A hugely sought after ecosystem

A hugely sought after ecosystem

As the industry navigates the inevitable and unstoppable merger between the worlds of television and digital video, OTT has emerged as the most popular term in entertainment

The evolution of the internet and the proliferation of smart devices has created a digital revolution that has paved way for a number of businesses. The combination of these has helped in the inexpressible growth of the media and entertainment industry. Consumers are increasingly switching from traditional cable/dish-TV setup and moving toward subscription-based video and audio streaming. The OTT services are being increasingly adopted across growing economies like India and China.

In the current scenario, consumers are forced to stay indoors to abide by the social distancing guideline, leading to the consumption of more video content. Though linear TV viewership is up by 6–7 percent, OTT video is up by 38 percent in the world during the pandemic period. Streaming video platforms like Netflix, Prime Video, HULU, Disney+, HBO+, Quibi, and others, are gaining traction during the time of pandemic. With no original content creation, these platforms are also adding library content to beef up the offerings.

Along with the original content spanning different genres and languages, many OTT service providers are offering the power of television through exclusive tie-ups with broadcasting networks – like AltBalaji with Zee5, Hotstar with Star India, MX Player with Arré and Hoichoi, and Hulu with ABC and NBC.

As a result, the increased content consumption is putting pressure on the conventional business models that underpin the TV and video sector; the sports model, in particular, is struggling. The disruption caused by the outbreak will also affect the value of transactional, advertising, and subscription revenue.

The silver lining…
A Digital TV Research predicts that global online TV episode and movie revenues will reach USD 167 billion in 2025, which is impressively double the USD 83 billion recorded in 2019, as forecast by Digital TV Research. About USD 16 billion of that figure will be added in 2020, showing that there is longevity after the spike and no significant slowdown to come afterward either; those figures average out as an average USD 13.1 billion per year for the five-year period after this one.

SVoD’s (Subscription video-on-demand’s) share of OTT revenues will stay at around 58 percent, indicating that SVoD’s share of the market will climb by USD 50 billion between 2019 and 2025 to a total of USD 98 billion. What is an interesting detail to add to all of this is that the top five countries will command two-thirds of global revenues by 2025, down from 72 percent in 2019 and indicating that the rest of the world will grow at a faster rate. All in all, OTT revenues will exceed USD 1 billion in 19 countries by 2025 – up from 13 countries in 2019.

The global OTT traffic showed an increase of 198 percent in April 2020 as a result of the government mandates that promote home isolation. Popular OTT providers like Amazon, YouTube, and Netflix reduced their streaming quality across the world to prevent servers from crashing and to manage the surge in internet traffic.

The launch of Disney+ outside of North America has coincided with the pandemic, causing a boost in the number of triallists and paying customers – it had more than 50 million paying subscribers in early April 2020.

With the tremendous improvement in internet bandwidth, premium video content is now easily accessed through a smart device or a personal computer (PC). These factors are facilitating the global OTT services market to be one of the most promising for investment in the coming years.

Several platforms with deep pockets are creating a spate of originals including high-end production values. SVoD services owned by large D2C companies are also grabbing a piece of the ever-expanding OTT market through acquisitions. Apart from solving the customer-acquisition problem in the newer markets, this is also helping them in increasing the content catalog. OTT platforms owned by traditional broadcast networks are offering a multi-tier pricing, along with access to dozens of TV channels at a fraction or free of cost.

Traditional cable-TV providers are migrating toward OTT services to meet the ever-growing public demand. BBC, for instance, is partnering with ITV to increase the market competition in Europe. The British television giant has earmarked significant funds to launch their BritBox service in the UK, which will compete with the likes of Netflix, using a competitive pricing strategy. Netflix and Amazon have managed to penetrate into the South Asian markets. The OTT services market in the APAC region is seeing a number of new entrants such as iflix, which in turn is making the market highly competitive.

OTT viewing is rocketing in India. The suspension of the country’s biggest sporting event, Indian Premier League (IPL), is expected to drive more viewers to OTT platforms. Moreover, OTT consumption is seeing a shift from the mobile screen to the larger TV screen on the back of lockdown effect, with broadband internet/FTTH companies being indirect beneficiaries. While already established players in the market, Disney + Hotstar, Prime Video India, and Netflix India have seen a whopping increase in the subscriptions, both ZEE5 and Alt Balaji too are seeing their subscriber bases grow.

The number of consumers using free trials for SVoD services is likely to further increase as consumers shop around for content. Service stacking will increase as people consume more. Hence, the average spends and the number of subscriptions per user will increase, thereby boosting retail revenue. TVoD (purchase content on a pay-per-view basis) revenue will grow significantly. Consumers that have not previously engaged with TVoD rentals will do so for the first time.

…with a touch of grey
The disruption to sports broadcasting is a key concern for operators and pay TV providers. Sports content often commands the highest per-channel revenue of all pay TV services, and OTT video providers have been blindsided by the cessation of almost all televised sporting activities. Sports programming is expected to resume in 2021 as usual, but the pandemic has delayed the market growth by 12 months.

At the time of writing, several pay TV providers have suspended rights payments to sports leagues that have cancelled matches. This will not only affect retail revenue, but also the ability of sports-specialist companies to bid in future rights auctions.

This fundamentally changes the outlook for OTT linear services and wipes out more than USD 5 billion of revenue in the remainder of 2020, with overthrown shades of longer-term effects. Hence, OTT linear channel services will be negatively affected by the disruption to live sports.

Advertising-funded OTT services will suffer significant financial pressure in the short-term. An increase in consumption will lead to an increase in costs. At the same time, advertising revenue will fall, primarily because of lower consumer spending, thereby resulting in a lower follow-through rate, where advertisements lead to fewer purchases and the willingness of advertisers to purchase slots, therefore, falls. This double pressure will be weathered by larger players but may cause commercial problems for single-country players like ad-funded platforms in India.

Service stacking will be temporarily boosted by the pandemic, but the number of subscriptions that any one user takes will fall in the longer term. Operators’ best response to managing this uncertainty is to be flexible and approach services in a modular manner.

Many services will be able to cope with the short-term shift in viewing preferences (allowing customers to directly substitute sports channels for other content through its self-service platform, without a loss in revenue) and the longer-term shift of consumers toward a more-nomadic use of TV and video services.

YouTube’s massive global audience of over 2 billion monthly viewers gives it the most upside in the short run – plus the service could see a bump in YouTube Premium subscriptions that turn off ads among other perks – but its massive digital ad business also faces the most downside in a global recession or depression.

YouTube’s gross global ad revenue of USD 15.15 billion in 2019 represented just 11.2 percent of the total gross ad revenues of USD 134.81 billion in revenues that Google hauled in for the year. Any bump in YouTube revenues could be easily overwhelmed, if Google’s overall ad revenues fell by 20 percent or more on an annual basis in 2020.

New OTT launches planned for 2020 including HBO Max, Peacock, and Quibi Holdings LLC are seeing a sizable impact from COVID-19, with some filming and production for certain series already disrupted. Comcast Corp. had planned a significant marketing push for Peacock, tied to the 2020 Summer Olympics and Quibi’s launch, without a sizable back catalog or major corporate parent could be challenging in the middle of a pandemic.

Way forward

OTT video services might seem to be obvious winners as people around the world go into mandatory or self-imposed quarantines, but the outlook remains uncertain for most operators. The subscription video-on-demand (SVoD) model is based on fixed-rate pricing regardless of consumption; so, popular SVoD services do not directly benefit from a short-term spike in consumption.

Hybrid services that offer an ad-supported tier might be more likely to see a bump in advertising revenues, says a study by SPB Global. Many major sports leagues around the world are pressing the pause button, and big advertisers may potentially shift digital ad spend that might otherwise have gone toward live sports on linear TV.

Most major SVoD services are operated by larger parents like Amazon, Apple Inc., AT&T Inc., and large media companies with much larger revenue streams outside of their video offerings that could face far more downside there from the impact of the pandemic.

Some costs for OTT providers also rise along with increased consumption, with services impacted to varying degrees depending on the content delivery network model employed. As the amount of OTT viewing goes up, so does the OTT provider’s cost of delivery, since CDN services are usually charged for the amount of content delivered. SVoD services with flat monthly fees that see a spike in viewing hours could face a greater challenge because their revenue per subscriber will not increase.

However, advertising-based services may see their ad inventory increase as viewing hours increase, thereby allowing their revenues per viewer to grow as costs grow. OTT providers like Netflix, Amazon, and YouTube that have their own CDNs are in a better position to control their delivery costs than OTT providers that rely on third-party CDN providers.

The near-term outlook, in general, could be rosier for free, ad-supported services, although a protracted economic decline might also cause advertisers across the board to scale back their digital ad spend. Hence, some SVoD services might see a bump in new subscribers, if quarantines drag on for months and consumers dig deeply into available services looking for new content, although economic pain in an extended shutdown might also force some subscribers to pare back their total number of SVoD subscriptions.

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