Playing the Over-the-Top Content Game
Written on 02 November 2016
by Ruth Fisher, PhD
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History of Cable
Away from Cable and Toward Over-the-Top
The Over-the-Top Game
Issues and Strategies
The recent announcement of the AT&T – Time Warner merger has generated a flood of press. There is much skepticism about whether the companies will be allowed to proceed with the merger. Regardless, the underlying trend that spurred the desire of the two companies to merge – the increasing prevalence of over-the-top content – will continue.
Since the advent of broadband internet in the early 2000s, users have been increasingly dropping their cable TV services in favor of accessing à la carte content over the internet, from such providers as Hulu, Netflix, and Amazon Prime. Such over-the-top (OTT) content has been wreaking havoc on cable companies’ bottom lines. In response, cable companies have been increasingly buying up content providers and creating their own original content in order to better compete with OTT content providers.
This analysis examines the OTT Content Game, in particular,
(i) How will OTT content continue to evolve? and
(ii) How will cable companies respond to the increasing prevalence of OTT content?
History of Cable
Here’s a very brief history of the cable industry, pieced together from “History of Cable”. Note that technological advancements of the industry tended to ebb and flow with the burden of FCC regulations on the industry.
Cable television originated in the United States in 1948 to enhance poor reception of over-the-air television signals in mountainous or geographically remote areas. “Community antennas” were erected on mountain tops or other high points, and homes were connected to the antenna towers to receive the broadcast signals.
In the late 1950s, cable operators began to take advantage of their ability to pick up broadcast signals from hundreds of miles away. Access to these “distant signals” began to change the focus of cable’s role from one of transmitting local broadcast signals to one of providing new programming choices.
In 1972, Charles Dolan and Gerald Levin of Sterling Manhattan Cable launched the nation’s first pay-TV network, Home Box Office (HBO). This venture led to the creation of a national satellite distribution system that used a newly approved domestic satellite transmission. Satellites changed the business dramatically, paving the way for the explosive growth of program networks.
From 1984 through 1992, the industry spent more than $15 billion on the wiring of America, and billions more on program development. This was the largest private construction project since World War II… The number of satellite networks continued their explosive growth, based largely on the alternative idea of targeting programming to a specific “niche” audience.
At the end of the decade [1990s], approximately 7 in 10 television households, more than 65 million, had opted to subscribe to cable.
During the latter half of the decade [1990s], cable operating companies commenced a major upgrade of their distribution networks, investing $65 billion between 1996 and 2002 to build higher capacity hybrid networks of fiber optic and coaxial cable. These “broadband” networks can provide multichannel video, two-way voice, high-speed Internet access, and high definition and advanced digital video services all on a single wire into the home.
The upgrade to broadband networks enabled cable companies to introduce high-speed Internet access to customers in the mid-90s, and competitive local telephone and digital cable services later in the decade.
As the new millennium got under way [2000s], cable companies began pilot testing video services that could change the way people watch television. Among these: video on demand, subscription video on demand, and interactive TV.
The digital TV transition leapt forward in 2003, as substantial gains were made in the deployment of High-Definition Television (HDTV), Video-on-Demand (VOD), digital cable, and other advanced services. Competitive digital phone service gained momentum as cable introduced Voice over Internet Protocol (VoIP) telephone services.
So it was the advent of broadband internet around the turn of the century that paved the way for consumers to bypass cable and access video content directly from the internet.
Away from Cable and toward Over-the-Top
Cutting the Cable Cord
Wikipedia defines “cord-cutting” as follows:
In broadcast television, cord-cutting refers to the pattern of viewers (referred to as cord cutters) cancelling their subscriptions to multichannel subscription television services available over cable, dropping expensive pay television channels or reducing the number of hours of subscription TV viewed in response to competition from rival media available over the Internet, from Amazon.com, Hulu, iTunes, Netflix, and YouTube, as well as BitTorrent. This Internet content is either free or significantly cheaper than the same content provided via cable.
As Wikipedia indicates, users – with Millennials leading the pack – are increasingly replacing cable with free and à la carte paid content on the internet. The Simple Dollar Staff explains this in more detail in “Cord Cutters: Why Millennials Are ￼￼Saying Goodbye to Cable TV”:
Why are consumers cutting the cord? Three main reasons:
• Cost: Cable is expensive and it’s getting pricier. In fact, the cost of a set-top cable box has shot up 185% since 1994. (Tech prices are supposed to go down over time, not up.)
• Channel selection: We aren’t wowed by hundreds of channels anymore. We’d rather just pay for what we watch. If our favorite shows are on Hulu and Amazon, why pay for 20 sports channels and the Hallmark Channel? (And wait, what is the Hallmark Channel anyway?)
• Convenience: We want to watch our shows anytime and anywhere, and streaming services let us do just that.
Millennial cord cutters are on the frontlines of disrupting the media industry. They want fewer fees, smaller channel bundles, and more flexibility to watch content on their smartphones and tablets.
In “More Than One in Five Households Has Dumped the Cable Goliath,” Aaron Pressman claims that “one in five U.S. households” (20%) have foregone cable, where cable penetration peaked at about 88% in 2009 (see Figure 2).
The number of people that have either cut the cords and dumped their cable television subscriptions or never ordered in the first place is steadily rising, now exceeding one in five U.S. households, according to a new report.
Figure 3 presents the declining trend in cable penetration from the opposite perspective, the number of households without pay TV.
Definition of Over-the-Top Content
Wikipedia defines “over-the-top content” as follows.
In broadcasting, over-the-top content (OTT) is the delivery of audio, video, and other media over the Internet without the involvement of a multiple-system operator in the control or distribution of the content. The Internet provider may be aware of the contents of the Internet Protocol packets but is not responsible for, nor able to control, the viewing abilities, copyrights, and/or other redistribution of the content. This model contrasts with the purchasing or rental of video or audio content from an Internet service provider (ISP), such as pay television, video on demand or an IPTV video service. OTT refers to content from a third party that is delivered to an end-user, with the ISP simply transporting IP packets.
In “Google Nabs CBS As AT&T, Amazon, Hulu Seek OTT Partners,” Reimhardt Krause describes how the new OTT offerings differ from earlier Internet video services: the expected inclusion of more live broadcast content.
The over-the-top (OTT) market is expected to heat up with new offerings from AT&T (T), Amazon.com (AMZN), Alphabet's (GOOGL) Google and Hulu. What differs in this new wave from earlier Internet video services is the expected inclusion of more live broadcast content. Most OTT services have featured on-demand programming.
Case Study: Comcast
The changing nature of Comcast’s revenues provides a case in point as to how the trend away from cable programming and towards OTT content has affected the cable industry. In its 10K report, Comcast describes itself as
one of the nation’s largest providers of video, high-speed Internet and voice services (“cable services”) to residential customers under the XFINITY brand; we also provide these and other services to business customers and sell advertising.
Before the advent of broadband internet, Comcast generated the vast majority of its revenues from the provision of cable video services. In 2002, Cable launched broadband internet services. In 2005 Comcast announced digital voice services, together with bundling of cable, voice, and internet services into a single package, the Comcast Triple Play. The bundling of these three services has increased customer loyalty, that is, it has decreased churn. Mike Farrell confirms this in “Comcast: We’ll Stick With Triple Play”:
Comcast cable CEO Neil Smit said on the call that while he could not speak for TWC, Comcast triple play customers tend to be more satisfied with service and churn at a lower rate.
“The triple play has still been a very effective program for us,” Smit said.
“It’s pretty clear those customers have higher satisfaction, lower churn and the best customer lifetime value,” Angelakis [Michael Angelakis, Comcast vice chairman and chief financial officer] said. “We’re going to continue to focus on customer lifetime value.”
Figures 4, 5 and 6 present Comcast’s revenues by segment between 2002 and 2015. From the figures, we see that
- Since their respective introductions, High-Speed Internet and Voice Services have been generating an ever larger portion of Comcast’s revenues;
- The Internet Services segment has shown relatively robust growth;
- Growth in Video Services has been anemic, particularly since the Financial Crisis (presumably as Users move away from cable video and toward OTT content);
- Growth in Voice services has been decreasing since the Financial Crisis and has recently become negative; and
- Business Services are becoming an increasingly important source of Comcast revenues.
The Over-the-Top Game
There are four main sets of players in the over-the-top (OTT) content game:
- Device Users (i.e., viewers),
- Voice and Data Connection Services Providers (i.e., MSOs, FNOs, MNOs, and MVNOs),
- OTT Content Services Providers (e.g., Netflix, Hulu, Skype), and
- Content Providers (e.g., Media Conglomerates).
The OTT Game is displayed in Figures 7 and 8, where Figure 7 illustrates the relationships among players and Figure 8 indicates the shifts that have been occurring from fixed to mobile and from cable to OTT content.
Note that while all Fixed Services Companies provide voice and Internet services to Device Users, not all Fixed Services Companies provide cable video services to Device Users.
- Purchase voice and data connection services from Fixed (MSOs and FNOs) and Mobile (MNOs and MVNOs) Services Companies and
- Use fixed (desktop) and mobile (laptop, smartphones, tablets, etc.) devices
- To access content from Fixed (MSOs) and OTT Content Providers (and other Device Users via telephone).
Shifting Away from Fixed and Toward Mobile
Device Users have increasingly been using mobile devices (smartphones, tablets, etc.) instead of desktop computers. This means users are increasingly using mobile connection services in place of fixed connection services. Figures 9 and 10 provide statistics showing the trends away from fixed and toward mobile.
Also, since Users can access both voice and data (e.g., video) through mobile connections, either directly or through streaming media devices, many Users are foregoing cable services as well and replacing them with OTT content (as described above in “Away from Cable and toward Over-the-Top”).
Aaron Pressman describes the switch from fixed broadband to mobile in more detail in “Why Cord Cutting Is Spreading to Broadband Internet Subscribers”:
The new trend is people dropping expensive home Internet connections and relying on smartphones to satisfy their online needs. Last year, 13% of adults used only smartphones to connect to the Internet, up from 8% in 2013…
The increasing capabilities of smartphones seemed to be the most important reason why people gave up home broadband connections, cited by two-thirds of phone-only Internet users. Other top reasons— both cited by 59% of phone-only users—were that the cost of home broadband was too expensive and that other options were available for Internet access outside of the home, such as at work, the library, or Internet cafes. Another 41% said the cost of a home computer was too expensive.
Voice and Data Connection Services Providers
Fixed Providers provide Device Users with voice and data connection services over fixed lines: cable, copper (DSL), and fiber.
Fixed Wireless Providers provide Device Users with voice and data connection services over the air to a radio antenna (e.g., dish) secured to Users’ residence.
Many Fixed Providers (i.e., cable companies) also provide video content services to Device Users that they license from Content Providers.
Lists of top Cable, DSL, Fiber, and Fixed Wireless Providers are displayed in Figures 11 and 12 below.
i. Cable Providers (MSOs)
Wikipedia describes MSOs as follows.
A multiple-system operator (MSO) is an operator of multiple cable or direct-broadcast satellite television systems. A cable system in the United States, by Federal Communications Commission (FCC) definition, is a facility serving a single community or a distinct governmental entity, each with its own franchise agreement with the cable company. Though in the strictest sense any cable company that serves multiple communities is an MSO, the term today is usually reserved for companies that own a large number of cable systems, such as … Cablevision, Charter Communications, Comcast, Cox Communications, and Time Warner Cable…
ii. DSL, Fiber and Fixed Wireless Providers (Other FNOs)
Mobile Providers (MNOs)
Mobile Providers provide Mobile Device Users with voice and data connection services over mobile lines.
A list of top Mobile Providers is displayed in Figure 13.
Mobile Providers also include Mobile Virtual Network Operators (MVNOs), which are entities that buy capacity from MNOs at wholesale rates and resell the capacity to Mobile Device Users.
Over-the-Top Content Services Providers
OTT Content Services Providers receive content from Content Providers and provide that content to Fixed and Mobile Device Users.
A list of major OTT Content Providers is displayed in Figure 14.
Content Providers provide content to Content Services Providers, such as MSOs and OTT Content Services Providers.
The Major Media Conglomerates, who provide a large portion of the content viewed by Device Users, are displayed in Figure 15,.
Other OTT Content is provided by original content providers, including those listed above in Figure 14: OTT Content Providers, as well as Device Users (e.g., through YouTube).
Issues and Strategies
Cable Providers (MSOs)
The increasing usurpation of MSOs’ video services by OTT Content Providers has raised some significant issues for MSOs’ business practices. In particular, the OTT presence has
- Increased competition for MSO services, and, accordingly, decreased their profits;
- Decreased MSOs’ incentives to invest in infrastructure; and
- Forced MSOs to unbundle their video services offerings.
Increased Competition and Decreased MSO Profits
Clearly, the increasing presence of OTT Content Providers in the marketplace has increased competition for business from Device Users, which has decreased MSO profits.
Device Users are cutting back or eliminating cable video services altogether. This decreases not only MSO’s revenues from video services, but their advertising revenues as well. While Device Users are increasing their use of broadband services, the increase will only be temporary, until connection services become more commoditized. Also, the current increases in revenues from broadband connection services are not large enough to compensate for the decreases in video services and advertising revenues. Xiaohan Zhu describes these issues in a bit more detail in “MSO content delivery networks”:
Cable operators are now hoping to “cord split” with OTT providers, where the two services coexist to complement consumer needs. What this means in practice is that consumers will likely downgrade their TV service to lower tiers but upgrade their Internet access speed... Growth in high-speed Internet access revenue will offset the loss in TV revenue, but only in the short term.
Bandwidth is on a much steeper commoditization curve due to fierce competition from telcos and industry innovations. In addition, reduced consumer engagement with TV service hurts not only subscription revenue, but also TV advertising revenue.
The case of Comcast’s trends in segment revenues, shown in Figures 4, 5, and 6, provides further evidence of these issues.
Furthermore, the OTT video traffic on MSO lines is managed less efficiently than MSO video traffic. This decreases the efficiency of MSO’s use of bandwidth. Strand Consult makes this point in “Telecom operators, regulators and competition authorities need to update their knowledge of what creates competition in the market. Here are four factors that should be considered when regulators define consolidation remedies”:
Another inequality is the disproportionate impact of OTT video traffic on networks. Whereas multicasting technology used by cable operators makes efficient use of bandwidth, traffic from a single video provider such as Netflix can devour more than a third of the network capacity.
MSOs will thus be forced to increase investments in better managing data flows on their pipes, further cutting into MSO profits. Xiaohan Zhu provides more detail on investments in managing data flows:
For MSOs, moving to IP, ‘web, cloud and CDN’ [content delivery network] is not an investment option but a survival strategy.
When OTT providers poured unicast traffic into MSO access networks and metro backbones, some U.S. MSOs observed yearly traffic increases of 100% at the CMTS [cable modem termination system] level. These operators now have to spend tens of millions each year on infrastructure upgrades and transmission costs, without generating any additional revenues or getting ahead of the traffic surge, which shows no end in sight.
A CDN that can manage OTT traffic would dramatically change the situation.
Decreased Incentives to Invest in Infrastructure
The profitability of providing bandwidth services to OTT Content Providers is less for MSOs than that of providing video services to Device Users. As the former increases and the latter decreases, MSOs will find it less profitable to invest in infrastructure. More on this from Strand Consult:
OTT services sharpen competition. However they can also make it less attractive to invest in infrastructure. Operators cannot earn the same returns as they have in the past, as consumers can substitute free services from OTTs in lieu of paid operator services.
Forced Unbundling of MSO Video Offerings
OTT Content Providers have finally accomplished what other industry players have tried, but failed, to do in the past: force the unbundling of MSO’s cable offerings. As Tyler Durden describes in, “HBO Officially Killed The Cable Bundle And ESPN Looks To Be The Biggest Victim”:
But, like it not, a la carte content purchases are the way of the future. While cable providers used to be incentivized to protect the "channel bundle" the advent of the internet and over-the-top content providers means that their true value offering to consumers is now in their broadband and not the content.
Responses to Over-the-Top Content Providers
There are several potential actions MSOs can take and/or have taken to increase their market position in response to the increasing prevalence of OTT Content Providers, including
- Providing skinny bundles of content;
- Providing original content;
- Establishing their own OTT content services to compete with other OTT Content Providers;
- Offer zero-rating on their own OTT content;
- Offering new services to Device Users; and
- Using their proprietary historical data on Device Users’ demographics and usage patters to offer tailored advertising and other analytics services.
Offer Skinny Bundles
OTT Content Providers have attracted away traditional Device Users of cable video services by enabling Device Users to subscribe to much narrower offerings of services. Many Device Users have dropped their cable video services altogether (“cord-cutters”) or down-graded their video services packages (“cord-shavers”) in favor of accessing the narrower bundles offered by OTT Content Providers. In response, MSOs have introduced “skinny bundles,” that is, video packages with fewer offerings at lower prices to Device Users. From Evolution Digital, “Are Emerging Virtual MVPDs Real Competition to Cable Operators?”
The “skinny” bundle has been brought to the market by MVPDs [multichannel video programming distributors] as a way to win back consumers who were ditching their cable services in favor of streaming Video on Demand platforms at a fraction of the price.
Additionally, there is the possibility of MSOs offering even more flexibility to Device Users in their video services. As Accenture notes in “The Competition: Shift from Protection to Innovation,”
There is a massive need for new bundles to offer consumers variety, content and flexibility at price points they haven’t had in the past.
Offer Original Content
To the extent that transmission services become commoditized, video content will become more important for differentiating MSOs and generating profits for them. This force has induced the recent waves of consolidation between Transmission Services Providers and Content Providers. In particular,
- Comcast purchased NBCUniversal from GE in 2013;
- Charter Communications purchased Time Warner and Bright House Networks in 2016;
- AT&T purchased DirecTV in 2015 and is in talks for the purchase of Time Warner as of Oct 2016; and
- Verizon purchased AOL in 2015 and Yahoo! In 2016.
An interesting question is the extent to which Transmission Services Providers will be able to generate greater profits from acquired Content Providers than they would be able to simply by licensing content from them. MSOs and OTT Content Providers should continue to generate more original content in an effort to win viewers. Perhaps they will take it a step further and retain exclusive access to content from newly-acquired Content Providers that used to be provided as non-exclusive content across multiple Transmission Services Providers.
Establish Own OTT Services
A natural response to the proliferation of OTT Content Provider offerings is for the MSOs to offer their own OTT video services. Press Trust of India provides more detail in “Cable cos bringing own OTT services amid competition: Ind-Ra”:
"In light of competition from independent OTT content producers/aggregators, like Netflix, Eros Now and Spuul, and broadcasters with OTT services — Ditto TV, Hot Star, Voot — and the industry wide shift of consumers towards consuming digital content, traditional cable companies are setting up their own OTT services," it [India Ratings and Research] said.
By adding OTT content to their repertoire, MSOs have the added ability to appeal to Device Users with offers of bundled OTT content, traditional video content, voice services, and broadband connection services. Press Trust of India iterates this point:
MSOs may try to bundle OTT services with their broadband services to create a bouquet offering.
Offer Zero-Rating of Own OTT Content
Wikipedia defines zero-rating as follows.
Zero-rating (also called toll-free data or sponsored data) is the practice of mobile network operators (MNO), mobile virtual network operators (MVNO), and Internet service providers (ISP) not to charge end customers for data used by specific applications or internet services through their network, in limited or metered data plans.
MSOs can attract Device Users away from other OTT Content Services Providers by enabling Device Users to stream unlimited amounts of the MSOs’ own OTT content without it counting towards Device Users’ data caps. This is what AT&T is doing with its DirecTV OTT offerings for AT&T wireless subscribers. Shalini Ramachandran, Ryan Knutson and John D. Mckinnon report on this in “AT&T-Time Warner Deal Stokes Debate Over ‘Zero Rating ’”
When AT&T rolls out its $35-a-month DirecTV Now online TV service this month, its wireless subscribers will be able to stream as much as they want without it counting toward their monthly data caps. But if the same customers binge on outside services like Netflix or Hulu, those bits will add up—potentially leading to surcharges.
Offer More Services
In response to the added competition from OTT Content Providers, MSOs can offer other services to Device Users that OTT Content Providers cannot offer.
In “Operators ‘VoLTE’ over the OTT competition,” Marc Bensadoun suggests MSOs offer VoLTE services.
Over-the-top (OTT) providers are a big and painful thorn in the side of telcos around the world. ..Voice over LTE (VoLTE), mobile operators have the power to change it and vault over the competition.
VoLTE gives operators a chance to fight back by providing a native product with the promise of a significantly better user experience... An all-IP technology combines LTE with IMS to efficiently deliver a full suite of services such as IM, video chat, HD voice, presence, and group chat — all opportunities for carriers to differentiate themselves from OTT providers.
Strategy& also proposes that MSOs offer higher quality voice services in “Enabling the OTT revolution”:
Operators can also consider differentiating themselves from the OTT companies by implementing new offerings for high-end segments, such as rich communication services — a combination of advanced IP-based voice, messaging, and video — and high-definition voice services.
Samantha Bookman, in “Competition, consolidation, and ... Cosmo? A look at OTT's year to come” notes that MSOs offer much better user interfaces for viewing options than do OTT Content Providers:
to see all of the available programming out there by scanning through a single user interface using a single remote. That same experience just doesn't exist in OTT: to get all the content they want, users have to sift through multiple online video services, and often must switch from one device to another, be it a PlayStation, a Chromecast or an over-the-air antenna.
Leslie Ellis, in “Defense, Offense and OTT Competition,” observes that MSOs can offer better customer service and greater “breadth and depth of content libraries”:
But if the goal line in this battle is ultimately churn reduction, then that offensive line also needs to be heavy on customer care, user experience and everything that comes with not giving customers a reason to even bat an eye at OTT alternatives.
Of course, there’s always the matter of breadth and depth of content libraries, and the glories that come with nesting more and more stuff in “the cloud,” so as to lighten dependencies on hardware in the home.
Another possibility is that the market bifurcates into a separating equilibrium, in which MSO video content caters to Device Users who prefer large bundles and more services at higher prices, while OTT Content Providers cater to Device Users who prefer skinny bundles at lower prices. Peter Litman describes this option in “Over-the-Top Video and The Innovator's Dilemma”:
The usual strategy for incumbents … is that the incumbent provider increases "spending on features / performance / functionality…
Cutting the price is not an appealing option for the incumbents because they do not want to reduce their profits and cannot cut their prices (and costs) sufficiently to compete with the upstarts... So, instead the incumbents respond to the competitive threat by improving the product.
… [T]he multichannel distributor can add all the value it wants, but that doesn't mean the consumers will continue to see their expensive package as their best option in the marketplace.
What seems more likely than the decimation of the pay TV ecosystem, is its gradual move to become more of a luxury good, rather than a 90%-penetrated household utility.
Peter Litman also notes that MSOs can add further value by gaining first access to newly-released content and increasing the period during which they have exclusive access to newly-released programming:
The big distributors are not enthusiastic about paying higher license fees for cable networks, but the greater competition in the distribution market has led them to do so -- they can't afford to be without top channels for too long. While conceding the money, the distributors are looking for added value in those deals (e.g., TV Everywhere rights, expanded VOD rights) and one form of added value are longer windows in which the programming is exclusive to the cable network and does not appear on their websites, Hulu, Netflix, et al.
Another option is for MSOs to offer higher quality video services than OTT Content Providers. Xiaohan Zhu makes this point:
MSOs also own the last mile to consumers: a bandwidth advantage that is essential for large live channel lineups and bandwidth-hungry services like high definition and 3D. MSOs can optimize targeted contents based on their network and achieve higher quality at lower cost...
One of the most effective ways to increase ARPU and reduce customer churn and acquisition costs is to attract consumers to the operators’ own platform and guide their consumption behavior. OTT providers have made consumers more demanding; they want access to premium content from any screen, anywhere. MSOs must address this need as soon as possible and launch their own multi- screen IP video services; such services must be of a higher quality when compared with OTT providers, or MSOs risk becoming irrelevant outside the living room. MSOs should also try to syndicate OTT content into their own B2C platforms and position themselves as a one-stop content discovery and recommendation portal that maintains and strengthens relationships with customers.
Use User Information and Analytics to Tailor Services
Finally, MSOs can respond to competition from OTT Content Providers by using historical information they’ve amassed on Device Users’ demographics and usage patterns to their advantage. In particular, MSOs can Use User information
- To hone service offerings,
- To hone advertisements, and
- to provide analytics to other market participants.
Ultimately, winners will use context to enable better consumer engagement, easier search and discovery and multiple monetization methods. They will capture behavior and consumption to help improve service through recommendations, reduce the clicks to get to content, improve search, and take other actions to engage consumers.
As MVPDs reformulate bundles, they need to reimagine how they monetize content to address consumer requirements. Advertising is a massively important part of this equation. Attempts are underway to expand ad viewership windows to more accurately value ad slots, improve ratings and increase monetization for content owners.
From Xiaohan Zhu:
Cable television was designed as a unidirectional push service; operators never understood what consumers were watching or why. IP and HTTP technology not only enables better interactive user experiences, but provides a feedback channel for the operator that functions at intervals of only a few seconds, leading to terabytes of user habit information that CDNs collect, process, and analyze; operators can use this data to provide better content recommendations and generate additional revenues through targeted ads (cached at the edge CDN nodes) and personalized value-added services.
… [MSOs] they maintain a dense, fully integrated, and scaled-up distribution footprint. This includes their strong retail network, with the ability to reach millions of users; supply chain and logistics services; an established billing and CRM relationship with their customers; and the ability to collect huge amounts of demographic, behavioral, and usage information about their customers. These assets allow operators to offer selected OTT companies access to their distribution footprint and to the customer relationships they have already established.
This strategy requires operators to build intelligent and open networks that let them deliver advanced network services such as tiered quality of service, security, and identity services. It could also encompass platforms and open programming interfaces to make data analytics, payments, and billing accessible to third parties.
Telecom operators possess large amounts of customer data — not just demographic, but also usage, online behavior, location, and the like. Operators could package anonymous versions of this data and sell it to businesses in retail, travel, and other consumer-facing industries
Over-the-Top Content Services Providers
OTT Content Services Providers benefit from several advantages over MSOs. In particular,
- OTT Content Providers face lower entry costs,
- Offer a variety of business models, and
- Offer narrower bundles of content at lower prices and with less commitment.
Lower Costs of Entry
By leasing connection services from MSOs and content from Content Providers, OTT Content Providers face lower costs of entry than MSOs. As Peter Litman notes,
The frightening thing for the incumbents is that none of these developments above require OTT services to do anything other than what they have been doing. Notably, they do not have to take on the risk of making a frontal attack on cable and licensing the popular cable channels.
Fewer Restrictions and More Options
MSOs all have a similar business model: Device Users subscribe to relatively large bundles of content for a relative high price over a minimum time horizon. In contrast, Device Users are able to benefit from several different types of less restrictive packages. Evolution Digital notes the lower amount of restrictions associated with OTT Content Service Providers
A key enticement for consumers to switch to new OTT services, such as Sling TV and DIRECTV, is the price slash in monthly fees. Take away yearly contracts, CPE leasing fees and credit checks, and these services have now knocked down huge hurdles that face television subscribers today.
Leslie Ellis notes the “lack of friction” associated with subscribing to OTT content in “Defense, Offense and OTT Competition”:
If you’re the OTT insurgent, your offense is the nearly complete lack of “friction,” when it comes to buying and using video... If hardware comes with it (think Roku, Amazon Fire TV Stick, and their ilk), it practically self-installs.
Finally, James L. Gattuso describes the various package options available:
These ventures [OTT Video Content Providers] use a variety of business models. Some, like Netflix, allow unlimited viewing for a flat monthly rate. Others charge a fee to digitally rent a particular movie or TV show, or to buy it. Most operate on an “on demand” basis, but a few, including Apple’s planned service and Dish Network’s Sling TV offer “linear,” or scheduled, programming.
While benefitting from several advantages over MSOs, OTT Content Providers suffer from two significant disadvantages:
- Content offerings are fragmented, and
- OTT Content Providers face potentially harsh regulatory burdens.
Fragmentation of Content
One of the benefits of MSO video services is that Device Users get one-stop shopping for all their content. In contrast, Device Users who rely on OTT Content Providers for their video content face a highly fragmented market of offerings. In “Competition, consolidation, and ... Cosmo? A look at OTT's year to come,” Samantha Bookman provides a nice summary of the fragmentation off the OTT market and its expected impact on Device Users.
The demand for OTT content is growing, but thanks to tangled content licensing agreements viewers have to navigate multiple services to see the TV shows and movies they're interested in…
Parks Associates Director of Research Brett Sappington told FierceOnlineVideo that t the content issue means that OTT will continue to see a lot of churn in 2016 as consumers "stack" services, adding and dropping SVOD (subscription video on demand) or AVOD (ad-supported video on demand) services to get the lineup they want.
It is likely that many new entrants will fall victim to the most powerful business driver of all: how much money the consumer is willing to pull out of his or her wallet.
MSOs are subject to many forms of FCC regulation that OTT Content Providers have so far escaped. However, the FCC is seeking to update its regulations to include OTT Content Providers. These new regulations would impose significant costs on OTT Content Providers. From James L. Gattuso:
The FCC now proposes to expand the MVPD definition to include OTT video providers, which offer scheduled programming on discrete channels of content.
￼￼￼￼￼￼￼￼Designation as a MVPD triggers a number of regulatory burdens for providers. Among these are mandatory closed-captioning, restrictions on the loudness of commercials, FCC equal-employment obligations, and requirements that set-top boxes be available for sale at retail stores rather than being provided by cable companies. Perhaps most important, however, MVPD status subjects providers to the FCC’s system of “retransmission consent” in order to acquire broadcast programming.
The FCC described this proposed change as a simple “update” of its rules. The expanded definition, FCC chairman Tom Wheeler explained in a separate statement, is technology-neutral. “Video is no longer tied to a certain transmission technology, so our interpretation of MVPD should not be tied to transmission technologies.”
With the advent of Internet video content services, Content Providers have been having an ever more difficult time getting the attention of viewers. James L. Gattuso provides a sense of the degree of fragmentation:
As late as the 1980s, broadcast stations [e.g., ABC, NBC, CBS, Fox, The CW] were the source of 80 percent of all programming viewed (albeit by then, most broadcast signals were already delivered via cable rather than by antennas). By 2012, only 30 percent of viewed programming was from broadcast stations. Thus, while broadcast programming remains an important source of content, it does not dominate the market as it once did. In many cases, online video providers have produced their own programming (such as Netflix’s House of Cards). Nevertheless, broadcast content is still much in demand.
Moving forward, the primary challenge for Content Providers will be finding sizable audiences for their programming. Inevitably, most programming will become more specialized for smaller audiences. As Peter Litman notes
The more interesting question is: how do the programmers respond to the (inevitable) decline in the number of multichannel subscribers?
What's likely is that programmers will sell greater amounts of individual programs to the OTT providers -- that is just a bigger play on something they are doing already.
An interesting tension Content Providers will face is the tradeoff between
- Providing exclusive content to one outlet at a relatively high price, to serve as a differentiator for that outlet and
- Providing nonexclusive content across a variety of outlets, for a much lower per-outlet price