Using TV Everywhere to Drive Premium TV Services. A Parks Associates Whitepaper Developed for

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1 Using TV Everywhere to Drive Premium TV Services A Parks Associates Whitepaper Developed for

2 Online Video: Hurting the Adoption of Premium Services Few trends have affected the global pay-tv industry the way online video and over-the-top (OTT) video services have over the past three years. In the U.S. market, Netflix has grown its Watch Instantly service from a novel sideline of its DVD-by-mail business to over 22 million subscribers. Hulu, the U.S.-based OTT television content service, has expanded to serve 27 million viewers, with over 2 million of those users paying a monthly fee for access to content. Both of these giants see opportunity worldwide and are expanding into markets in Latin America, Western Europe, Asia, and the Pacific. While terrestrial broadcasters are currently the most popular online video destinations among consumers in Western Europe, OTT services including LOVEFiLM and Acetrax have expanded their coverage to become multinational video providers. Other services are following the same path. Regardless of market, these services have several commonalities, including access to a wide assortment of content on a variety of Internet-connected devices and business models that have a low (or no) cost to consumers. Consumers have responded to the availability of these services with broad adoption, integrating these services into their entertainment budgets, both in terms of time and money spent. THE INITIAL FEARS of service providers centered on the possibility that consumers would DISCONNECT their pay-tv service and REPLACE it with ONLINE VIDEO. While a segment of consumers have experimented with this extreme change, the overall cord-cutting experience has proven to be much more fragmented, manual, and time consuming than the pay-tv experience. These inhibitors have limited the number of consumers willing to go with online video only. More troubling for operators are cord shavers, a group of subscribers who retain a basic version of their core pay-tv service but eliminate some or all of their premium TV services, including HD service, additional channels, premium content, pay-per-view, and on-demand services. While both cord cutters and cord shavers have reduced the amount paid to pay-tv providers and have replaced pay-tv content with online video, the motivations and behaviors of the groups differ. 2

3 Using TV Everywhere to Drive Premium TV Services Those who sever their pay-tv relationship are often marginal television viewers, watching less broadcast TV than the average broadband home. Free terrestrial broadcasts, ad-supported online video, and DVDs are adequate to meet their videowatching needs. In contrast, cord shavers value video overall and will retain at least a basic pay-tv subscription even while reducing their overall pay-tv spend. Instead of total pay-tv cancellation, shavers replace the premium portion of their TV services with OTT services and ad-supported online video. Cord shavers use both legitimate and unlicensed sources to sate their thirst for video content. Cord Cutters 60% of all subscribers that cancel their pay-tv service watch online video (U.S. market) Broadcast TV remains the most important source of video content Cutters watch less broadcast TV than average household Free, ad-supported content is also an important source for video Use of DVDs and Internet video on the TV & PC is much greater than average homes but less than cord shavers vs. versus Cord Shavers Heavy TV viewers, watching 4.2 hours of Internet video per week on their TV ARPU is $20 less (27% less) than average pay-tv subscribers (U.S. market) 66% of cord shavers reduce their channel package size 66% reduce the number of premium channels (e.g. movies, sports) received 47% eliminate HD service OTT services are as important as ad-supported video sources Cord Shavers Unlicensed Online Video Viewing (As % of Monthly Online Video Sessions) U.S. U.K. Germany Spain France Italy Canada % of Cord Shaver Online Video Sessions that Access Unlicensed Content per Month (self-reported) 0% 30% 60% Source: Parks Associates Consumer Analytics Parks Associates Percentage of Broadband Homes that are Cord Shavers U.S. U.K. Germany Spain France Italy Canada % of Broadband HHs reducing their Pay-TV Service Package that Watch Online Video 0% 6% 12% Consumers elimination of premium services is a particularly troubling trend for pay-tv providers. In the U.S. market, where most consumers subscribe to middle tiers of pay-tv services, the loss of premium service revenues from a small percentage of users is painful. In Europe, Asia, and other parts of the world, the most basic service tier is most commonly adopted by consumers. Moving consumers from basic subscriptions to premium services in these markets is already a significant challenge, and losing even a small percentage of premium subscribers to online video represents ground lost to an emerging rival. Further, while the operator faces lower ARPU (an average of 27% lower in the U.S. market) for cord shavers, those providers that supply at least broadband services experience an increase in broadband traffic as consumers compensate for the lost content with content that they find online. In markets such as South Korea, where broadband caps are not feasible due to competitive forces, the increase in traffic translates into higher capital expenditures and operational costs to serve these cordshaver customers now paying less than they did before cord shaving. Importantly, the battle for premium services extends beyond today s cord shavers. As use of alternatives to the pay-tv operator grows, consumer acceptance and adoption of OTT services will increase. Thus, the groups of cord cutters and cord shavers are being joined by the cord nevers, those who grow up relying on alternative video providers for all of their content needs and never had a cord to cut or shave. Source: Parks Associates Consumer Analytics Parks Associates All rights reserved. 3

4 TV Everywhere: Driving Premium Services In the face of this online video threat, a number of pay-tv providers throughout the world have responded with heavy investments in their own OTT services. These TV Everywhere services were introduced as value-added features of pay-tv services to prevent subscriber loss to online video. Thus, many operators introduced the services at no additional cost to their customers. In several markets, this approach quickly proved to be problematic. Offered for free, the TV Everywhere service is a concrete provider cost, but reducing consumer churn is a difficult result to quantify. Advertising a free TV Everywhere service not only adds more cost to the service but also has an opportunity cost: those ads do not promote the provider s core TV service. However, without promotion, consumer awareness remains limited, minimizing the effectiveness of TV Everywhere as a defense against OTT services. Given these challenges with a free service business model, operators in several global markets are re-focusing their TV Everywhere strategies to include premium services, using TV Everywhere services to drive consumers to higher tiers of service and to produce incremental revenues. Pay-TV providers have several advantages that they can leverage to make TV Everywhere services successful. With strong relationships with content owners, pay-tv players have access to the most current, popular content available, and as well-funded corporations, they have the capital to acquire such content. In addition, pay-tv providers already have an established billing relationship with consumers and can make the transaction process easy for the consumer through existing billing mechanisms. Operators can bundle TV Everywhere services with their core services or other value-added services, making them more attractive to subscribers. TV EVERYWHERE and PIRACY While TV Everywhere can be used to drive premium services, it also has the added benefit of providing a disincentive to content piracy. Often, when consumers cannot find desired content on a particular device from a legitimate source, they will turn to unlicensed sources in order to address their needs. By offering a legitimate option for subscribers, operators not only grow usage and loyalty among their customers, but they also help minimize content piracy. Moreover, offering content via connected CE devices helps the operator reach new audiences with their content services, including the emerging cord nevers. Satellite service providers in Europe are already testing these waters. ViaSat s ViaPlay service and BSkyB s Sky TV Now service allow consumers to purchase TV service on connected CE devices only, including computers, tablets, smartphones, and smart TVs. This approach allows companies to expand outside of their traditional DTH customer base. Pay-TV providers have tested a variety of TV Everywhere business models; a few of the more successful models are particularly well suited to driving premium TV services. Importantly, each of these business models complements or reinforces key aspects of the operator s core TV-based video service. 4

5 Using TV Everywhere to Drive Premium TV Services INCENTIVE TO UPGRADE Strong benefits of free as a defensive business model are that customers experience low barriers to adoption and competitors cannot feasibly undercut the price. However, at the low ARPUs realized for basic pay-tv service, a free TV Everywhere service is particularly untenable for operators, eroding already minimal margins. By attaching free live or on-demand TV Everywhere to the highest tiers of pay-tv and broadband services, providers win in three ways: They achieve an adequate margin to support the service; They offer an additional value-add to spur upgrades; and They still preserve the positioning advantage that free provides. Swiss telco Swisscom and Italian terrestrial pay-tv broadcaster Mediaset have both successfully used TV Everywhere offerings to migrate subscribers to higher tiers of broadband or video services. PREMIUM TRANSACTIONAL VOD Rather than using TV Everywhere as a defensive tool, operators taking this approach perceive OTT delivery of content as an extension of their existing VOD business, relying on premium transactional VOD on connected CE devices for incremental revenues. Transactional VOD offerings scale well with content and delivery costs, and the results of adoption can be easily measured. While transactional VOD on connected devices is less popular with consumers than the more cost-efficient (from the customer perspective) subscription VOD services, pay-tv providers can extend the early windowing advantages that they have with popular content on TV-based VOD to connected devices. U.S.-based Verizon is one operator that focuses on incremental transactional revenues; it is using this business model to drive its FlexView service. PREMIUM SUBSCRIPTION VOD Some operators directly confront the specter of OTT video services by offering their own. Bundling a subscription OTT service with a traditional pay-tv service not only provides a convenient path to market the service, but also allows the operator to subsidize the cost of the service. Thus, the pay-tv provider can either bear greater expense for more current, compelling content or offer a lower price than OTT video service alternatives. In either case, the pay-tv service can realize a notable market advantage over OTT competitors. U.S.-based Comcast and U.K.-based BSkyB have both launched subscription VOD services. Comcast s service, available exclusively to its pay-tv subscribers, is designed to lure customers back from the Netflix Watch Instantly service. Sky s TV Now service is available to all U.K. consumers, not just its pay-tv subscribers, effectively expanding the satellite provider s reach to new potential customers. All rights reserved. 5

6 TV Everywhere for Premium Services: Keys to Success Appropriate business models, while important to acceptance and long-term viability, will not guarantee the success of a TV Everywhere initiative positioned to promote premium services. Several other factors will also be critical to creating a service that will drive ARPU and corresponding revenues. Compelling content: Paying customers want the assurance that each time they use a service, they will have something interesting to watch. Several OTT services address this requirement with massive libraries of content that include an abundance of long-tail titles. Pay-TV providers can offer live streaming of channels or use their early access to VOD content to supply customers with content that is unavailable from OTT services. User experience: Having compelling content is a wasted benefit if customers cannot find what they want quickly. In a market replete with options for potential video customers, the user experience will be an increasingly vital differentiator among services. Discovery tools that help users easily winnow down linear and on-demand choices to a manageable consideration set minimizes the time and effort required by consumers in selecting content. While a good user experience is important to keep paying customers engaged in subscription services, rapid discovery is essential to the success of any transactional VOD services. Awareness Consumer Availability Content Options COMPELLING CONTENT Device Options User Experience Security Video Choices Availability on a wide variety of CE devices: One strong attraction for OTT services is their widespread availability on almost every connected CE device that the consumer owns. Netflix s near ubiquity on connected devices provides consumers with the confidence that if they pay for the service, it will be available on the devices that they most want to use wherever and whenever they want to use them. To provide a strong premium service, operators must close any existing device availability gap. Secure and easy to use: Both the consumer and content partners have a vested interest in the security provided as part of a premium service. For consumers, using a service from a trusted provider eliminates the risk of viruses, spam, and other dangers that may be associated with accessing unlicensed content online. At the same time, security measures cannot be so cumbersome or limiting that they hinder the user experience. Content partners will require any OTT service to deliver content securely, particularly for early release or HD assets. Thus, security solutions used must be market proven, approved by content creators, easily integrated into service provider apps, and able to quickly support the variety of new devices that are introduced each year. Consumers and content providers expect their operators to adequately address security for current threats and over time as new potential risks arise. Awareness and promotion: Greater adoption, use, and incremental revenues from TV Everywhere services will occur only with heightened consumer awareness. Unlike promoting free services, promoting premium-oriented TV Everywhere services will contribute to the bottom line while reinforcing the operator s core TV services. 6

7 Using TV Everywhere to Drive Premium TV Services Conclusions TV Everywhere offers pay-tv providers an opportunity to gain traction in an emerging market area largely ignored until alternative service providers began to affect consumer viewing and spending. Adapt TV Everywhere services into the main component of an offensive market strategy. Although they initially undertook TV Everywhere for defensive purposes, pay-tv providers need to adapt It as an offensive strategy. This change demands a vital distinction in the way that the service is designed, positioned, and promoted. Whereas a defensive approach minimizes the loss of subscribers, an offensive approach seeks to use TV Everywhere capabilities to acquire customers and improve ARPU. In this way, the operator not only positions its offering aggressively against OTT services but also against other pay-tv providers that may also offer TV Everywhere to consumers in the provider s footprint. Integrate TV Everywhere into the provider s core service portfolio. In many cases, operators have added TV Everywhere as an extra service rather than as an integrated part of their overall business, both in terms of service positioning and technology integration. Instead, pay-tv providers need to integrate TV Everywhere in a way that supports the provider s core service portfolio and minimizes risk. Position TV Everywhere services to complement TV-based linear and on-demand services. The majority of video consumption on connected CE devices supplements consumption on the television. Thus, the business model for and delivery of the TV Everywhere service are best positioned when complementary to TV-based linear and on-demand services. In terms of technology integration, adopted TV Everywhere solutions must reinforce their tie to core services and minimize risks to the consumers, pay-tv provider, or content partners that result in a loss of trust or greater cost. At the same time, any solution must be able to scale quickly and securely to new CE platforms as they emerge. Solutions must not only allow swift deployment but also have the flexibility to adapt to the rapidly changing needs of the consumer. Having quick scaling capability will allow the operator to reach new connected CE platforms as rapidly as OTT rivals. Drive adoption of premium services. Finally, pay-tv providers need to adopt TV Everywhere business models that drive premium services. Not only will these models drive incremental revenues and higher ARPU, but they will also address the pay-tv provider s key vulnerability to OTT services. All rights reserved. 7

8 ABOUT THE AUTHOR BRETT SAPPINGTON, Director, Research, Parks Associates As a director of research at Parks Associates, Brett Sappington leads Parks Associates services research team, including access and entertainment services, digital media, OTT, cloud media, video gaming, and technical support services. Brett is an expert in worldwide television and broadband services. His personal research focuses on the activities and trends among operators and the market forces affecting their businesses. Brett is a regular speaker and moderator at international industry events. Brett has spent over eighteen years in the industry as an analyst, executive manager, and entrepreneur. Previously, he founded and served as vice president for Teligy, a software company specializing in software for wired and wireless communications systems. Brett established new divisions for networking and audio/multimedia software for Intelligraphics. He has also been involved in the development and marketing of early-market products for wireless networking, VoIP, and other technologies. Brett holds an MBA from the University of Texas at Austin with a concentration in high-tech marketing and a BA in physics from Baylor University. ABOUT PARKS ASSOCIATES Parks Associates is an internationally recognized market research and consulting company specializing in emerging consumer technology products and services. Founded in 1986, Parks Associates creates research capital for companies ranging from Fortune 500 to small start-ups through market reports, primary studies, consumer research, custom research, workshops, executive conferences, and annual service subscriptions. The company s expertise includes new media, digital entertainment and gaming, home networks, Internet and television services, digital health, mobile applications and services, consumer electronics, energy management, and home control systems and security info@parksassociates.com ABOUT IRDETO Irdeto is a world leader in content security, management and delivery for pay TV, online operators and content owners. Through its innovative conditional access, dynamic monetization and content security technologies, the company allows new forms of distribution for broadcast, broadband and mobile entertainment, as well as for the world s most popular apps, estores and consumer devices. Regionally headquartered in Amsterdam, Beijing, and San Francisco, the company employs more than 1,000 people in 25 locations around the world. Irdeto is a subsidiary of multinational media group Naspers (JSE: NPN). Please visit Irdeto at Attribution: Authored by Brett Sappington Published by Parks Associates Parks Associates Dallas, Texas All rights reserved. No part of this book may be reproduced, in any form or by any means, without permission in writing from the publisher. Printed in the United States of America. Disclaimer: Parks Associates has made every reasonable effort to ensure that all information in this report is correct. We assume no responsibility for any inadvertent errors. 8

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