Common Thread in Top Innovation Priorities Reflects Consistency of Competitive Threats
November 22, 2016 – Entering 2017 the challenges faced by pay TV providers the world over are remarkably consistent region to region, as evidenced by the results of an extensive global survey of operators undertaken by the Pay TV Innovation Forum initiative spearheaded by NAGRA. At the same time, innovation strategies vary depending on regional market conditions and where any given service provider sits in the intensifying competitive scrum.
In the interview that follows, Simon Trudelle, senior marketing director for NAGRA, provides an overview of the survey process and its findings. We then present excerpts from Pay TV Innovation Forum interviews with six executives from different regions of the world who describe the market conditions, challenges and innovation strategies that characterize their operational environments. Companies represented include AT&T/DirecTV, Liberty Global, Hong Kong’s PCCW, Brazil’s Oi, Link Net-First Media in Indonesia and Telekom Malaysia.
ScreenPlays – It’s great to have this opportunity to catch up with you, Simon, especially in light of some of the research that’s come out of the Pay TV Innovation Forum that NAGRA has been spearheading. Why don’t we begin with your telling us what this is, how long it’s been operating and what its agenda is?
Simon Trudelle, senior product marketing director, NAGRA – It’s a program we launched in Q2 2016. A final report and conclusions were released at IBC 2016.
The program aims to look at the state of innovation in the pay TV industry and really answer the question of what will be driving growth in the years to come at a global level. The approach we’ve taken is to work with a London-based consultancy, MTM. They have been experts in the TV space for over a decade.
They researched the market around the world looking at the top 231 operators across the leading countries and analyzing the state of innovation with each of these operators. And then we opened up the conversation with industry executives. Over 200 people were asked to contribute and to provide their view of what are the priorities in terms of innovation for years to come.
We ran six workshops in different parts of the world – Europe, in London and Rome; Asia-Pacific, in Singapore, and in the U.S. Los Angeles. And we also went to Mexico and Brazil. We surveyed executives in each of these regions to capture their input and also ran some surveys and analyzed data to get a complete view of the situation today and where it’s headed.
SP – I don’t know of anybody that has done this. Usually you get research studies that aren’t really talking to distributors. They’re talking to everybody else to get trends and what have you.
Getting them to cooperate was no small feat I imagine. Once you did what did you find out?
Trudelle – Ultimately we realized that there are some obvious leaders worldwide. They’re not specific to one region. We listed major players that are ahead of the curve in many ways and have been able to innovate already and launch new types of services, improving the pay TV experience or even going into what we call adjacencies, new areas of growth for pay TV. We provided a benchmark and ranking of the players. That data is available in the reports.
What comes out is that, in terms of the next steps, we’re going to see more competition driving more innovation. Eighty-three percent of the service providers we surveyed said that competition is going up, and 78 percent said that innovation was the answer.
It means we are reaching a point in the industry where we know things are changing and the opportunities are there to actually grow the pay TV industry. But the recipes will be different, because the technologies and the networks to deploy pay TV services are evolving with IP and cloud technology and data becoming more and more important.
And the other dimension in terms of how to do it better for the future, in the conclusions we not only see a focus on the new technologies but also on partnerships with key vendors to accelerate this innovation process and be more agile in leveraging the best-of-breed players to get there and build the future of pay TV.
SP – Where is that collaboration in the vendor community centered? How does that get done?
Trudelle – We’ve analyzed several models. There are some consortiums that have begun to be put in place. Also, there are some contributions from open-source communities. There are also some service providers among the largest ones that have started making equity investments in some of their partner vendors.
We think there are several models. It will be a mix of them that will make service providers successful. It is certainly a new way of approaching the market. The end game is that service providers have to be in a position where they put the consumer at the center of the experience, and they’re agile enough to move their systems to the next generation of technology.
SP – What did you see as the biggest area of consensus on innovation strategies? Is it revolving around UHD and HDR? Is it starting other services? Is it mounting an over-the-top?
Trudelle – We looked in particular at nine major categories, and out of that list there were three that stood out more. One is more on the business side, the pricing and packaging of the offering.
The feedback we’re getting from the industry is that we will move progressively away from the one-fits-all type of bundle to more segmented, targeted products that respond to the needs of consumer segments. And that has become possible because of OTT delivery, new technologies and new experiences that can be delivered. In the survey that came out as one of the top priorities.
Then it’s also about improving the offering in terms of content. So on-boarding OTT content, particularly the Netflix’s and YouTubes of the world…
SP – A few years ago that survey would have come up near zero on that question.
Trudelle – Absolutely. We started this survey over a year ago where we already had some signs that it was becoming a reality. And now we’re seeing that happening and more service providers saying we would like to on-board more content and create the one place where you have access to all the best content. So it’s really giving pay TV its leadership role again as being the one place where the best content is available.
The third priority is increasing the reach to all screens – big screens, TV sets, very important, but also bringing the same content to other devices with the on-demand capabilities easily available from all devices. That’s more to address the needs of a younger generation that is consuming content on all these devices.
SP – Obviously, these priorities are all intertwined. They basically feed off each other as the priorities of the industry. That survey really gives us a good idea of what’s on these people’s minds. Were the findings different for North America?
Trudelle – There were trends that are stronger in the North American market. We’ve learned from service providers there is a great appetite for delivering OTT content and building an app model addressing on-demand consumption anywhere anytime and also more flexible pricing and bundling.
And with the pressure from content owners that are going direct to consumers this is also bringing service providers to look at the market with a different vision of where it’s headed. We haven’t seen that much of these trends emerging in other parts of the world yet. When we look at the four reports, we see that North America is already addressing challenges that the other regions are only dreaming about.
SP – In this area of collaboration, did anything come up around security and the fact that these new [content licensing] rules that are coming into play will require far more cooperation on enforcements in tracking piracy, which is really a pan-industry kind of agenda?
Trudelle – It does come out in some conversations that there is, especially in markets like those in Latin America, a lot of illegal content that is available and hurting the pay TV industry. We at NAGRA work with regional operators to improve the anti-piracy efforts as part of the Alianza alliance in the region.
But this is potentially holding back growth and playing a negative factor on innovation, because consumers find the content they want but through the wrong channels. That means that service providers at some point and content owners as well have to get themselves the tools and the technologies to stay in control of the distribution of content and also make sure the experience at the end is better than what you get from a pirated site. So it is both defensive and proactive.
SP – Our audience can go to your website and get your findings from the forum?
Trudelle – Absolutely. These findings are available for download for free – registration at https://dtv.nagra.com/paytvif. And we’ve also published a number of public interviews with executives that were created as part of the program. They provide from a service provider perspective real examples of what’s happening in a given market. Some insights of how they see innovation in their companies and innovation in the industry and what they see as the key success factors.
SP – We’ll definitely be watching the site for that input. Thanks much for taking us through this, Simon.
Excerpts from Pay TV Innovation Forum Interviews with Service Provider Executives
Charles Cataldo, Manager Technical Services, DirecTV/AT&T
Pay TV Innovation Forum – How would you describe the state of the US pay-TV industry today?
Cataldo – Ten years ago, a typical pay TV subscriber was a family household. Today, the picture is very different – there might be five members of that household, each of them looking for different content. The ‘one subscription fits all’ model does not work anymore. Pay TV service providers now have to focus on building an ecosystem of products and services that appeals to each member of the household.
In addition, the younger generation has grown up watching YouTube. Their perceptions of and expectations for content are very different from those of a traditional pay TV decision maker. For a long time, I have believed that would present a great opportunity for video services that sit North of YouTube and South of traditional pay TV. That is exactly the type of standalone OTT subscription services that Major League Baseball (MLB.TV) and HBO (HBO Go) have developed.
PTVIF – What are the innovation priorities for pay TV companies in the USA?
Cataldo – Pay TV service providers that have physical networks and are experienced in developing great content need to be able to innovate in terms of search engines and content placement on the user interface. On the other hand, OTT service providers, such as Netflix, that have flexible technology platforms and are sensitive to their customer preferences need to be able to establish relationships with major programmers in order to build great content propositions.
At the end of the day, the factors that will determine the success of a pay TV product will be content quality, followed by user experience and ease of navigation, followed by quality of delivery.
PTVIF – Looking ahead, what will be the most exciting areas of opportunity for pay TV service providers?
Cataldo – In terms of content, there is significant unrealized value in standalone OTT content, particularly sports, and mobile content, including mobile-first content and mobile gaming. In terms of business models, there are exciting opportunities to move beyond subscriptions. For example, pay TV service providers can utilize freemium models, where users can choose to pay the full price for the service without advertising, or get the service for free or at a reduced price with advertising. In addition, pay TV service providers can be creative in terms of how they promote their services, instead of buying advertising they could spend those ad dollars on offering pilot episodes to the public for free.
Shuja Khan, VP Revenue Growth Transformation, Liberty Global
PTVIF – How would you describe the state of the pay TV industry today?
Khan – When you look at the long-term evolution of the pay TV industry, the last five years have been much more disruptive than the previous ten. During the first decade of the century, European pay TV providers were focused on improving their content offerings by, for example, increasing channel lineups, differentiating themselves from free-to-air channels, and investing in their distribution platforms and set-top boxes. Today the focus is on delivering even better experiences for our customers – they are now used to almost continuous app updates compared to the three-five year refresh cycles we used to have. Then it’s also about bringing new content offerings to our platforms with flexible propositions and addressing the exciting new growth opportunities that are opening up with on demand, personalization and impact of social media.
It feels like we’ve gone from a jog to a sprint triathlon!
PTVIF – Pay TV companies are often perceived as not being especially innovative. Why do you think that is the case?
Kahn – In my opinion, what makes pay TV companies successful is their ability to transition breakthrough innovation into mass market adoption. The innovation may have originated in other markets, often niche markets, but what they do is make the technology reliable and easier to use and then package it in a way that is compelling. That for me is still innovation.
PTVIF – Looking forward, what do you see as the key innovation challenges facing the pay TV industry?
Kahn – First of all, the pay TV delivery mechanism is very complex. It has so many components to it and bringing innovation to the whole system is not straightforward, in terms of technology and cost. I think on balance it’s better to get it out then make sure it’s perfect…and then course correct.
Secondly, organizational design is really important for innovation, and lots of pay TV companies are not designed to be innovative – they’re designed to be efficient. A lot of them are still working in silos, with little collaboration. This is one of the key reasons for some of the transformational changes that I’m involved with at Liberty Global.
Third, there are return-on-investment considerations. Pay TV is a great cash-generating business and has healthy margins, so innovative products and services can face a very high return-on-investment hurdle.
Finally, lots of pay TV operators are worried about disrupting their existing businesses, so innovation is much more likely to come from new entrants or industry outsiders. The best way to address this – and the ROI challenge – is to strategically invest, incubate, rapidly experiment and then integrate.
PTVIF – What steps can pay TV service providers take to develop and grow their businesses?
Kahn – Quick ones. Pay TV service providers can’t ignore the disruptive forces facing the industry. They need to identify potential disruptions and take steps to take advantage of them.
In general, pay TV companies are doing a good job addressing the basics, investing to better set-top boxes, great OTT products and very advanced functionalities. Competition is stimulating innovation across the industry.
Secondly, the future is uncertain so we need to place bets. A good way to do that is through corporate venturing. As an investor, you can integrate the new innovation into your business – and could buy the business outright at some point, if it makes sense.
There are also lots of exciting new growth opportunities opening up for pay TV providers outside of their core business. Advertising and data is one area. There is a wealth of data that pay TV service providers can extract, analyze and monetize, leveraging return-path data from set-top boxes and OTT products. It’s a really unique asset that we have and can enable some really exciting new business models.
Thirdly, we need to follow consumer behavior and demand. This is what makes multiscreen or OTT interesting and exciting. Although TV Everywhere services are almost ubiquitous, there are still lots of opportunities to extend content onto new screens – to deliver the next generation of aggregation services and to make the mobile viewing experience easier and more user-friendly.
There is an abundance of opportunity; it’s just a case of prioritizing what’s most likely to provide the best growth.
Koby Zontag, VP Media Sales and Business Development, PCCW
PTVIF – Do you think innovation is becoming more or less important to the pay TV industry?
Zontag – Innovation is definitely becoming more important to the industry, and companies are investing more in it. It is particularly important for market leaders who need to invest heavily to respond to disruptive technologies and innovate continuously to maintain their market positions. Pay TV service providers will always face potential disruptions. Today, it is OTT services, tomorrow there will be something else, so they have to be ready. It is also important to note that with major Internet businesses, such as Google and Amazon, entering the video market, the lines between different types of TV and video service providers are getting blurred.
PTVIF – Looking ahead, what will be the most exciting areas of opportunity for pay TV service providers?
Zontag – Service providers will focus a lot of their attention on offering great content, so we should see more original and exclusive content in the market and stronger partnerships between content owners and pay TV service providers.
Multiscreen TV Everywhere services will also be very important for pay TV service providers going forward. TV Everywhere is slowly becoming a must-have service for customers and it will soon become part of the most basic pay TV service offering. Commercially, I see a big opportunity to bring more premium content, particularly sports, to consumers, allowing them to, say, watch football finals on the go. The key challenge will be monetizing these TV Everywhere services, but there are various ways to overcome it, such as tiered pricing based on the number of supported devices or higher reliance on advertising revenue.
In terms of adjacent businesses, smart home solutions will be a very important way for pay TV service providers to extend their presence in consumer homes by providing connectivity for all consumer devices.
On the B2B side, targeted TV advertising will be a major opportunity for pay TV service providers as advertisers will be willing to pay more money for effective ways to reach their target audiences. Pay TV service providers, broadcasters and advertisers will have to work together to find a mutually beneficial business model. Today, it might be more lucrative for some broadcasters to sell TV advertising on their own. However, with TV advertising rates getting squeezed by online advertising, it will be just a matter of time before targeted TV advertising becomes a reality.
Ariel Dascal, Head of Digital Innovation, Oi
PTVIF – How would you describe the state of the Brazilian pay-TV market today?
Dascal – There is a clear generational divide in terms of how people consume TV and video content. Under 35s have very distinct viewing habits: they are very technologically savvy, they prefer streaming videos – either on subscription OTT services, YouTube or pirate sites – and consume a lot of content on mobile devices. Selling pay TV packages to them is difficult. They do not see much value in packaging, they want freedom to watch content whenever and wherever they desire. And then we have the older generation who consume TV in the traditional linear way and who are used to buying traditional pay TV services and triple-play bundles.
Although pay TV service providers need to respond to this new market reality, the pay TV industry still has huge growth potential in Brazil. There is a large untapped market, with less than half of the households subscribing to pay TV. Even among the high income households, where penetration is just over 80 percent, there is still a significant base of potential users that pay TV companies could go after.
However, there are three key barriers to further expansion. First is the price of pay TV. Most households that do not subscribe to pay TV services simply cannot afford to at the current price levels. Second, subscribing to pay TV used be a status symbol, but with the economic crisis many subscribers are dropping their pay TV subscriptions and keeping only their broadband subscriptions. Third, some consumers are leapfrogging pay TV and going from free-to-air TV to non-linear OTT services.
PTVIF – What are the innovation priorities for pay TV companies in Brazil?
Dascal – The number one priority is the digitization of the pay TV experience in terms of delivering a better end-to-end experience to our customers and reducing our costs of operation and customer acquisition. We need to bring our services into the 21st century. As consumers are comparing pay TV services to Netflix, pay TV service providers need to deliver an interactive digital user experience across all consumer devices.
The second priority is acquiring great content, particularly for various on-demand and streaming propositions. Pay TV service providers face a major challenge in relation to the content industry, which is slow to respond to changing market realities and still follows the traditional approach of managing release windows and selling packages of channels. The content industry is highly susceptible to disruption driven by large Internet businesses, such as Apple and Google, which will allow consumers to get whatever content they want whenever and wherever they want it.
The industry also needs to look for opportunities beyond pay TV and OTT services in areas such as e-commerce, advertising, innovative pricing, new types of content, second-screen applications, mobile-first solutions and home automation and security solutions.
Iris Wee, CMO, Link Net-First Media
PTVIF – What do you think makes the Indonesian pay TV market different?
Wee – The Indonesian pay TV industry has faced a unique set of challenges and opportunities. Historically, pay TV penetration has been low due to high level of piracy and a very vibrant and competitive free-to-air TV market that offers high quality local content, providing little incentive to people to switch to pay TV. The pay TV market has been dominated by satellite operators that have primarily pursued aggressive pricing strategies, with little differentiation or innovation.
PTVIF – How would you describe the key developments in the Indonesian pay TV market?
Wee – I think the market is changing. First of all, the traditional DTH satellite providers have realized the limitations of their business model and are now increasingly trying to bundle their services with fixed broadband or 4G mobile data services, usually through partnerships with telcos. In addition, they are trying to move beyond pure price competition and are looking for ways to differentiate their services. However, without being able to support two-way communication, DTH satellite operators are at a big disadvantage. Hybrid set-top boxes might seem like a reasonable next step for them, but this would require significant capital expenditure and a long-term view of the business, which are not supported by the ‘low ARPU and high-churn nature of the DTH satellite pay TV business.
Secondly, there has been a number of new fiber providers entering the market recently, with pay TV and video playing a significant role in their market penetration strategies. Some of them offer pay TV services as part of their bundle, while others have partnered with OTT players to offer on-demand entertainment bundles.
Finally, the market has seen a number of OTT service launches. It is yet to be seen whether these services are going to be a substantial threat to the traditional pay TV model, but they have definitely been very innovative. OTT service providers recognized that a one-size-fits-all model would not work in the Asian market and adapted their propositions in terms of pricing and content. They have implemented a myriad of content localization techniques, such as subtitling and dubbing, and are actively looking to acquire and produce local content.
PTVIF – Looking ahead, what will be the most exciting areas of opportunity for pay-TV service providers?
Wee – Telcos will drive innovation in pay TV over the coming years, with broadband being key to pay TV market penetration strategies. They will not limit themselves to offering pay TV as a set-top box-based home entertainment service. Their offerings will be agnostic of consumer premises equipment and will include OTT products targeting the on-the-go digital consumer. It is only a matter of time before we will see the proliferation of digital media players, such as Chromecast and Apple TV, and these guys will be ready for that.
For mobile telcos, OTT services will be key to monetizing their mobile data services. We are already seeing a number of telco and OTT partnerships in the market, and these will be ever more important. However, the penetration of these services will heavily depend on pricing and packaging strategies.
Also, if you compare mobile networks in Europe and those in emerging Asian countries, you quickly realize that our networks cannot support a great on-the-go video experience. Some OTT and TV Everywhere services already have download-to-go functionality, and anyone trying to build a successful OTT service will need to support it.
Meanwhile, DTH satellite operators are changing their strategies and moving away from competing solely on price. They are seeing rationalization and investment in new set-top boxes, with differentiating functionalities, and putting more focus on premium customers.
Emily Wee, VP Business and Media Operations, New Media, Telekom Malaysia
PTVIF – Where does innovation rank among the Malaysian pay-TV industry’s top priorities?
Wee – Innovation is definitely one of the top priorities. Pay TV operators have to innovate to keep up with market trends and to protect and enhance their revenue streams. For us, as a challenger in the Malaysian pay TV industry that entered the pay TV business only five years ago, innovation is particularly important. We always need to look for an edge to convince customers to choose us rather than our competitors.
Innovation has become much more important over the last couple of years. The rate of change has accelerated and we are seeing many new players in the market, while consumers have a lot more choice and freedom. A growing number of different businesses are jumping onto the OTT bandwagon, with subscription fees of some OTT services as low as a tenth of the price of traditional pay TV packages. In addition, with technology companies, such as Google and Amazon, and TV manufacturers coming into the game, the urgency for the pay TV industry to innovate and keep ahead is growing.
PTVIF – Looking ahead, what will be the most exciting areas of commercial opportunity for pay-TV service providers?
Wee – There is a substantial opportunity to bring all entertainment together on a single platform. Partnerships with OTT content providers or game developers are where a lot of convergence is happening. The key task and challenge is to ensure that the whole experience fits nicely together.
Great user experience is the missing piece of the puzzle. How can pay TV service providers make it seamless? How can they build a search and recommendations engine that encompasses not only linear content, but also all the on-demand libraries, applications and OTT content? Smart TV manufacturers were the first to attempt that. They have tried to partner with as many content providers as possible in order to bring the adoption rate of smart TVs up. However, the experience has not lived up to the expectations. It still feels a bit clunky, with users having to navigate between different standalone apps.
In the OTT space, TV Everywhere is a ‘must do’ for all operators. I think there are also interesting opportunities for pay TV companies to offer standalone OTT services that are differentiated from their core propositions and targeted at new customers outside their footprints. Sky has made it work quite well with Now TV in the UK. However the jury is still out as to whether this would be applicable to the Malaysian pay TV market, given the differences between the two markets.
Outside the core pay TV and OTT propositions, Internet of Things and smart home solutions would be the first priority. This is particularly true for telcos, which are increasingly focused on owning the connected home. However, it is very early days for Internet of Things and smart home solutions in Malaysia. These solutions will develop much faster in other countries in the region that have higher incomes and higher broadband penetration.