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Streaming Wars: The OTT Force Awakens

21 Dec, 2015 By: Erik Gruenwedel

With their logos affixed to remote controls of smart televisions, Blu-ray Disc players and streaming devices, subscription video-on-demand pioneer Netflix, Amazon Prime Instant Video and Hulu Plus have long been media Trojan horses.

In 2015, entertainment conglomerates — for the first time — recognized and responded to previously ignored warnings about Netflix and cord-cutting causing seismic changes in the pay-TV landscape.

The industry’s weak attempt to retain pay-TV subscribers through TV Everywhere platforms, which enabled on-demand access via portable devices, had failed to dent cord-cutting or SVOD sub growth.

Indeed, almost one-third of all U.S. consumers — more than 70 million people — are thinking of making changes to their cable bundle, with the number of subs looking at alternative entertainment sources (over-the-top video) twice as common as those who want expanded TV service, according to data from GfK MRI.

That tally dwarfs the 10 million to 20 million broadband-only (millennial) households that have eschewed the traditional cable bundle in favor of less expensive online video alternatives.

“Today’s TV landscape has transformed into one big trade-off,” said Christie Kawada, EVP of product management and innovation at GfK MRI. “Unless you are willing to pay for it all, you have to choose which video services are within budget, and take the shows you get with them, sacrificing others in return.”

The OTT video genie is more than out of the bag. It has gone viral, mushrooming globally. And traditional media has responded, launching OTT video platforms to stake a claim in the direct-to-consumer video market — and lessen the impact of Netflix’s burgeoning global footprint.

More than 25% of OTT video services in the U.S. market today launched this year, and 40% of services bowed within the last two years, according to Parks Associates. Nearly 60% of U.S. broadband households have used at least one OTT video service in the past 30 days. More than 25% of households used two or more OTT video services in the past 30 days.

“The Web has changed the way we all think about video,” said Sam Schwartz, chief business development officer, Comcast Cable.

New standalone streaming services include HBO Now; Showtime OTT; YouTube Red; NBC Universal’s comedy-themed Seeso; Nickelodeon’s Noggin; Cinedigm’s Dove Channel, CONtv, and Docurama; AMC Networks’ horror-themed Shudder.com; Shout! Factory’s ad-supported Shout! TV; and Hallmark’s Feeln.

“OTT video is the 2015 media story,” said Michael Pachter, senior media analyst with Wedbush Securities in Los Angeles.

People streaming movies, TV shows and user-generated content dominated North American primetime broadband traffic through Sept. 30 — double the percentage five years ago, according to Sandvine.

Netflix again dominated the field with 37% market share. YouTube was second at 18%; Amazon and Hulu trailed significantly at 3.11% and 2.58%, respectively with the remaining nascent OTT video field barely registering.

“Netflix now has a greater market share of primetime broadband traffic than all streaming audio/video did five years ago,” said Sandvine CEO Dave Caputo.

The Golden Globes nominations underscored OTT’s emerging clout. Original programming from Netflix, Hulu and Amazon accounted for more than 25% of nominees in the TV categories. In fact, Netflix, for the first time, generated more nominations (nine) than perennial Globes leader HBO, with eight.

“OTT video is definitely mainstream,” said Brett Sappington, director of research at Parks.

He said millennial cord-cutters may be a key target demo of OTT video, but content producers need the revenue of the mass market in order for OTT video to be sustainable.

“We are seeing increasing adoption at all ages as well as increasing penetration and use of streaming devices,” he said.

Challenging the OTT Video Status Quo

With Netflix, Amazon and Hulu’s first-mover status and fiscal wherewithal, OTT video challengers face daunting odds supplanting them, let alone generating requisite subscriber bases and rights to content. With Netflix demanding (and getting) exclusive global rights to original and third-party content, new players require deep pockets and/or a niche — preferably the latter.

“It is going to be very challenging,” said Billy Purser, VP of marketing with Digitalsmiths, a data company owned by TiVo.

HBO and Showtime have the finances and brand recognition to compete against Netflix. Priced at $15 a month, HBO Now is the most expensive domestic SVOD service. It is also home to “Game of Thrones,” which Parrot Analytics claims is more popular than Netflix newest series “Narcos,” and award-winners “Orange Is the New Black” and “House of Cards,” based on so-called “demand expressions” via social media.
OTT video services — unlike broadcast TV — do not disclose viewership data for original programing, citing their ad-free business models.
In an effort to compete, upstart SVOD services have chosen to specialize in content targeting their niche audiences, with social media and related features to build community around their subscriber bases. Anime SVOD service Crunchyroll has generated more than 700,000 subs paying $7 monthly since its 2009 launch. DramaFever offers Korean, Latin American telenovelas, and a wide selection of Asian TV shows and movies targeting a niche within the millennial demo.

"There is a rapidly changing demographical composition in the U.S., where Hispanics, Asians and African-Americans make up almost 40% of millennials," David Gandler, VP of sales at DramaFever, told Adweek.

Indie-film service Fandor offers a slate of curated movies. RLJ Entertainment’s Acorn TV ($4.99) is as old as Netflix and has built a subscriber base of 150,000 fans who covet classic British TV shows. Former Hulu CEO Jason Kilar’s Vessel.com ($2.99) offers user-generated/semi-pro videos — essentially a paid version of YouTube. CuriosityStream ($2.99) specializes in documentaries and non-fiction content. A+E Networks’ Lifetime Channel launched “Lifetime Movie Club,” a $3.99 streaming service offering a selection of 30 Lifetime movies alternated weekly from a portfolio of hundreds of titles.

Comcast in select markets beta-launched Stream TV, a $15 platform for Xfinity broadband subs that includes a DVR and on-demand access to movies and TV shows. Nationwide rollout is planned for 2016.

“We want to make ordering Stream as easy as buying a song online. And make tuning in to a show as simple as opening an email,” said Matt Strauss, EVP and GM of video services at Comcast Cable.

CBS All Access, the ($5.99) service featuring new and catalog TV series, generated buzz in November when it announced a new original “Star Trek” series would bow exclusively on the service in 2017.

“CBS All Access is the only place where subscribers can access stacking full seasons of 24 of our current series and watch CBS live outside of the home,” said Marc DeBevoise, EVP and GM of CBS Digital Media at CBS Interactive.

Notably, classic CBS shows are available on All Access that had not been on CBS platforms before — and they are commercial-free.
“All Access was a great way to offer CBS content to the millions of cord-nevers that don’t have a traditional cable package,” DeBevoise said.
WWE Network ($9.99) revealed its SVOD service had 1.2 million wrestling subs at the end of September — a 73% increase from the previous-year period. WWE Network was launched in 2014, utilizing technology from Major League Baseball Advanced Media, which also powers HBO Now and WatchESPN, among other digital properties.

The battle for children’s eyeballs in August took a streaming turn when Sesame Workshop, the nonprofit organization behind venerable series “Sesame Street,” and HBO announced an exclusive pact that makes the next five seasons of the Emmy Award-winning show available first on HBO Now, in addition to HBO and HBO Go. “Sesame Street” had aired exclusively on PBS for the past 45 years.
“These OTT video services appeal to the mass market, but are hoping to capture attention (and revenue) with their unique content,” Sappington said.

The Skinny Alternative

In addition to standalone OTT video, multichannel video program distributors in 2015 took the bold step of launching ISP-based TV platforms offering 20 channels for $20 — nearly 80% less than the average 120-channel bundle. The streamlined bundles offer a lineup of the most popular pay-TV channels, including for the first time ESPN — cable’s marquee sports channel. Other channels include A&E, Hallmark, CNN, Maker TV, Disney Channel, Lifetime, Freedom (formerly ABC Family), Food Network, HGTV, AMC, FX, History, H2, TBS, National Geographic, Discovery and TLC.

According to Digitalsmiths, 77% of survey respondents would like the ability to pay for only the channels they watch, or an à la carte TV model. The skinny bundle is an attempt to remedy that — sans the à la carte option. The new bundles include Dish Network’s Sling TV, Sony’s PlayStation Vue, Charter’s Spectrum TV Stream, Univision’s Spanish-language Univision Now, and Time Warner Cable’s beta TWC TV, among others.

“We see the evolution of the TV screen as being all screens,” said DeBevoise, regarding the network’s inclusion on Spectrum TV Stream. “If we are appropriately compensated and our content can be viewed, measured and monetized (equally or greater than our current models), CBS is open to being there.”

Comcast launched Xfinity TV, a 20-channel platform for $20 that is accessed through the cabler’s broadband-based X1 set-top box. Comcast says the X1 (installed in 25% of the cabler’s footprint) provides a platform from which to deliver more than streamed content.

“There is greater viewership (with X1); there is more VOD consumption, both transactional and sellthrough,” said Comcast Cable CEO Neil Smit. “Churn reduction is significant. There’s more DVR usage. So, we’re investing behind the X1 platform.”

A reboot of Apple TV to include SVOD was scuttled after CEO Tim Cook — despite lording over $200 billion in free cash — balked at paying content holders’ ratcheted rights fees. But the issue is more than just money. Apple reportedly wants to do to pay-TV what it did to the music industry: Turn it into an à la carte business.

Sling TV in February became the first online TV platform — a landmark Dish CEO Charlie Ergen attributed to the realities of a rapidly changing entertainment landscape.

“The lifecycle of a [pay-TV] customer today is less than it was three or five years ago,” Ergen said. “So when you put all that together, we just take an approach [with Sling TV] that we think is more economical … and offers alternatives.”

Meanwhile, Time Warner Cable has no interest launching a skinny bundle, according to CEO Rob Marcus. The executive recently told an investor group that aggregating and selling other companies’ infrastructure isn’t appealing.

“I’ve always been a believer that our competitive advantage comes from our physical [cable] infrastructure,” he said. “We don’t have any plans to go [skinny].”

Instead, the CEO said TWC’s future is predicated in part on delivering video content into subscriber homes via their own streaming media device. The No. 2 cabler is beta-testing TWC TV, a 20-channel streaming platform delivered via broadband and a subscriber’s own streaming device. Marcus said delivering the traditional pay-TV experience to subscribers without the need for set-top boxes and related service calls would significantly lower costs.

“I think this is where video is going,” he said.

In what could lead to an online TV pricing war, Charter in October launched “Spectrum TV Plus,” a $12.99 service includes a free Roku 3 media player and access to four broadcast channels (ABC, CBS, Fox and NBC), in addition to either Showtime or HBO. For another $7 monthly, “Spectrum TV Plus” offers subscribers access to an additional 16 pay-TV channels.

“I think it’s very clear consumers want skinny bundles,” Digitalsmiths’ Purser said. “However, while [they] are talked about frequently, adoption of these services is not quite known.”

Indeed, none of the online TV services have disclosed subscriber numbers thus far. Frost & Sullivan analyst Dan Rayburn, citing third-party vendor sources, said Sling TV had less than 500,000 subscribers at the end of October.

“This number would align with some of the estimates that analysts have put out in the market, pegging Sling TV’s subscriber count at around 400,000,” Rayburn wrote in Dec. 8 blog post.

Regardless, analysts contend skinny TV bundles will be limited to major media companies. Many companies, including Microsoft and Intel, have explored the linear TV option online, only to back away due to the cost of licensing content. Indeed, Intel sold its OTT video backend to Verizon, which the telecom operator rebranded as Go90, a streaming video platform targeting mobile devices.

“Independent OTT players will find it extremely difficult to cost-effectively license popular channels for a streaming service, making it very difficult for them to compete with these types of services,” said Parks’ Sappington.

Amazon is taking a different approach. The e-commerce giant unveiled a “streaming partners program” for third-party OTT video services. In effect, Amazon wants to be a one-stop shop for subscription streaming not named Netflix and Hulu. OTT video services would have access to services such as subscriber acquisition, customer service, billing, managing consumer credit cards, backend streaming infrastructure and device compatibility. Initial launch partners include Showtime OTT, Starz, Lifetime Movie Club, Shudder and SundanceNow Doc Club, Acorn TV, Urban Movie Channel, Acacia TV, DramaFever Instant, Tribeca Short List, Dove Channel, Docurama, CONtv, Smithsonian Earth, IndieFlix, Curiosity Stream, Qello, FlixFling, Hooplakidz Plus, ScreenJunkies Plus, Gravitas (Film Forum, Daring Docs, Fear Factory) and Ring TV Boxing.

“The way people watch TV is changing, and customers need an easier way to subscribe to and enjoy multiple streaming subscriptions,” said Michael Paull, VP of digital video at Amazon.

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