September 10, 2010 – The latest moves among over-the-top content suppliers Amazon, Apple and Netflix underscore more than ever the risks subscription service providers will incur if they fail to exploit TV Everywhere to its maximum potential.
As OTT players spawn ever more business models aimed at displacing or at least sucking some significant dollars out of subscription revenue stream, the volume and penetration of connected devices affords them new opportunities to add new levels of convenience to the consumer entertainment experience. For service providers the question becomes, what must be done to adjust TVE to the new realities?
"The market is wide open," says Kurt Scherf, vice president and principal analyst at Park Associates, referencing his firm's latest research on consumer behavior and attitudes. "It's the Wild West."
While recent research from a variety of sources has shown the rising consumption of long-form video over the Web has had no apparent impact on TV viewing numbers, which continue to rise, nobody seems to be comfortable with assuming business as usual will work for long. Just how uncertain things are for everyone from over-the-top players like Netflix to the biggest players in subscription TV is underscored by Parks' data.
In a survey of 2,111 broadband households Parks found a good degree of interest in new approaches to accessing entertainment content, even at this early stage when very few people have had direct experience of Web-based video delivered to their TV sets. For example, Scherf says that among the small proportion of users – eight percent, according to another Parks survey – who have used a TV connected to a PC in the past six months to watch online video, 29 percent said they were highly likely to cancel their pay TV subscriptions.
Twenty-one percent of viewers who accessed online video through a game console, representing a larger proportion of the population at about 16 percent of broadband households, said they were inclined to cancel pay TV service. Among survey respondents who represent the 53 percent of broadband households who have been accessing long-form video on their PCs, 16 percent said they were highly likely to cancel pay TV.
While quality of video delivered over service providers' networks was the most-often cited positive attribute of pay TV service (by 66 percent of respondents), the quality advantage may be relatively short lived, given projections that by 2014 the majority of broadband households will be able to access the Internet at 10 megabits per second or faster speeds. Already, Scherf notes, users who have overcome the hurdles of connecting PCs to TVs are expressing satisfaction with the quality they're getting on the big screen.
"We got a lot of comments about the quality of Netflix," Sherf says. "If you can put content accessed from the Internet in the comfortable viewing environment of the TV at quality levels people expect, that's what would concern me if I were a pay TV executive."
While subscribers who use VOD seem satisfied with the service, just 39 percent of respondents overall rated VOD as a strong attribute of pay TV service. In contrast, the prospects of getting content on demand from the Web had strong appeal to the majority of respondents. Among several new on-demand and multi-platform service options posited by Parks, by far the most appealing was "special set-top box for broadcast HD, online video and V0D" (essentially, the Sezmi service model), which 54 percent cited as highly appealing, followed by 49 percent for whole-home DVR and 42 percent for TV Everywhere.
Clearly, service providers are concerned, which is why TV Everywhere became a strategic mantra in cable a year and a half ago. But, as Comcast CEO Brian Roberts acknowledged recently (see June, p. 1), the service, branded On Demand Online by his company, has not fulfilled its promise, partly because of too many complexities, which Roberts said Comcast would remedy this fall, and partly because it has taken a long time to line up programming support . In terms of the goal of replicating access to the full scope of cable service online, "today [service providers] are doing a poor job of that," Scherf notes.
Meanwhile, the scramble to capture viewers who seem ready to try something different has intensified with the outbreak of an online rental price war between Apple and Amazon and with reports that Amazon is preparing to launch a subscription service in competition with Netflix. Apple, as the dominant provider accounting for 57 percent of movie and 53 percent of program rental transactions, according to Screen Digest, said it was cutting the rental fee for some TV shows supplied by Fox, ABC, ABC Family, the Disney channel and BBC America from the usual $1.99-$2.99 to 99 cents. At the same time the company took another stab at generating interest in its Apple TV service with launch of a new $99 terminal that can stream videos but does not support downloads to storage.
Amazon, generating just eight percent of TV and movie rental transactions, matched Apple's price cuts on the selected shows from the same suppliers. Whether the aggressive pricing strategy supported by News Corp., the owner of Fox, and Disney, which owns ABC, will force other media companies to follow suit remains to be seen. So far, with TV shows priced at $1.99-$2.99 and movies at $4.99, the online rental market has drawn relatively low user participation, with total transaction fees expected to hit $407 million in the U.S. this year, according to Screen Digest.
These numbers, however, don't include the growing amount of online TV and movie transactions taking place on game consoles. That market, counting downloads to own as well as rentals, topped $600 on a worldwide basis last year, according to Parks.
But it's the subscription versus per-program rental model that presently is moving the market, thanks in large measure to the success Netflix has had with offering its by-mail subscribers access to movies and TV shows online. In July Netflix reported its streaming service was used by 61 percent of its 15 million subscribers in the second quarter compared to 27 percent a year earlier.
In contrast to Hulu, which offers recently aired TV programs to users on a subscription basis at about $10 per month, Netflix has focused on supplying older TV shows and movies that are behind the DVD and pay TV release windows. The Wall Street Journal in August reported and Amazon sources confirm that the big online retailer is preparing to roll out a subscription service directly competing with Netflix. Amazon, like Netflix, hopes to ride the wave of connected device suppliers who need OTT content to drive sales.
It's a dicey business for all concerned, especially for those, like Netflix, who have all their eggs in one basket or another, in contrast to the likes of Amazon, Apple and Google where there's far less at stake, win, lose or draw. In a candid but upbeat assessment of the Netflix strategy, company CEO Reed Hastings leads off a recently posted online slide presentation with the statement, "We seek to lead streaming subscription for TV shows and movies."
This will be the only content and payment category the company pursues, Hastings says. But within this category at $9 per month for unlimited streams Netflix intends to be "ubiquitous on game consoles, Blu-ray, Internet TVs, laptops, tablets and mobile."
Predicting the DVD-by-mail shipments that have driven its business since its founding will peak in 2012, Hastings makes clear the company's future will increasingly depend on the online segment of its business. He forecasts 2010 will end with a big spike in subscribers to over 18 million, up from 12.27 million at YE 2009, thanks largely to what he describes as the "skyrocketing" streaming business.
Hastings describes the subscription streaming business as a fairly safe place to be insofar as the company is not trying to compete with TV subscription services or early-release-window content offered through other on-demand venues. "We are evolving to be more movie-catalog and prior-season TV-show focused, as opposed to new-release focused," he says. "At this low price we augment rather than replace the standard video package." Pay TV subscribers rarely give up their service when they sign up for Netflix, he notes.
But there are threats, Hastings acknowledges, ticking off a slew of possible developments such as a big success ("$100 CPMs") for targeted advertising on streamed content from the likes of Google or some effort by broadband service providers to choke off competing video content. Among the more likely threats seen by Hastings are the possibilities that "giants" like Amazon, Microsoft, Wal-Mart, AT%26T, Best Buy, etc. will jump into the streaming subscription business and that "CSTs" (cable, satellite, telco service providers) will succeed in efforts to "co-opt our benefits and bundle them into their core service to limit our attractiveness."
Where the "giants" are concerned, Hastings suggests they may take some business away. But he asserts that, given the Netflix lead in this space, the only advantage they have is their "ability to absorb large losses." Moreover, they have little chance of profiting from such ventures, because Netflix will "defend our segment to the bitter end since we have nowhere to exit to."
But when it comes to the threat from CSTs, Hastings sounds a bit less confident. With more on-demand content, IP-based delivery models, TV Everywhere and better user interfaces, CSTs could "hurt us the better their service gets, because fewer people will pay for supplemental Netflix service."
Indeed, notwithstanding the difficulties of getting TV Everywhere off the ground, service providers have an opportunity to fend off Netflix and the many other OTT options by taking a more expansive approach to TVE that encompasses the full range of VOD content and taps new opportunities for advanced advertising, Scherf says.
"We think TVE will move quickly to becoming a more holistic VOD service," Scherf says. "If you look at consumer demand for TVE as a replication of cable programming, 42 percent say they find that highly appealing. But it's also true that 37 percent indicate they want full access to VOD rentals and downloads." Free access to time-shifted content in VOD is another big plus for service providers, he adds, noting that survey respondents listed availability of greater volumes of free on-demand content as the strongest incentive for shifting to another service provider.
Service providers have talked about the advertising possibilities with TVE but say they first must get a viable platform in place with sufficient content and viewership if they are to create a reasonable value proposition for advertisers. That may be true, says Kelly Anderson, director of MVO solutions at data management supplier Openet, but now is the time to be building the back-office foundation for executing on the TVE advertising potential and other important capabilities.
"TVE is a huge opportunity for cable operators, not just to compete with Hulu Plus and Netflix, but also to put their unique spin on the service based on what they know about their customers," Anderson says. "They have a major advantage in knowing what their customers like to watch, what ads are likely to appeal to them, what type of device they're accessing content from and how that influences content and advertising options you offer to them."
Openet's message to operators is that they should look beyond basic subscriber authentication when it comes to aggregating subscriber data for TVE applications. "Being able not only to authenticate but to offer content and advertising around what subscribers like to see is a key benefit we offer through our subscriber data management system," Anderson says.
There's a plethora of nuances operators need to address if they're to maximize returns on the TVE investments, she notes. For example, advertising placements in programming supplied through the VOD platform are different from ads placed in live or time-shifted programming.
"You have to be sensitive to the established culture where VOD viewers are used to very brief and fewer commercials with time slots allocated to ads lasting just 30-45 seconds or one minute at the most versus three to four minutes for live advertising breaks," she says. Operators can also take advantage of the online interactive environment to offer subscribers access to more information about a particular product that may be advertised only briefly in the initial exposure, she adds.
Similarly, advertising will change with what devices are used and where the subscriber is when accessing a program. "The whole key is knowing your customer," she says.
Operators want to be able to aggregate viewing metrics on advertising across all outlets, but they need to make that information useful to advertisers with respect to confirming which ads were watched in which environments by how many people. Differences in CPMs among live TV, time-shifted, VOD, online and mobile have to be taken into account. "It's not just a matter of tracking views," Anderson says. "You have to be able to look back into the data and report on how ads were viewed down to a very fine level of granularity."
Many benefits arising from smart use of subscriber data can contribute to maximizing the effectiveness of a TVE strategy. For example, Anderson notes, TVE customers who are not subscribers to, say, HBO might be offered per-view access to programs, thereby increasing the flow of revenue to the operator and the programmer. Operators can also track customer behavior as a clue to whether the quality of experience is measuring up to expectations. "If someone is experiencing latency, we'll know, because we're streaming data back from their set-tops as they are viewing," she notes.
With an expanded multi-device experience associated with TVE, operators may have an opportunity to begin charging extra for the service, which will require an ability to track specific program viewings so the new revenues can be proportionately shared with programming partners. "Subscribers are willing to pay to watch programming online, on their iPads and mobile devices," Anderson says.
Indeed, 16 percent of respondents to the Parks research indicated they would pay up to $5 per month for a TVE service. Overall, Scherf says, "As folks running TVE start to leverage the data they're getting back from their subscribers, it's only going to make their platforms more valuable. The use of data analytics can give service providers a vast repository of information to share with advertisers and content owners."