent, support to content creators. Often this includes or the MCN might offer only a licensing agreement, funding, digital rights management, music cle- keeping 100 percent of the ad revenue. There are arances, studio and editing facilities, and most many permutations. important, support for content monetization (via advertising, merchandising, and other revenue streams). THE ELEMENTS OF CHANGE Part 2

What sometimes gets lost in the discussion of They are able to do this because they value these new production models is that they create the investment in the context of its impact on opportunities for established players as well as new customer acquisition and retention – not unlike the entrants. Many of the key investors in MCNs, for approach pioneered by HBO in the 1990s. Netflix, example, come from the ranks of traditional content for example, spent more than $100 million to companies, including Comcast, DreamWorks, Pro- produce the first two seasons of House of Cards. Sieben, FreeMantle Media, and RTL Group. But it only needed to increase its subscriber base in the U.S. by some 1.5 percent to break even on New approaches to producing content are now that investment. In the process, House of Cards being applied to traditional TV formats, too. A very became the first original online series to be visible example of this is the way online content nominated for a Primetime Emmy Award in a aggregators – companies such as Netflix and major category (its first season received a total of Amazon – are increasingly commissioning and nine nominations in 2013, and it ultimately won producing high-impact, mass-market programming three awards). The series’ critical and commer- comparable to what consumers would view on a cial success not only propelled Netflix’s subscriber FTA or Subscription TV channel. numbers but also helped establish it as a key player in the video content industry.

Exhibit 2.4 ONLINE/MOBILE PLAYERS INCREASINGLY INVOLVED IN ORIGINAL CONTENT PRODUCTION

Original commissions by OTT players SVoD players specifically focused on from the start of 2012 to Feb 2014 Entertainment TV

100 Amazon 24 9 Netflix 18 4 80 Hulu 9 BBC 9 Microsoft 5 60 YouTube 3 100 87 Vevo 1 40 NBC Universal 1

Fox Sport 1 20 Full commissions Dailymotion 1 Pilots Apple 1 0 0 10 20 30 TV series, Movie Other Total pilot # of commissions # of commissions

Source: Informa 2014

48 | 49 THE ELEMENTS OF CHANGE

House of Cards also highlights how tech-savvy Significant industry changes players are leveraging another asset – tools and expertise in big data – in order to focus their con- Already, these forces are having an impact on both tent acquisition and production efforts on program- consumer preferences and the relationships among ming that can generate the most value. Netflix, for the various players along the content value chains. example, uses analytics to, in effect, learn what its Several key trends are emerging: subscribers want to watch. It crunches the numbers it is continually collecting – on what its users are » Online viewership is becoming significant, downloading, on which stars and directors are increasingly at the expense of viewership within most popular, and so on – to determine the kind the FTA and Subscription TV value chains. of content, down to the talent, that is most likely to » A major shift in viewing patterns to nonlinear resonate with viewers. consumption is occurring. » Value capture is beginning to follow viewers Meanwhile, new ways in which viewers interact online. with content are emerging. Traditionally, interaction – » The profile of valuable content is changing. such as viewing itself – followed a linear, well- » The distribution of value across the supply chain defined path. We watched content and if it was is relatively stable but slowly shifting to content particularly noteworthy, discussed it after the creators and rights holders. fact at the proverbial water cooler. But connected » Key industry players are changing their business devices enable immediate interaction. portfolio as they seek to get ahead of shifting control points.

In aggregate, these trends may, for the ﬁrst time in the history of the television business, reshape industry structure in a revolutionary as opposed to evolutionary manner. If this is true, the television business, which has to date been able to “defy gravity” relative to the digital transition, may join the ranks of other traditional media businesses that also felt they were immune, such as the music, newspaper, magazine, and radio industries.

Online viewership is becoming significant at the expense of viewership within the FTA and Subscription TV value chains in several markets. Video traffic on IP networks is growing at a sharp rate. By 2018, video will account for nearly 80 percent of global data traffic on fixed networks and close to 70 percent on mobile networks (up from 61 percent and 53 percent, respectively, in 2013). THE ELEMENTS OF CHANGE Part 2

Exhibit 2.5 ONLINE VIDEO TRAFFIC IS INCREASING – BOTH ON FIXED AND MOBILE NETWORKS

Global fixed data traffic Global mobile data traffic Other Video Other Video

Petabytes per month Petabytes per month

80 15 70,1 13,2

+20 % 58,7 21 % 60 31 % +62 % 48,9 25 % 10 9,0 40,6 29 % 40 33,8 35 % 5,8 27,9 32 % 36 % 79 % 5 3,6 38 % 69 % 20 39 % 75 % 71 % 2,1 68 % 41 % 65 % 64 % 1,2 61 % 44 % 62 % 59 % 47 % 56 % 0 0 53 % 2013 2014E 2015E 2016E 2017E 2018E 2013 2014E 2015E 2016E 2017E 2018E

CAGR '13-'18 +6 % +27 % CAGR '13-'18 +49 % +70 %

Source: Informa 2014, BCG analysis

Viewers are embracing the new video- ﬂat to declining viewing levels for traditional distribution pathways at the expense of the FTA and Subscription TV pathways. Indeed, traditional value chains. Overall video viewing by 2020, online viewing will account for nearly has grown on a global basis for decades. And 40 percent of all video consumption – some 24 while there are speciﬁc differences across ge- hours per week for the average viewer, up from ographies, in general, this growth is continuing. just a couple of hours per week in the early 2000s. But its composition is shifting. Almost all of the increased viewing is in online and mobile with

50 | 51 THE ELEMENTS OF CHANGE

Exhibit 2.6 VIDEO CONSUMPTION IS SHIFTING, WITH ALL GROWTH ATTRIBUTABLE TO ONLINE AND MOBILE

Video consumption growth globally U.S. / DE online video-growth examples

Mobile video Online video TV Mobile video Online video TV

Nr. of hours per week spent per media type Avg. time per week with with video in hours

75 50 +4 % 40 30 CAGR '11-'14 +122 % 60 20 6 +22 % 10 -1% 0 45 2011 2012 2013 2014 18 1 1 Avg. time per week with video in hours 30 50 40 38 37 CAGR '09-'12 15 30 +22 % 20 +2% 10 0 0 1940 1960 1980 2000 2020 2009 2010 2011 2012

Source: ICarat insight media survey; European Technographics Benchmark Survey; emarketer; Gallup TV meter; SKO; MMS; BARB AdvantEdge; Mediametrie; CIM TV; Eurodata TV, The Nielsen Company; BCG Analysis

This shift in viewership highlights the begin- ing, frequently opting for less breadth of video ning of economic stress in the traditional Subscrip- offerings for less cost. tion TV business. “Cord cutting,” “cord thinning,” and “nevers” – where consumers decide either to In a 2014 survey of German-speaking online- eliminate, reduce, or never subscribe in the ﬁrst video users, only 3 percent said they had signed up place to traditional cable-, satellite-, or telecom- for an online video service expressly so they could based TV – is becoming a reality in mature markets cut the cord on their existing TV provider. But 58 and will likely follow suit in currently emerging percent said they could imagine doing so now that markets once they mature. For many consumers, they’ve started to use the service. Indeed, looking there is no “master plan” to do this; instead, as out to 2018, we expect TV subscriptions to decline they get exposed to new online services, and as in some markets, such as the U.S. market, and the prices of traditional TV bundles continue to experience slower growth in others, particularly in increase, they begin to shift their time and spend- Western Europe. THE ELEMENTS OF CHANGE Part 2

Exhibit 2.7 GROWTH IN TV SUBSCRIPTIONS EXPECTED TO SLOW OR DECLINE IN MATURE VIDEO MARKETS AROUND THE WORLD

Number of TV subscriptions reached a Growth in subscriptions expected to plateau, expected to decrease slow, East-West division can be observed

Net additions in TV subscriptions (’000s) Western Europe – Net additions in TV subscriptions (’000s)

2 000 6 000 4 000

1 500 2 000 0 -2 000 1 000 2008 2010 2012 2014E 2016E 2018E

500 Eastern Europe – Net additions in TV subscriptions (’000s)

12 000 0 10 000 8 000 6 000 -500 4 000 2 000 -1 000 0 2008 2010 2012 2014E 2016E 2018E 2008 2010 2012 2014E 2016E 2018E

Source: Ovum, BCG Analysis

A major shift in viewing patterns to non-lin- as the development of “free” video-on-demand ear consumption is occurring. Another signiﬁcant services by distributors, have spurred this trend. By trend is a shift in viewing patterns, from linear the end of 2015, fully one-quarter of all viewing “appointment TV” content consumption to on- hours will fall under the nonlinear banner; that is, demand consumption. viewing via online, mobile, or time-shifted TV. By 2018, nearly half of all entertainment viewing in The shift in viewing to online pathways, which the U.S. is expected to be nonlinear. cater to an on-demand content experience, as well

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Exhibit 2.8 SHIFT TO ONLINE AND MOBILE VIEWING IS ACCOMPANIED BY AN ACCELERATION OF NONLINEAR VIEWING

Watching online / mobile1 Watching time-shifted TV

Share of nontraditional viewing in % of total hours watched

50 49 %

41 % 40 +31 %

33 %

30 35 % 24 % 29 %

22 % 20 17 % 14 % 13 % 8 % 10 5 % 14 % 11 % 13 % 8 % 9 % 10 % 0 2013 2014E 2015E 2016E 2017E 2018E

U.S. is leading the way but the EU is quickly following in terms of nonlinear growth

1. Includes watching using multimedia devices, the Internet on a computer, and a smartphone/tablet Source: Nielsen 2014

It’s important to note that nonlinear viewing appreciated when viewed “in bulk” since it is easier works better for some content types than others. to follow the plot lines (and also to get to the payoff Sports and news, for example, remain time- that might otherwise be stretched out for months). sensitive events that most users continue to watch In the UK, for example, drama series are regularly live. Entertainment content, on the other hand, is time-shifted: about 40 percent of all viewing is now a more evergreen experience, in some cases better nonlinear. THE ELEMENTS OF CHANGE Part 2

Exhibit 2.9 DRIVER OF NONLINEAR GROWTH IS SERIALIZED ENTERTAINMENT

Share of time-shifted viewing as % of total genre viewing % of time-shifted viewing

Entertainment Drama series 40 %

Soaps 29 %

Documentaries 21 %

Movies 20 %

Comedy series 19 %

Lifestyle 14 %

Children’s 11 %

Sports Sports 10 %

News News / Weather 3 %

0 10 20 30 40

Source: Ofcom CMR 2014

Value capture is beginning to follow viewers Transaction-Based Video on Demand (TVoD). online. While still in the early stages, value is Content on these services is available to own or beginning to follow viewers. As we have seen in rent for a one-off fee. Video is distributed via digital transitions in other industries – music, streaming or via downloads that can be stored on newspapers, and radio among them – it takes time the user’s own hardware and viewed later (when for the economics to catch up with consumption. an Internet connection may not be available). But it inevitably does. Examples include Apple’s iTunes Store, Maxdome’s store in Germany, and Amazon’s Instant Video Within the online value chain, three primary shop. busi ness models have emerged: Subscription-Based Video on Demand (SVoD). Advertising-Supported Video on Demand For a monthly fee, this group of services offers (AVoD). These services offer free access to a large access to a library of content – generally a mix of library of movies, TV shows, clips, and other video movies and TV shows. Video is usually distributed content. As with traditional FTA TV, content costs via streaming, requiring an active online connec- are supported by advertising revenue. Video is typi- tion. Examples include Germany-based Watchever cally streamed (instead of downloaded for later and Maxdome (speciﬁcally, its subscription viewing), requiring an active online connection. offerings) and U.S.-based Netﬂix. Examples include Germany-based MyVideo and U.S.-based YouTube and Hulu.

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Exhibit 2.10 THREE PRIMARY BUSINESS MODELS EXIST IN THE ONLINE ECOSYSTEM

Description Examples of VoD players

Free access to a large library of movies, AVoD TV shows, and clips (advertisting Includes advertising as a means of supported) creating revenues for OTT platform Usually distributed via streaming

SVoD Access to a library of movies/TV shows (subscription-based for a monthly subscription fee and advertising supported) Usually distributed via streaming

TVoD Paid acquisition or rental of electronic (transaction-based, copy of offered video material ad free) May be distributed via download or streaming

Source: BCG Analysis

For each of these business models, the future between 2010 and 2015 and will then more than holds a great deal of potential. In the U.S., the double by the end of 2018. Meanwhile, we expect lead market for online and mobile video services, transaction-based and subscription revenue to advertising revenue has increased seven-fold nearly double over the next four years. THE ELEMENTS OF CHANGE Part 2

ONLINE ECONOMICS ARE SCALING QUICKLY Exhibit 2.11

Online and mobile revenues to grow Advertising revenues to follow viewers to rapidly, dominated by SVoD online/mobile video EST TVoD SVoD Desktop Mobile Share of total online advertising spending

Global on-demand Global ad spend revenues in $ (billions) 21.7 in $ (billions)

20 ~3.5 % ~8.1 % ~15.2% 4.8 (22 %) 40 18 35 34.5 16 +23 % 2.1 (10 %) 14.2 14 30 3.4 12 (24 %) 25 19.1 +36% 10 1.4 (10 %) 20

8 14.8 15.3 6.3 (68 %) 15 6 1.7 (27 %) 9.4 10 11.1 4 0.7 (11 %) (66 %) 5.5 15.4 2 3.9 5 (62 %) 5.1 4.3 0 0 2012 2015 2018E 2012 2015 2018E

Source: Magna, Ovum, BCG Analysis

The profile of valuable content is changing. Meanwhile, audiences are shifting very large The shift of viewing and economics to online and event content, or content that appeals strongly to nonlinear formats is beginning to have a profound a small but avid fan base. This type of content impact on what content is considered valuable. In sits at the bookends of our spectrum: compelling particular, commoditized second-run entertainment mass entertainment and compelling niche enter- programming – once the darling of the video content tainment. As a result, there has been signiﬁcant world – is becoming somewhat less valuable. There erosion in viewing for the commodity programming are two key reasons for this: the volume of new in the middle. original content has grown signiﬁcantly and consumers have more opportunities to catch up on programs before they reach syndication.

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Exhibit 2.12 TOP-RATED AND UNIQUE / NICHE CONTENT IS BECOMING MORE VALUABLE, MID-TIER LESS ATTRACTIVE

Future consumption curve Present consumption curve

# of viewers

Exclusive and top-rated Lower-rated programming “Long tail” unique content programming and niche

Premium FTA channels & Channels “30-150” Subscription TV basic cable package on cable

Source: BCG Analysis

The distribution of value across the supply annual growth rate of nearly 10 percent between chain is relatively stable but slowly shifting to 2006 and 2012. Indeed, for many distributors, content creators and rights holders. For some content investments will grow faster than sales industry players, the changing value of content revenue over the next several years, putting pressure is also coming at a cost. In the UK, for example, on their margins. FTA channels have seen their sports content costs nearly double between 2008 and 2013. In the It is perhaps not surprising, then, that the U.S., cable operators and other distributors have distribution of industry value – while still split roughly seen their content spending increase at a compound equally between the different player types – is THE ELEMENTS OF CHANGE Part 2

showing signs of a shift. While the overall pie con- » Rationale for the Move. Expansion into content tinues to get larger, content creators and rights ensures access – and in most cases, exclusivity – holders are seeing their relative share grow, from to high-quality content, especially in entertain- 33 percent of the total in 2010 to 36 percent in ment. This helps players not only to differentiate 2014. These changes might not be dramatic, but themselves but also to mitigate, at least to some they do signal a potential rebalancing of power – degree, the spiraling costs of content. one that will enhance the bargaining position of » Examples of Which Companies Are Doing It. content creators. Sky entered into a partnership with Znak & Jones, an international TV production company, Key industry players are changing their busi- in 2014; Amazon launched Amazon Studios in ness portfolio as they seek to get ahead of shift- 2010. ing control points. In the FTA and Subscription TV value chains, the three key groups of players – EXPANSION INTO ONLINE creators, broadcast networks, and distributors – » How It Is Happening. Content creators, FTA had aligned incentives and were mutually depen- and Subscription TV channels, and distributors dent upon one another to deliver content to the alike are developing or acquiring capabilities to consumer. The creators cofunded and developed gain traction in the new online value chain. For content; the networks aggregated that content (and traditional players, the acquisition of a digital audiences) and provided the programming that content company can enable a relatively quick – distributors bundled into packages and delivered if often costly – entry into the new content eco- to subscribers over their cable, satellite, or telecom system. networks. But in the online ecosystem, traditional » Rationale for the Move. Expansion into online relationships are not necessary for the delivery of enables traditional players to improve viewers’ video content. access to content via increasingly popular pathways, provides additional opportunities to As a result, we are seeing the beginning of a promote and monetize content, and helps players serious battle for key assets along the value chain – keep pace with competitors. Most important, with content and online distribution becoming the this strategy hedges against the risk of focal points. becoming irrelevant in an online-centric world. » Examples of Which Companies Are Doing It. UPSTREAM EXPANSION INTO CONTENT Virtually all. RTL Group acquired StyleHaul, » How It Is Happening. Online content aggregators an MCN for fashion, beauty, and lifestyle; CBS and infrastructure-based distributors are acquir- launched CBS All Access, a subscription-based ing or creating their own production capabilities video-ondemand service offering more than and developing original television shows and 6,500 episodes of the network’s shows; The movies. This content is then made available Walt Disney Company acquired Maker Studios, to subscribers via the company service infra- which produces videos for YouTube channels. structure. The list goes on.

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Exhibit 2.13 TRADITIONAL OWNERSHIP STRUCTURE SHIFTING HIGHLIGHTED BY VERTICAL AND HORIZONTAL EXPANSION

Aggregation Access / Display Content Network & Distribution (HW / Navigation)

Broadcast network Broadcast station Broadcast

Cable network Cable / sat / telco Pay TV Pay

Digital TV aggregator / Aggregation ISP network Online / mobile

First-order implications for key Within the traditional FTA and Subscription TV players value chains, one of the first-order implications may be the misalignment of economic incentives. Together these trends may change the television Content creators and rights holders, broadcast net- industry, and already, we are starting to see their works, and distributors have all historically relied combined pressures affect many of the business’ on each other – their businesses wouldn’t work traditional players. We are also beginning to see otherwise. And while the relationships could get how the trends can benefit and create opportunities complex, their incentives were largely aligned in for the industry’s new “attackers.” ways that benefited everyone. THE ELEMENTS OF CHANGE Part 2

Selected examples

Upstream expansion into content

Consolidation

(rumoured)

Expansion into online / mobile

In the Subscription TV value chain, for instance, But we are starting to see signs that this inter- content creators licensed their content on an dependence may not necessarily hold true in the exclusive basis to broadcast networks that, in turn, future. Some players may be able to make their charged carriage fees to distributors that received businesses work without relying on their traditional fees directly from consumers. When content costs partners – and perhaps work even better. rose, the increased costs were passed along the chain to consumers. And conversely, when consumer prices were raised, some of the increase was passed along the chain back to the studios.

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Some of the initial implications that are starting » Content creators and rights holders are not to emerge in some markets include the following: unaffected, either. While the online value chain presents new sources of revenue, the ripple » Traditional FTA and Subscription TV distributors effect of pressures in the FTA and Subscription are starting to see a reduction in the strategic TV ecosystems may reduce revenue from these importance of their physical video infrastructure. traditional sources. This group of players has This infrastructure has always been a key source always relied on strong TV buyers to grow their of competitive value. The capital required to revenue and promote their content assets. If build these pathways for delivering video – and broadcast networks are weakened, the creators the regulatory burden that invariably had to be will need to ﬁnd new buyers that not only can tackled – ensured Subscription TV that distribu- write them a check but help them ﬁnd a large tion was a scarcity that only a few players could audience as well. Some players, of course, will provide. But this is not as true now – and will have an easier time of this than others, depend- be less true in the future – as the new wave of ing on the type of content they control. online content aggregators can take advantage of the broadband connectivity that consumers Yet these are still the early days of the new content are already paying for. landscape, and historically, predictions of tectonic shifts in the television industry have turned out to » Broadcast networks are also feeling pressure be wrong. Whether the potential for misaligned from these trends. Distributors are pushing interests will create fundamental changes in back more vigorously on proposed carriage-fee industry structure – or not – will depend on a variety increases as their own ability to raise prices is of factors, including the actions that individual challenged. Meanwhile, the strategic value of companies choose to take, as well as the steps that the linear network – the programmed structure regulators in different markets take not only with of TV shows that determines what a consumer respect to the television industry but also more can watch at any point in time – is declining broadly. in the face of the increasing ease by which consumers can decide what they want to watch In Part 3, we explore the alternative ways in and when they want to watch it. which the industry could evolve and the implications for the different types of players. » THE ELEMENTS OF CHANGE Part 2

62 | 63 P3 part 3 SCENARIOS FOR P3INDUSTRY EVOLUTION SCENARIOS FOR SCENARIOSINDUSTRY FOR INDUSTRY EVOLUTION EVOLUTION

SCENARIOS FOR INDUSTRY EVOLUTION

Given the forces at work in the television ends up will depend on a number of factors: the industry and the trends emerging from them, specific nature of the trends in that market, the we believe it is critical to stimulate thoughtful starting point of the industry, and the actions that discussion about the nature of change the in- leading companies and regulators take to shape dustry is facing: the evolution of the industry. We believe, however, that the following five scenarios bound the range While industry shifts for the last several of potential outcomes – and provide a good star- decades have been evolutionary, will they continue ting point for framing the discussion in any given to be so in light of these changes? market.

If the changes are revolutionary and will Scenario 1: disrupt the structure, conduct, and business Gradual evolution within the models of the industry, how will the industry work current industry structure in the future? Where will critical business assets and value shift? Historically, new developments – whether driven by technology or by new content types, market In this part of the report, our goal is to help entrants, or consumer behaviors – have con- contribute to this discussion by exploring the tributed to the evolution of the industry without different ways in which the industry might evolve. significant disruption. The roles, relationships, and At a high level, we believe that these changes will interdependencies among content creators, broad- be disruptive in many but not all markets. We cast networks, and distributors have remained also believe that there will be no single industry essentially intact. And at each stage along the value structure across markets. chain, incumbents found opportunities to continue to grow successfully. Instead, we think there are five possible end states for the industry structure and that most mar- In this first scenario – the base case – the kets will be a blend of two or three – but not all. industry will continue to evolve in a natural and In this section, we will describe our view of these gradual process. Incumbents, particularly within scenarios and examine how value and influence the FTA and Subscription TV value chains, will all will shift for each. benefit – perhaps not growing as much as they would were these changes not taking place, but It is important to note that the development of still gaining in ways that are attractive. the industry in any given market cannot be exactly predicted. Where among these scenarios a market SCENARIOSSCENARIOS FOR INDUSTRY FOR EVOLUTION

INDUSTRY EVOLUTION Part 3

Consumers will continue their migration to We expect this scenario to have the fol- non-linear content and streaming-capable devices. lowing impact on value chain players and their Some cord cutting, shaving, and slicing will con- content-related assets: tinue to occur, but most consumers will use online services in addition to – and not instead of – their Content Creators and Rights Holders; FTA existing TV service. Online channels and content and Pay TV Channels. Leading content creators aggregators adopting every business model – and the broadcast networks that package their AVoD, SVoD, and TVoD – will carve out a healthy content into channels will continue to grow in and growing share of value. Meanwhile, traditional importance and value. players will continue to enter the online space, but they will do so largely under existing rules and Content creators that make compelling TV shows – relationships, through TV Everywhere services whether for niche or mass audiences – will become (such as Sky Go and WatchESPN) and through more important as the increasing set of viewing small, modest investments in online diversification opportunities will increase the downstream value (such as Disney‘s investment in Maker Studios). of desirable content. Meanwhile, increased viewing opportunities will also lead to a demand for more All three content ecosystems – FTA, Subscription original content, boosting the importance and value TV, and online – will remain intact and healthy. of successful studios. Those that produce or control Most players at each content stage – creation, the rights to serialized dramas will be especially aggregation, and distribution – will adjust, find well positioned, as this format works particularly opportunities to grow, and maintain their relevance well in a nonlinear world. As discussed in Part 2, in and importance within the chain. And the relation- some markets such as the UK, dramatic series are ships among players will remain largely in place, already time-shifted 40 percent of the time. without significant disintermediation. Broadcast networks that can provide exclusive, Traditional players will, of course, need to top-rated, or unique content will enhance their make adjustments in order to thrive in the new brands with consumers and become increasingly environment, and those that do not will suffer. But valuable to both infrastructure-based distributors the majority of the incumbents will find ways to and the new breed of online content aggregators. take advantage of the new distribution pathways, ESPN, for example, has substantially increased access devices, and consumer behaviors on the viewing by making its content available across basis of their strengths in packaging and deliver- platforms, primarily through its authenticated TV ing content. The easier and more convenient they Everywhere application, WatchESPN. On average, make access to their content, the better they will viewers who access ESPN via four or more create value from the new viewing experiences. We platforms spend nearly six times more time are already seeing evidence of some players taking watching its content than viewers who use a single this approach and benefiting from it. platform.

66 | 67 SCENARIOS FOR INDUSTRY EVOLUTION

Exhibit 3.1 MULTI-PLATFORM CORRELATED TO HIGHER LEVELS OF CONSUMPTION

U.S. multiplatform viewers have ESPN usage is three to six times higher disproportionate share of usage for multiplatform

ESPN monthly usage in Sept 2013 (hours.minutes) 40.00 4+ platforms 4 % 9 %

3 platforms 17 % 4,3x 5,2x 5,9x

51 % 33 % 30.00

2 platforms 30 % 84 %

20.00

42 % 30.57 27.26

1 platform 49 % 10.00 19.45

16 % 4.43 0 Users Usage 1 platform 2 platforms 3 platforms 4+ platforms

Source: ComScore, Arbitron, Goldman Sachs Global Investment Research 2014, ESPN

Infrastructure-Based Distributors. With new align themselves with authenticated multiplatform online entrants able to deliver smaller and cheaper offerings to capture new viewing under existing bundles of content, or even à la carte offerings, business rules. TV Everywhere – a model that some cord cutting and cord shaving is inevitable. allows consumers to access their subscription Already, growth in traditional TV subscriptions is content on an authenticated basis across all plat- slowing, and in Western Europe, net additions are forms and devices, both in the home and outside expected to slow year after year from 2014 on – of it – is an example of this approach. and beginning to turn negative by 2018. However, creating these services will lead to Yet while the physical infrastructure for content de- continued increases in content costs for distribu- livery – operated by cable, satellite, and telecom tors, and not all of them will have the resources to operators – may not be as crucial a content asset play this game – which biases toward scale and as it once was, in the base case scenario, content is likely driving the increased pace and intensity creators, broadcast networks, and distributors of consolidation we are seeing among distributors. SCENARIOS FOR INDUSTRY EVOLUTION

Part 3

Indeed, recent consolidation moves – and attemp- gram guides that today are the key mechanism for ted moves – in the European Union (involving, program discovery and choice and that are now for example, Vodafone and Kabel Deutschland in supplemented by social media referrals and recom- Germany, Zon and Optimus in Portugal, Unitymedia mendations. and Kabel BW in Germany, Ziggo and UPC in the Netherlands, and the merger of Sky UK, Germany, Yet currently, none of these navigation layers and Italy) clearly signal the importance of a scale provide a single source of navigation and curation. game in this context. Social referrals are incomplete and electronic program guides are pathway dependent. Within New Online Networks and Content Aggrega- the Subscription TV value chain, for example, they tors. As online content continues to drive meaning- will typically provide information about, and access ful viewership numbers, the players that make it to, FTA and pay networks – and only in very select available – from the MCNs that support creators cases, online services. Those will require external to the online aggregators that provide an easy navigation and access. Consumers who want to path to viewers – will assume an increasingly watch both Subscription TV content (via their cable, important role in the industry. And they are likely telecom, or satellite provider) and online content to generate increasing revenues. Clearly, some (via Internet-based services) are required to switch traditional content players have already come to between different input ports on their TV sets and that conclusion: Comcast, Dreamworks, ProSieben- search through a different program guide for each Sat.1, and Time Warner have all made recent service. This is a less-than-optimal consumer investments in MCNs. experience.

But for the overall structure of the industry, the This second scenario is centered on the chal- primary theme in this scenario is peaceful coexis- lenge – and the opportunity – navigation presents. tence. The picture is similar to that seen in the In it, infrastructure-based distributors succeed development of the Subscription TV value chain: by extending their navigation into the emerging new content creators, channels, and distributors online ecosystem, so that it curates all of the video a came on the scene and found success, yet players consumer has access to – independent of whether in the FTA chain also increased revenue, margins, that content is part of the services the distributor and in many cases, value. provides. For instance, in Germany, a consumer who subscribes to Unitymedia’s “Horizon” service Scenario 2: has seamless access not only to Horizon’s own Disruption driven by the rise of video library but also to the content offerings of Sky, multiplatform navigation YouTube, Maxdome, and others. And they have that access across different devices: television sets, Through the different stages of the TV industry, tablets, and smartphones alike. In these instances, navigation has evolved – from the printed guides a consumer would be able to search for program- that once were dominant (daily newspapers, TV ming across a full spectrum of providers – their Guide in the U.S., and TV-Digital, TV Magazine, cable, satellite, or telecom provider, as well as Netflix, and TV Choice in Europe) to the electronic pro- Hulu, iTunes, YouTube, and other online services –

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through a single interface and without changing For many viewers, this kind of comprehensive, the settings on their TV. multiplatform navigation would be very compelling. And traditional distributors, with their signifi- By offering this single point of navigation across cant customer relationships and available budget, pathways and devices, infrastructure-based distri- are well positioned to deliver it, becoming new-era butors would retain their standing as the “front curators of video content and differentiating them- door” to the world of video content and continue to selves in the process. Infrastructure-based distribu- “own” the customer relationship. However, opening tors would not only remain relevant in the content up their navigation interface, and providing access value chains but also actually improve their impor- to content regardless of whether it is part of a distri- tance and power. butor’s paid service, means a fundamental shift in strategy for most incumbents – a move away from Liberty Global and Comcast have already started their current focus on defending and growing their down this path, making first attempts in deploying own video service. a broader video-content navigation layer.

Exhibit 3.2 MVPDS HAVE MADE FIRST ATTEMPTS TO DEPLOY A BROADER VIDEO CONTENT NAVIGATION LAYER

LGI‘s latest set-top box with interactive Interactive content navigation layer covering features from live TV to catch up and VOD linear TV channels, catch-up, and VOD

(own TVOD service and third-party services) Latest episodes of U.S. top-100 shows always saved for catch-up viewing Automated, catch up with multiple recordings in parallel Smart search across the whole content offering, with Smart search engine facilitating discovery voice search Downloadable applications Downloadable applications

SCENARIOS FOR INDUSTRY EVOLUTION

Part 3

We expect this scenario to have the following FTA and Subscription TV Channels. The impact on value chain players and their content- increased (or retained) importance of distributors related assets: as the primary gateway to video content will change their relationship with broadcast networks and po- Infrastructure-Based Distributors. Robust all- tentially impact, perhaps significantly, the fees that inclusive navigation coupled with the ability to stream these networks receive. all video content, independent of its source, on every device – especially TV sets – is a “killer- To date, FTA and Subscription TV channels have app” in the new multipathway world we are enter- been able to raise carriage fees on a year-in and ing. Distributors that make this significant transition yearout basis, with distributors passing along the will be well positioned to enhance their increases to consumers. Yet with their relationship relationship with consumers and serve as the first with viewers extending across all content, inde- and only place consumers go to view content. In pendent of pathway, distributors will be in a better addition to preserving their role as the primary negotiating position with respect to these fees. gateway to viewing, they will be better able to serve They will also become increasingly indifferent to their customers, as the information they collect what video services consumers chose, as they will on individual viewing behavior – stewarded be able to create similar financial value by provi- effectively from a privacy and consumer-protection ding highspeed data services and video navigation perspective – will allow them to make relevant and to cord-cutting consumers who only want to watch compelling program recommendations. That same online programming. information will also enable them to provide next-generation targeting for video advertising, These dynamics will affect different broadcast benefiting both consumers and advertisers alike by networks differently. Those networks that source increasing the relevance of the advertisements compelling original content – either must-see mass consumers are exposed to. entertainment or high-engagement niche content – will continue to command premium licensing Successful pursuit of this approach will significantly fees and to increase their viewership and related increase the relative position of distributors – not advertising revenues. Those that either do not source only within their traditional Subscription TV value compelling original content or rely on previously chain but also across value chains, including the aired, second- or third-run content will suffer. emerging online ecosystem. With that greater standing and stronger negotiating position will come Meanwhile, all broadcast networks will need to the corresponding financial rewards. find new ways to promote and create awareness for their new programs. In a shift to a single point However, not every infrastructure-based distributor of navigation and significant nonlinear viewing, the will be able to pursue this approach. The required importance of data-driven recommendation engines, investments are significant, and this approach social recommendations, and search will increase – favors large players in strong financial positions. and the power of the network brand will diminish. One likely outcome of this scenario, then, is further industry consolidation.

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Content Creators and Rights Holders. Under Scenario 3: this scenario, leading creators and rights holders Disruption driven by exclusive will continue to increase in importance and value. entertainment content The ease of finding the content a consumer wants to view, whenever and wherever he or she desires In this scenario, traditional infrastructure-based to view it, increases dramatically with a single, distributors and online content aggregators invest welldesigned consumer interface for all video pro- in exclusive sports and entertainment content. The gramming across all viewing devices. And the cream – idea is this: by providing programming that is avai- the great sports, mass-entertainment, and niche lable only on their platforms, they can differentiate programming – will rise to the top, with more broad- their offerings and drive customer acquisition. cast networks competing to acquire it. Consumers’ choice of providers, then, will be Online Content Networks. This scenario is a far more influenced by their content preferences, boon for MCNs, most of which struggle to create while other factors, such as pricing, navigation, awareness among potential viewers. The existence and the mode of delivery (online or via traditional of a single point of content navigation and access, infrastructure), will be less important. with best-in-class recommendation engines, creates the opportunity for online-only programming and Exclusive content strategies – both limited and channels to find audiences – while circumventing full scale – have long been in place. British Telecom the costly marketing and promotion vehicles of the secured rights to Premier League games in order FTA and Subscription TV ecosystems. to build and strengthen its TV business, using the content for a new football-focused channel with Online Content Aggregators. A unified, multiplat- interactive features, which it included in higher-tier form navigation interface shifts power – and related packages. That said, BT‘s exclusivity is “limited,” economics – away from these new, emerging play- as its games are available through Sky as well, just ers. The primary relationship with consumers, and under pricing disadvantages to Sky‘s customers key data on their viewing, now resides with tradi- vis-à-vis BT‘s. tional Subscription TV distributors. While a NetFlix, Hulu, Zattoo, MyVideo, or Maxdome will have DirecTV’s long-standing relationship with the access to consumer viewing patterns for the content NFL for its out-of-market broadcasting rights is a they provide, Subscription TV infrastructure-based more complete example of content exclusivity, as distributors will have the bigger picture: visibility the package is not available via other distributors. into all of a consumer’s viewing behavior across all And larger online aggregators, such as Amazon services and platforms. Over time, this broader and Netflix, aren’t just buying exclusive distribution relationship with the consumer and deeper under- rights but are increasingly creating their own enter- standing of their viewing may cause the disinter- tainment content and owning it across viewing mediation of some online players, much as some windows. Such exclusivity doesn’t come cheap. broadcast networks are likely to be disintermediated. For Netflix, spending on original productions is SCENARIOS FOR INDUSTRY EVOLUTION

Part 3

Exhibit 3.3 DIRECTV USES IT‘S EXCLUSIVE OUT-OF-MARKET NFL GAME RIGHTS TO DRIVE SUBSCRIBER ACQUISITION AND RETENTION

DirecTV offers access to all NFL games… …which have enormous value as a subscriber acquisition and retention tool M USD Estimated economics 300

290

0 620

-330

-300

-600 -1 140

-810

-900

-1 200 Cost Direct Total Acquisition Total revenue (gross) & Retention (net) benefit

Need to take customer acquisition and retention into account to make it profitable

Source: DirecTV; Atlantic Equities Report, 2012; BCG analysis

expected to increase from $5 million in 2012 to becomes even more important. Content creators $543 million in 2017, representing 12 percent of that can scale their businesses to feed the growing its annual content expenditures. appetite for original programming will be particularly well positioned – and examples of this are We expect this scenario to have the following already appearing in certain markets. Lions Gate impact on value chain players and their content- Entertainment has scaled its production capability related assets: to meet the demand of new buyers across the value chain – delivering, among other shows, Orange Is Content Creators and Rights Holders. This the New Black for Netﬂix, Mad Men for AMC, and scenario increases the value of sports rights and Deadbeat for Hulu. In the process, EBITDA more entertainment content as their role in determining than tripled between 2010 and 2014 before some success in the downstream distribution battles recent volatility.

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Infrastructure-Based Distributors and Online Scenario 4: Content Aggregators. In this scenario, exclusive Disruption driven by the direct- programming – not infrastructure, navigation, or to-consumer strategies of content other elements – becomes the basis of competition creators and broadcast networks and the most critical asset for both traditional distributors and online aggregators. Content costs This fourth scenario finds content creators and will rise for these players as they move upstream broadcast networks circumventing both tradi- into the world of content funding and development, tional distributors and online aggregators to go and smaller distributors and aggregators, with direct to consumers. Instead of subscribing to cable-, smaller budgets, will be at risk of losing market satellite-, or telecom-based video services, or even share. in some cases online-based services such as Netflix or LoveFilm, consumers will access video Yet those players that are able to make substantial programming directly from studios, such as Sony and investments – and the right investments – will have Disney, or networks, such as HBO and Premeira. an opportunity to increase their importance and value. Larger satellite players, in particular, may In some ways, this scenario is a step “back to ﬁnd this approach the most appealing of all the the future” to the early days of FTA television, when potential options available to them. Unlike wireline- there was no distribution role that stood between based distributors, most of these providers lack viewers and broadcast networks. Consumers made high-speed data infrastructures and cannot pursue individual choices about which channels to view, the integrated navigation path or strategies that independent of an intermediary that bundled chan- trade off the value of their video business with nels into tiered packages. consumer broadband and enterprise communications services. There are many inherent challenges in this scenario. Content creators and broadcast networks FTA and Subscription TV Channels. With will have to absorb significantly more risk. For exclusive content now a key strategic asset for one thing, they will be bypassing the downstream traditional distributors and online aggregators, elements of the value chain that provide certainty broadcast networks will face more competition for around revenues and absorb the incremental costs exclusive original content – and likely, increasing associated with viewer promotion, acquisition, and licensing fees. The networks will ﬁnd themselves customer service. Moreover, for many broadcast needing to increase their spending on signature networks, breaking out of the bundle means putting content, with greater bargaining power – and greater at risk the significant economic subsidy they value – shifting to content owners. receive from households that pay for traditional TV bundles – and thus contribute to the carriage fees channels receive – yet don’t even watch their programming. Then there are the array of operational capabilities that will need to be developed – from pricing to e-commerce to robust digital products and experiences. SCENARIOS FOR INDUSTRY EVOLUTION

Part 3

Still, for all the potential downside, there is one and original entertainment libraries. Similarly, one big, compelling advantage to taking the direct-to- would expect companies such as ESPN (for sports) consumer route: by working without the middleman, and Disney (for kids) to have a high chance for certain content creators and broadcast networks success should they pursue a direct-to-consumer have the opportunity to capture more value from model. core viewers than in today’s bundled world. Overall, the likelihood of this scenario depends on the On the other hand, content players without both degree to which content creators and broadcast of these attributes – the have nots – will likely fail networks pursue this path (how many of them in this model. Lacking strong brands that stand for try it, how extensive their efforts are, and how a specific content genre, they will have to invest successfully they tackle the challenges). heavily to attract viewers. Lacking enough content for any specific genre, they may disappoint the We have started to see the beginnings of this viewers they attract. direct-to-consumer approach in several markets (albeit currently, many players are only testing the Infrastructure-Based Distributors and Online waters). Sky Online offers a standalone streaming Content Aggregators. If content creators and broad- service in the UK and elsewhere. In the U.S., HBO cast networks can “go it alone,” distributors and and Showtime have introduced standalone SVoD aggregators will be disintermediated and likely services (with HBO Now and Showtime Anytime), decline in importance and value. Traditional distri- as has the FTA network CBS, whose for-pay di- butors will suffer a loss of subscribers, and declines rect-to-consumer service, CBS All Access, offers in average revenue per user, due to cord cutting subscribers more than 6,500 on-demand episodes and cord thinning. In the online ecosystem, of the network’s shows, as well as live TV. Sports subscription-based aggregators will lose subscri- leagues, such as Major League Baseball and the bers, and advertising-based aggregators will lose National Football League, have also begun to offer viewers. All will suffer financially, although players direct-to-consumer streaming and content services that operate broadband infrastructure have a key as well. asset they can utilize to try to maintain value via different leverage points. We expect this scenario to have the following impact on value chain players and their content-related assets:

Content Creators and Rights Holders; FTA and Subscription TV Channels. This scenario will divide the content universe into “haves” and “have nots.” Players with a critical mass of content and strong consumer brands that represent it – the haves – have a high likelihood of success. This is why the ﬁrst companies into the fray are those such as HBO and Showtime that possess deep movie

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Scenario 5: closely tailored to individual viewer needs or bund- Disruption driven by online content les of linear and nonlinear content that are not avai- aggregators moving into linear lable in the market today. For many consumers, streaming of broadcast networks this may result in a “best of both worlds” value proposition – spurring them to cut the cord with One of the mainstays of the traditional distri- their existing, infrastructure-based distributors. bution business is its linear streaming of a rich set of broadcast networks. Indeed, the desire to A growing list of companies – including Dish watch “live TV” is a major reason viewers do not Network, Magine TV, Sony, and Zattoo – have cut the cord. In this final scenario, leading online already started packaging live linear channels for aggregators move into linear streaming business online delivery, bypassing traditional cable and by licensing network content from the key FTA satellite providers. None of these players have and Subscription TV channels in their markets. In fully integrated nonlinear services, such as SVoD, combination with online-only programming, though some, such as Sony with its Playstation traditional TV catalogue programming, in-season Vue service, do enable users to time-shift program- TV content, and the ability to watch all of this in ming and watch in nonlinear ways when they want nonlinear fashion, these players can create AVoD to. And while the current offerings do not provide and SVoD services that are richer and more flexible anywhere near the channel selection viewers typi- than those available from traditional infrastructure- cally get with a traditional TV bundle, this is more based distributors. a matter of a player’s business model and willing- ness to invest rather than a structural barrier. Depending on the market, online aggregators that embrace this approach enjoy another key We expect this scenario to have the fol- advantage as well: the ability to develop their lowing impact on value chain players and their offerings on a clean slate. For traditional players, content-related assets: decades of legal agreements and regulation tuned to a predigital streaming environment mean inter- Online Content Aggregators. By creating locking tiering and rights issues that can contain services that surpass traditional video bundles, innovation. By negotiating all of their broadcast- online aggregators would have the potential to network relationships at the same time, online disintermediate infrastructure-based distributors, aggregators may be able to license agreements winning over their customers – and their subscrip- that avoid some of these issues. And depending on tion revenues. However, not all online aggrega- the specific regulatory rules in individual markets, tors will be able to play: this scenario favors the they may also be free to pursue a broader range of development of national, regional, and potentially business models and services than traditional players. global players that have the ability to invest in the programming, platforms, consumer marketing and For instance, online aggregators may be free to acquisition, and analytics (to mine viewing data for create a wider set of alternative consumer offerings, insights and opportunities) that will be critical to such as smaller, lower-cost programming bundles success. Smaller and more focused players of linear channels – offerings that can be more would likely not survive this transition. SCENARIOS FOR INDUSTRY EVOLUTION

Part 3

Infrastructure-Based Distributors. This scenario aggregators – will also enhance content creation represents the most negative outcome for economics. traditional distributors. In it, online aggregators largely replace them in their core video business and significant value shifts away from them – There is no single answer. Most markets at least in the context of video. However, many will evidence a blend of these scenarios, but traditional players – those with robust broad- with one or two as the dominant driver of the band, communications, and nonvideo services industry structure. And the market structure businesses – are well positioned to shift the will also vary significantly across markets. focus of their financial base, emphasizing For example, relatively mature video markets, these other services as the transition to a new such as the U.S. and UK, are much more distribution landscape, centered around online likely to see disruption from online aggregators aggregators, unfolds. and from direct-to-consumer plays by content owners due to the relatively developed state Traditional players without other, growing of their broadband connectivity infrastructure business, will be more negatively affected. and consumers’ corresponding adoption of Having a primary reliance on their video online pathways and nonlinear viewing. offerings, and not being able to compensate for the shift of value to the digital aggregators, they stand By contrast, markets such as Brazil, Turkey, to lose market share – a sizeable amount of it and and Croatia have significantly less developed potentially much more. online video capabilities and have seen, so far, less change in consumer behavior. This FTA and Subscription TV Channels. With both gives thoughtful and proactive traditional online aggregators and traditional distributors licen- players a greater opportunity to shape the sing their programming, leading channels that curate market ahead of its development. In this original mass-market entertainment or sports context, the navigation and exclusive content content – or engaging niche programming – will scenarios look more likely – or potentially, realize attractive growth and increasing influence. traditional players could even leapfrog all of Yet as the prominence of online aggregators increases, the scenarios by forestalling the emergence the shift to nonlinear viewing will accelerate – of an independent online value chain. meaning greater pressure on those channels that do not offer compelling mass or niche content. In our final section, Part 4, we turn from scenarios for how the industry could evolve to Content Creators and Rights Holders. Under the imperatives these alternative industry this scenario, creators and right holders will see in- structures create for different types of players. creased value as the incremental economics that We also suggest some of the actions compa- online aggregators bring into the FTA and Subscrip- nies along the value chain might consider – tion TV ecosystems flows to them through the value either to shape the outcome or to position chain. At the same time, the accelerated transition themselves to adapt to it as it evolves. » to nonlinear viewing – the heritage of the online

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part 4 IMPLICATIONS FOR KEY P4INDUSTRY PARTICIPANTS IMPLICATIONS FOR PARTICIPANTSKEY INDUSTRY

The scenarios in Part 3 described how the Implications for content creators television industry might evolve. While there is still and rights holders legitimate room for debate around which scenarios will play out in which geographies, it is hard to Content creators and rights holders are facing, argue that a prudent path is to assume that the in general, the best range of outcomes across the first scenario – gradual evolution within the current different scenarios. In almost all cases, the related industry structure – will define competition, control value of their content increases. And in some points, and value in the future as it has in the past. cases, their relative importance and ability to serve as a control point increases as well. It is from this starting point that this section suggests some implications and related potential Sports rights holders. Across all scenarios, actions for industry participants at the different the holders of sports rights will continue to be stages of the value chain. Depending on where a in an advantaged position. They own must-have participant starts, there are either “shaping” actions content that is of key strategic value across all of that should be taken to influence the evolution of the different scenarios. As a consequence, the the industry in its market or “positioning” actions value of these rights will increase. that should be taken to prepare for some of the scenarios. The high value of sport content may also enable those that control it to create their own Specifically, we will discuss our views on these networks and content offerings and offer them implications and actions for each of the key direct to consumers. Increasingly, the seeds of this groups of players: approach can be seen in different geographies. In the U.S., for instance, the National Football » Content creators and rights holders League, National Basketball Association, National » Broadcast networks Hockey League, and Major League Baseball are » Infrastructure-based Subscription TV distributors all developing direct-to-consumer subscription » Online content aggregators and advertising supported offerings. While such efforts have been slower to evolve in sports leagues outside the U.S., examples such as Basketball Bundesliga Live (BBL) – a partnership between Basketball Bundesliga and Deutsche Telekom – have made an appearance.

This strategy will not work for every rights holder in every market. And even where it is possible, it will be critical for rights holders to navigate the unique set of competitive and regulatory dynamics within speciﬁc markets to deﬁne a path to success. But with this caveat, sports rights holders should continue to mine incremental value from their TIONS FOR ANTS

Part 4

rights negotiations, to split rights across formats One interesting windowing issue that is likely and pathways, and to pursue opportunities to build to arise raises unique challenges. This is the in- their brands and enhance their direct-to-consumer creasing array of opportunities to provide exclusive offerings. content to a single player in one of the value chains. For content creators, the challenge is to Entertainment content creators and rights effectively value exclusive entertainment content holders. Similar to sports rights holders, the enter- in advance of knowing whether, and to what tainment content community is, in general, in an degree, it is compelling and with which audiences. advantaged position and should see the value of It may represent a shift from a hit-driven business their content increase across all of the scenarios. model to a more stable – albeit with less upside – Certain formats in particular, such as serialized approach to content creation. dramas, are increasingly well positioned to take advantage of consumers’ adoption of time-shifted Hit shows achieve their extraordinary value viewing. because of their broad distribution across the widest possible range of windows. While it is Of course, to maximize this value, entertain- conceivable that a broadcast network or online ment players will need to think strategically about aggregator might be willing to pay a premium for how to manage the increasing number and types exclusive access to a hit show, the paradox is that it of windows for their content – not only across time is the broad distribution that proves the show’s hit and geography but also across pathways and roles value. Given the very high failure rates of new enter- in the value chain. tainment content, as described in Part 2, finding a fair price in advance is almost impossible. For players with strong brands and a critical mass of genre-specific content, the opportunity to Implications for broadcast networks pursue direct-to-consumer services should also be actively considered. In pursuing this path, they will FTA and Subscription TV broadcast networks need to address the trade-offs between near-term will face more pressure as consumers shift to monetization opportunities and the longer-term the online ecosystem and as the risk of disinter- potential of building an independent path to con- mediation from content creators and rights holders, sumers. traditional distributors, and online aggregators becomes more palpable. The key factor that will Those without the necessary brand strength or differentiate performance among FTA and Sub- critical mass of content will have the imperative scription TV networks will be the degree to which to focus on developing more refined windowing individual players build hit-driven or niche port- approaches. The increasing number of distribution folios that distinguish their brands. Networks such pathways, consumption formats, and business as AMC and the Food Network in the U.S. are models increases the opportunity for windowing effectively pursuing this strategy and consequently the inherent value of their content. are improving their position for the future, as that future evolves.

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FTA channels. Leading FTA networks are This move to embrace new modes of consumer primarily competing on hit content today and have engagement should also enable these players to a strong starting point across scenarios. However, access additional pools of value. ABC’s initiatives there are some key considerations for them to take are occurring under a variety of business models into account. For one thing, the traditional sources (SVoD, AVoD, and apps authenticated as part of of “lead in or lead out” advantage – in which a a pay-TV bundle) and with a variety of partners – highly rated show or sports event “anchor” creates traditional distributors, online aggregators, and greater awareness, sampling, and viewership of other broadcast networks, among others. ancillary programming – will decrease over time in most scenarios. Few FTA networks should attempt to create direct-to-consumer services on their own. Most of Then there is nonlinear viewing. It should be these players provide a mix of general entertain- a strategic imperative for FTA channels, across all ment, news, and sports programming, and while scenarios, to embrace this new style of viewing, their individual shows and live events may be com- and to create online products and services to max- pelling and their brands strong and well known, imize the reach of their content, getting it to as few have sufficient critical mass of any single type many consumers as possible. By developing the of content – a prerequisite for becoming a direct right approach to these platforms, they can create consumer destination in a world of comprehen- greater awareness and sampling for their must- sively aggregated television content. Instead, their have content. And through effective management focus should be the ubiquity of their content, of nonlinear experiences, FTA channels potentially available on a network-branded basis across all of gain the flexibility to incubate new generations of the different pathways and business models. leading entertainment programming. Subscription TV channels. Compared with their Indeed, in the U.S., FTA players such as ABC FTA counterparts, Subscription TV networks will were among the first FTA channels to embrace need to adopt very different strategic approaches new platforms; even a decade ago, ABC content to positioning themselves relative to the various was available on iTunes. Today the network has scenarios. In general, Subscription TV channels a myriad of strategic time-shifted and online are much more content and genre-focused than content plays, including Hulu, ABC.com, and FTA channels. But even among the Subscription WATCH ABC TV Everywhere app. ProSieben, TV players themselves, strategies will differ, as their a German TV network group, has explored a similar starting positions, in terms of brand and content strategy with the launch of MaxDome, an SVoD strength, vary widely. service, and MyVideo, an AVoD service. Those Subscription TV channels with compelling entertainment or sports content, as well as strong brands, are in a pole position relative to the changes that are coming. Whether they are ANTS

Part 4

leading massmarket brands (such as HBO in enter- Implications for infrastructure- tainment, Sky Sports in sports, and Canal+ in based Subscription TV distributors film), or niche brands (such as the Food Network and AMC), these channels have the opportunity The implications and related actions for infra- to go direct to their consumers as a go-to-market structure-based distributors will vary – significantly – approach operating in parallel to pursuing viewers depending on whether a player has broadband through infrastructurebased distributors and online capability or not. content aggregators. Video-only distributors. As broadband speeds Depending on their specific genre or niche, that accommodate HD-quality television reach Subscription TV players may also have the oppor- ubiquity, the strategic position of infrastructure- tunity to develop alternative products, services, and based distributors without a broadband business, revenue streams beyond pure advertising-supported or with low quality broadband, becomes tenuous and consumer pay video. The Food Network, for across all scenarios. Historically, these players – example, has expanded its presence into a popular predominately, but not exclusively, satellite-based – online destination for recipes, FoodNetwork.com, have leveraged their unique ability to offer the and will continue to have an opportunity to expand richest set of pay TV channels to nearly every into adjacencies such as the sale of cookbooks, household in a market in order to build market cooking products, and packaged food. share and drive attractive economic returns. But these players are particularly vulnerable to cord Any broadcast network that does not produce cutting and cord shaving in a world of nonlinear or otherwise source engaging first-run video viewing and increasing subscription costs, and content – either mass-market or niche – will need to increasingly they are susceptible to share shift as focus on its programming mix. A channel centered consumers make video choices on the basis of on low engagement programming or previously broadband providers first. aired TV shows will be on the wrong side of almost all of the scenarios. In those markets with several The choices these players should consider include hundred video channels, it is unlikely that all of the following: them will be able to make the necessary transition in time or that the underlying economics of the Build, partner with, or acquire broadband television industry would support the creation of capability and related non-linear services. Just enough new, original content for everyone. Thus, because the current platform does not provide a making the shift soon isn’t just wise, but vital. robust two-way experience does not mean that this is a permanent condition. BSkyB has created an integrated broadband-and-video offering through Sky Broadband. Dish Network has gone down a different, but related, path with its Sling TV offering in the U.S. And prior to its acquisition by AT&T,

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DirecTV had partnered with the telecom giant to of their customer-service and field-support organi- create integrated broadband-and-video offerings. zations positions them well for this strategic pivot – In executing this approach, players should also as long as they move quickly and maintain the deploy the integrated multipathway navigation pace. interfaces discussed earlier in this report. The prerequisites and benefits of this move are Compete on exclusive content. Another op- as described in our discussion in Part 3. Yet the portunity to differentiate one’s video distribution challenges in taking this approach and executing service is on the basis of exclusive content. For it effectively will be significant for many operators, over a decade, English Premier League rights have and warrant special attention here: been used as such a strategic asset by a number of distributors in the UK market. For video-only distri- In many cases, the execution of an “open” butors, this approach can help them retain their navigation strategy, covering content both inside competitive advantage in an environment where and outside the distributor’s walled garden, infrastructure-based video distribution is de- re quires a significant change in mind-set and emphasized. culture – both among a management team and across a large organization that has long been focused Merge with strategic broadband players. on building and protecting core video subscribers. Rather than continue to fight a potentially losing battle, strategically aligning with a broadband Pursuing this approach will also create signifi- player can be a sound option. In many cases, cant conflict with key business partners, most video-only players still enjoy one of the largest, if notably broadcast networks and set-top-box not the largest, video customer bases in their pro viders that will act to prevent this shift. market. For broadband players, the opportunity to acquire those customers and drive scale and Equity markets – analysts and investors – may buying power can be very attractive. Meanwhile, be slow to understand and reward this pivot in its such a move insulates video-only players from an early stages. After decades of focusing on metrics exodus of subscribers to the online ecosystem. such as revenue generating units and video sub- These are among the strategic considerations scribers, they may have difficulty adjusting to behind the AT&T-DirecTV merger in the U.S. a strategy that de-emphasizes protecting the traditional video offering. Distributors with broadband capability. Large, well-positioned Subscription TV distribu tors Depending on the specific market or geo- with attractive broadband services should move graphy, there may also be licensing and regulatory aggressively to pursue multiplatform navigation issues to be addressed. (Scenario 2 in Part 3 of this report). The strength of their current relationship with consumers, the quality of the services they currently provide, and the scale ANTS

Part 4

Finally, it will likely be important for these dis- Implications for online content tributors to consider approaches to investing in, aggregators or owning, key elements of proprietary content. However, this will need to be pursued on a highly Online aggregators are carving out leading po- selective basis. Players must carefully balance the sitions in nonlinear experiences. And many are trade-off between owning video content and related building attractive economics and related valuations. rights that have the potential to strengthen the core broadband subscriber base while also ensuring As they look at the potential scenarios described that key content has the broad reach and access in Part 3, aggregators, too, have a fundamental necessary to maximize its value. strategic choice: to protect their leading position in nonlinear viewing experiences in the online value Small Subscription TV distributors. These play - chain or to directly attack infrastructure-based dis- ers will be in a challenged position relative to all tributors by licensing linear FTA and Subscription scenarios other than gradual evolution. They do not TV channels and providing them to consumers. have the scale required to design and implement This choice will, and should, vary across markets the technical changes necessary for integrated on the basis of the following: video navigation and curation. As a consequence, they will be dependent on third parties to develop » The competitive position and financial strength these capabilities and license them on attractive of online content aggregators in the market terms. And with lower margins than the larger » The degree of maturity for the market’s infra- players (in most geographies), due to higher con- structure-based distributors (household pene- tent costs and a smaller customer base over which tration of Subscription TV, degree of consolida- to amortize fixed operating costs, many of them will tion, quality of network architectures, and level have to carefully think through the strategic choice of consumer satisfaction) between remaining independent and participating – » The regulatory frameworks that define the con- as a seller – in industry consolidation. duct and structure of industry competition

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In addition to the overarching question of future Tuning in to the future direction, online content aggregators face a number of more tactical decisions: While there are a range of alternative scenarios for the future of the television industry, we believe Whether to Pursue SVoD, AVoD, or a combi- that the future is more likely to be revolutionary nation of both. We are still in the early days of the than evolutionary. The well understood roles within online value chain, and there are major debates the different value chains will see a significant within the industry about which revenue model is degree of disruption – and for the players that have better. Some players, such as Netflix, have staked traditionally assumed those roles, change will be out a very strong ad-free position for the future. At required. this stage of evolution, consumer pay is more tan- gible and near-term, and advertising – as it does for These disruptions and changes will undoubtedly all new content forms – is taking time to develop. occur in different time frames and at different In the context of this debate, we would pose the levels of intensity in markets around the world. question of whether there is sufficient direct- But within these differences, there are also consumer-pay economics for an SVoD-only similarities: approach to be the predominant business model for the online aggregators. As viewer shifts start to In almost every case, the role of content – who impact advertising spending in the FTA and pay TV creates and owns it, how it is packaged, and who value chains, content creators will demand increa- delivers it – is at the center of determining how the sing license fees for their content in the online industry will change. This will shift value to content value chain. And advertising is a likely source for creators and rights holders in all scenarios and in this incremental value. all markets. In some instances, it will also give these players the ability to shift the direction of a market’s Whether – and How – to Expand Internatio- evolution toward a specific scenario. nally. Most leading online aggregators derive the bulk of their revenue from a single geography Infrastructure-based distribution will likely (YouTube and Netflix are key exceptions). Video decline as an independent source of competitive content rights, locally produced content, and advantage and as a related control point in video. consumer viewing preferences vary dramatically by There are too many alternative pathways that market, and given this, the strategic importance of content creators and broadcast networks can utilize international content rights and a global platform for distribution to remain a barrier. remains unclear. Determining the best market expansion strategy to drive scale, though, will have a myriad of benefits within the online ecosystem, irre- spective of the role of international content versus local content. This will be a key battleground. ANTS

Part 4

Content aggregation – independent of infrastructure-based distribution – will increase in importance. Consumers will continue to need platforms and services that make discovering and ac- cessing content easy and manageable. And the ﬁght for share in the context of navigation and access will be a major battleground across the historically independent value chains.

Individual companies will need to make difﬁ- cult choices about what path to pursue. Regulators will need to make choices regarding how – and even if – they should change the current rules by which the industry works. All of this must be done in advance of a clear view of how the industry will, or should, work.

86 | 87 GLOSSARY OF TERMS

AVoD. Advertising-supported video on demand IPTV. Also known as Internet Protocol tele- is a business model where an online content vision, IPTV delivers video content via IP networks, aggregator offers free access to a large library generally those of major telecom companies, of video content, including movies, TV shows, instead of via cable, satellite, or terrestrial systems. and clips (the content may be professionally produced, user-created, or both). YouTube is an Multichannel networks. Commonly referred example of this model in action. to as MCNs, multichannel networks are a new breed of content player that provide production and Broadcast networks. This term includes FTA promotion support to the creators of online content. and Subscription TV channels that aggregate units This support often includes funding, digital rights of content into a stream of programming. While management, music clearances, and studio and broadcast networks sometimes create content editing facilities. MCNs – whose ranks include the internally, through their own production arms, they likes of Vevo and Collective Digital Studios – also are the chief buyers of content from third-party assist with the monetization of content. While their creators and rights holders. agreements with creators can vary, an MCN will typically share in the revenues generated by the Content creators and rights holders. These are content and, in some cases, may own the content the studios, sports leagues, and other players that outright. either shepherd content from idea to production or control the rights to content (licensing them to Nonlinear viewing. An “on demand” method other players that wish to produce or distribute the for consuming content, in which viewers are no content). longer locked into ﬁxed schedules set by programmers at broadcast networks. Instead, viewers choose FTA. Free to air was the ﬁrst business model when they want to watch content. While non-linear to emerge in the television industry; it broadcasts viewing isn’t a new concept (the videocassette content over the airwaves in unencrypted form. recorder and digital video recorder have long made Revenues are derived from either advertising (in it possible), online pathways are accelerating the the U.S.) or from public tax levies (the model in trend by making it exceptionally easy for viewers to many European markets). access the content they desire, when they desire it.

Infrastructure-based distributors. Playing a Online content aggregators. A new type of key role in the Subscription TV ecosystem, these content distributor, borne by the rise of streaming- companies own and operate the physical means quality broadband, these players aggregate con- to deliver content to viewers: the cable systems, tent from creators and broadcast networks (and satellite ﬂeets, and IPTV networks. Traditionally, increasingly are creating their own programming) their business model has been to aggregate dozens and deliver it to viewers via online pathways. and even hundreds of channels into bundles sold – Since delivery relies on the Internet, consumers can and delivered – to viewers in return for a monthly access content without using – or subscribing to – subscription fee. the services of traditional cable, satellite, and telecom operators. GLOSSARY

Subscription TV. The second of the two TV everywhere. This business model enables traditional video ecosystems to emerge (after traditional distributors and Subscription TV FTA); Subscription TV is the aggregation and channels to make content available, on an authen- delivery of multiple pay channels (for example, ticated basis, across an array of platforms and ESPN) and premium channels (for example, devices. Essentially, viewers “verify” their under- HBO) through a distribution infrastructure – cable- lying home-subscription service to the relevant based or relying on satellites or telecom IPTV. channel or service before enabling access to it via Typically, subscribers of these services will pay a smartphone, tablet, or other means. distributors (the cable companies and so on) a monthly fee in return for the ability to access a TVoD. Transaction-based video on demand is bundle of broadcast networks. an online business model where aggregators make content available to own or to rent in exchange for Premium subscription channels. These broad- a one-time fee. While an Internet connection is cast networks emerged from the Subscription TV required to download the content, once it is on the ecosystem as new, direct consumer-pay services user’s device it can generally be viewed without on top of the government-funded and commercial a live connection. Players that have adopted this networks included in Subscription TV packages. approach include Apple and Maxdome. For an incremental monthly fee, customers can add “deluxe” content to their bundle of channels, Windowing. Under this strategy, content rights whether that content involves recent theatrical are split across platforms, geographies, and time ﬁlms, highproﬁle sports, or some other “high value” periods. The idea is that by doing so, content programming. Examples of premium subscription creators and rights holders can maximize the channels include HBO in the U.S., Premiere in value generated by a single unit of content across Germany, and BSkyB in the UK. multiple buyers.

Pure-play digital services. These companies do business with their customers solely online, relying on the Internet to distribute their products and services.

SVoD. Subscription-based video on demand is a business model where for a monthly fee, an online aggregator will provide access to a library of content, generally distributed via streaming. U.S.-based Netﬂix and Germany-based Watchever are examples of content players that have em- braced this approach.

88 | 89 IMPRINT

Liberty Global commissioned The Boston Consulting Group to author a study on the topic of the evolving Television industry in the context of the overwhelming trends toward digital distribution and time-shifted viewing. The objective of this work is to contribute substantively to a dialogue which is high on the agenda of industry leaders, policy-makers and regulators, by providing an assessment of the key trends shaping industry change, the implications for shifts between roles in the industry, and a perspective of the different potential ways the industry could evolve. The report takes a quantitative angle on each of these dimensions, and provides empirical evidence on both demand and supply side dynamics inﬂuencing this change.

This study reﬂects BCG‘s thoughts on the topic of the future of TV, supported by industry analyses, expert interviews and case studies based on publically available information. In the process of writing the study, BCG and Liberty Global co-hosted a 2015 Davos workshop with more than 25 industry leaders on this topic. The study provides a basis for discussion for key stakeholders across public and private sectors.

For more information, please contact:

John Rose Sr. Partner and Managing Director BCG New York [email protected]

Joachim Stephan Partner and Managing Director BCG Munich [email protected]

Frank Arthofer Principal BCG New York [email protected] NOTES

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