Reality. Myth. OTT is highly cannibalistic of traditional TV. Only somewhat. OTT TV Myth #3: OTT Is Highly Cannibalistic of Traditional TV

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1 OTT TV Myth #3: OTT Is Highly Cannibalistic of Traditional TV Alarmist statements abound regarding the predatory nature of over-the-top (OTT) and how it is poaching traditional TV viewers. Myth Reality While cannibalization does exist, the interplay between linear TV and OTT varies depending on the type of online content offering. For Myths 1-2, please see part one of Over The Top TV Trends in our Executive Insights Spotlight on Media & Entertainment series. OTT is highly cannibalistic of traditional TV Only somewhat What type of OTT content is cannibalizing linear TV?»

2 Guess Who s Coming to Dinner: OTT Sports Services Cannibalize Traditional TV, Entertainment Complements TV Sports-related OTT services (e.g., UFC.TV, MLB.TV, WWE Network) show the highest cannibalization of traditional TV consumption. Entertainment services such as Netflix, Amazon Prime or Hulu Plus are used as complements to linear TV. While there is no certainty of a causal relationship, recent research from the Cabletelevision Advertising Bureau attributed ~% of 14 Q3 and Q4 TV ratings decline to a combined effect of online video services and measurement systems that do not capture digital device viewership. Impact of OTT on Traditional Linear TV Viewing of Similar Content 1 (14) Relative impact on traditional TV consumption indexed to impact of online catch up services UFC.TV MLB.TV WWE Network Sports-related services Hulu+ Netflix TV catch-up Amazon services Prime Percent of respondents stating online service had no impact on traditional linear TV consumption Entertainment services HBO Go Note: 1 How has your online video consumption impacted your viewing of traditional TV over the past year?; 2 Cannibalization indexed on the TV cannibalization from MVPD catch-up services Source: 15 L.E.K. Media & Entertainment Survey, Cabletelevision Advertising Bureau Base Index itunes So is traditional TV dead?»

3 OTT TV Myth #4: Traditional TV Viewing Is Dead TV has yet to breathe its last breath: Traditional TV still remains the largest media consumption platform Myth Reality Consumers prefer free or subscription-based services (including linear TV) over transaction-based offerings Traditional TV viewing is dead Nope What is the status of traditional TV consumption?»

4 TV Is Dead, Long Live TV (!): Traditional TV Remains the Single Largest Platform of Media Consumption Television accounts for ~31% of total hours spent on media per week. Paid and free OTT online video services have been growing but still represent only a 1% share of total hours consumed. So what form of video consumption platforms work best with users? Time Spent Consuming Various Forms of Media Content 1 Percent of total hours 1% 8 7% 23% 6 5% Movies 2 Publishing Games Internet Music Radio Paid and Free OTT Online Video Services 3 TV (traditional) 1% 31% Note: 1 On average, how many hours of the following types of media do you consume in a typical week? ; 2 Includes in-theater and physical purchase / rental, and includes TV show box sets; 3 Includes free video (3 hours) and paid OTT services (4 hours, mostly streaming) Source: 15 L.E.K. Media & Entertainment Survey How do consumers prefer to access video content?»

5 A Tale of Two Cities: Subscription Platforms Grow, While Transaction-Based Models Decline People are watching more on free/subscription services and less on pay-per-view services. This chart shows an increase in the net variance in consumption for free or subscription-based media, indicating a consumer preference for passive forms of billing, which either do not require a payment or which only require an initial set-up. On the other hand, transactionbased media (which requires users to make a payment decision each time they wish to consume) is struggling. While this is good news for both traditional TV and OTT services, a question remains around the viability of the cable bundle. Change in Consumption of Forms of Media 1 Percent 3% 1 (1) () Increased somewhat (5-1%) 13% (7%) (7%) Pay Television Free / subscription based 11% (6%) (5%) Paid OTT / online video service, streamed Increased significantly (>1%) 14% 6% (5%) (5%) Free online video service Decreased significantly (>1%) Paid OTT / online video service, rented or downloaded TV Series (purchased / rented physical discs e.g, DVDs) Decreased somewhat (5-1%) Transaction based Movies (purchased / rented physical discs e.g., DVDs) Note: 1 Compared to last year, has your weekly consumption (in hours) for different types of media increased, decreased, or remained the same as current? ; 2 General internet net variance was 36% in 1 and 27% in 9 Source: 15 L.E.K. Media & Entertainment Survey 3% (7%) (5%) 6% 4% (7%) (9%) 9% 4% (7%) (1%) Net variance 2 1% 4% (6%) (9%) Movies (in-theater) Is the cable bundle going away?»

6 OTT TV Myth #5: The Cable Bundle Is Going Away Multichannel video programming distributor (MVPD) subscriptions have grown slightly at 1.4% per year from Myth Reality But new virtual MVPD services such as Apple TV or Sling TV are potential substitutes to traditional cable subscriptions. These services could contribute to a drop in the share of households subscribing to traditional MVPDs from ~89% currently to ~7% in 19. The cable bundle is going away Maybe in the long term but not in the next five years What is the status of traditional TV consumption?»

7 Don t You Forget About Me: MVPDs Have Continued to Grow Between Overall cable, satellite and Internet TV subscriptions (MVPD subscriptions) have grown 1.4% per year even as OTT services have proliferated. Newer video operators such as AT&T (U-verse) and Verizon (FiOS) are continuing to penetrate the market (growing at 17.4% and 1.6% per year, respectively between 11-14) and are sustaining overall MVPD expansion compared to the stagnant/declining footprint of more traditional cable and satellite operators. The bottom line: MVPDs are not going away anytime soon. Key Provider Subscription Rates (11 14) Millions of subscribers Verizon AT&T Time Warner Cable DISH Network Corp. DIRECTV Comcast Corporation Source: SEC Filings, L.E.K. analysis Are virtual MVPDs a disruptive force?»

8 Clear and Present Danger: Virtual MVPDs Are Potential Substitutes for Traditional Cable Subscriptions Several new virtual MVPD platforms have been announced, such as Sling TV (Dish), PlayStation Vue (Sony) and Apple TV. These platforms represent direct substitutes for traditional MVPD services as they provide live streaming of linear channels. How likely would you be to subscribe to a service (described to be similar to PlayStation Vue) at a price that you would consider reasonable? Take rate 1 1% Current multichannel subscribers Current non-multichannel OTT viewers Our recent survey of U.S. multichannel respondents yielded an ~1 take rate (after overstatement adjustment) for a virtual MVPD service similar to those recently announced. Interestingly, the take rate was greatest among non-millennials, highlighting the crossgenerational appeal of these offerings All Respondents 22% 12% Surprisingly, non-millennial current multichannel subscribers reported a higher take rate for the new OTT MVPD service 24% Millennials / Gen Z 2 21% % Non-Millennials Note: 1 Take rates are normalized by a 7/3/1 adjustment; 2 Millennial / Gen Z category includes those under 35 as of 14 Source: 15 L.E.K. Media & Entertainment Survey How great is the risk for the traditional multichannel ecosystem?»

9 Brave New World: By 19 Virtual MVPDs Could Drive Multichannel Share of Households Down to About 7% Without new virtual MVPDs, not much will change. MVPD share will be comparable (dropping from ~89% to ~86%) if you project demographic shifts to 19 and apply the current growth rate of subscription video on demand (SVOD). However, virtual MVPD services could deliver a step change in OTT penetration and drop the multichannel share to ~7% by 19. Media Subscription Rates Over Time: Demographic Shift + Existing SVOD Growth + New Offerings (14E-19F) Percent of adult broadband population 1% 8 6 New "Virtual MVPD" offerings Broadcast OTT standalone Multichannel 5.2% 6.% % 9.7% 17.2% 4.9% 7.5% The predicted share gains for virtual MVPDs assume that the products actually work. They might fail if the services have too many bugs and/or cannot get complete channel lineups. 85.5% 7.4% 14E Source: 15 L.E.K. Media & Entertainment Survey 19F dem. shift + existing SVOD growth 19F dem. shift + existing SVOD growth + new OTT MVPDs But does this mean that even premium bundles are at risk?»

10 OTT TV Myth #6: Premium Networks Will Be Extinct Increasingly traditional premium TV networks such as HBO are experimenting with standalone OTT offerings, by-passing their existing operator relationships. Myth Reality The bulk of premium networks revenues will continue to be driven through traditional multichannel distribution in the short term. But as the share of the broadband-only population increases, premium networks need to develop alternative platforms, likely through new partnerships with device manufacturers and tech companies such as Microsoft, Google or Apple. Premium networks will be extinct Not yet (but they will need to go on the offensive) This approach should help these networks hedge their bets. How resilient are premium offerings to OTT?»

11 Staying Alive: OTT Versions of Premium Networks Could Drive Significant Shifts in MVPD Subscriptions As both an offensive and defensive move, HBO has introduced HBO Now, a standalone OTT offering of HBO, which will target consumers who only receive content via broadband. While HBO executives see the initiative as a means to go after low hanging fruit, customers who currently only receive video content through broadband, it may generate pushback from MVPDs. According to our proprietary survey, a premium OTT network analogous to HBO Now could potentially cause ~54% of respondents to modify their TV subscription. Consumer Actions if Premium OTT Network Was Available 1 Percentage of responses 1% % 36% 1 Note: 1 What impact would such a service have on your existing premium pay TV subscription? Source: 15 L.E.K. Media & Entertainment Survey No change Cancel movie package Cancel full TV subscription Overall 54% would cancel their movie package or full TV subscription Is live sports the only thing holding the cable system together?»

12 OTT Myth #7: The Cable Ecosystem Is Disintegrating Access to live sports content is a fundamental aspect of the multichannel video programming distributor (MVPD) bundle offering. Myth Reality Sports leagues recognize the value of their content and have been able to extract significant domestic rights fees from operators. Bottom line: live content, and sports in particular, is the glue holding the MVPD ecosystem together and a killer app in slowing cord cutting. The cable ecosystem is disintegrating Live sports is holding it together Can sports content protect the multichannel ecosystem from the threat of cord cutting?»

13 The Last of the Mohicans: Live Sports Is a Key Barrier to Cord Cutting Live sports is a key driver of consumers willingness to subscribe to cable. What s more, 27% of survey respondents would trim or cancel their TV subscription if the ESPN channels were OTT-only. Third-party studies confirm the role of sports in preserving MVPD subs: According to a 13 Harris Interactive poll, 43% of U.S. adults cited live sports as a reason for not cancelling cable According to a Frank Magid Associates 14 survey,1.4% of ESPN watchers were very likely to cut the cord in the next 12 months compared with 2.9% overall Consumer Actions if ESPN Channels Were Only Available in OTT Format 1 Percentage of responses 1% % Note: 1 What impact would this have on your existing cable / satellite TV subscription? Source: 15 L.E.K. Media & Entertainment Survey; Frank Magid Associates, 14; Harris Interactive, June 13 19% No change Cancel sports package Cancel full TV subscription 27% would cancel their sports package or full TV subscription L.E.K. Consulting is a registered trademark of L.E.K. Consulting LLC. All other products and brands mentioned in this document are properties of their respective owners. 18 L.E.K. Consulting LLC Is OTT only relevant in mature TV markets like the U.S.?»