Streaming Forum: IPTV Companies Poised to Win the Pay TV Battle
Launching direct-to-consumer video services is increasingly easy, but gaining a mass audience requires getting access, warns IHS Markit.
Cable IPTV companies are in a better long-term position to capitalize on the convergence of home entertainment and pay TV than are pure direct-to-home (DTH) players. That information came from market research company IHS Markit speaking at today's Streaming Forum conference in London.
“This is a battle for subscribers, but it will be won by those who gain control over access,” said Jonathan Broughton, senior analyst for IHS Markit. “Content is the gateway to that access.”
Where DTH players are largely focused on owning content and selling video, cable IPTV providers own infrastructure and sell access to it rather than making money purely from pay TV.
That means a company like BT should not be underestimated in its bid to topple Sky as the number one video provider in the UK. BT, Broughton suggested, makes more money from gateway access than it does pay TV.
“When we think of disruption we think of Netflix as a business coming at an existing market from a different angle. But, big companies can sometimes do that too. There’s a reason Netflix is not available on Sky, which is a legacy of angry negotiations going on between them, and a reason why Netflix is available on BT. The BT platform largely exists to sell broadband access with some tentpole (mainly sports) titles.”
Even though it is increasingly easy to go direct-to-consumers, pay TV is the gateway to the mainstream for OTT providers, Broughton said.
“It’s where most consumption occurs and where consumers spend most money. If you want to grow your business in the next few years then getting to the main screen in the front room is essential.”
The lines between distribution, operation, and channel are increasingly blurred.
“A decade ago the market was a whole lot simpler with only two distribution media outside of TV: DVD and cinema. DVD was lucrative, predictable, and had one format," Broughton said.
By contrast, in 2017 consumers have many more options. Cinema is still the first window, but with the number of connected devices multiplied four or five times since 2006, distribution windows are shorter. IHS showed that disc sales (now in multiple formats) still retain the number two slot after cinema in most markets, although sales are declining.
“In 2006, the PC was the main gateway for connected media," Broughton said. "In 2016, digital media adapters (small STBs or dongles with in-built Wi-Fi and HDMI ports) have taken off. There are over two smartphones in the average household and each household also has a tablet. The STB is only just being connected.”
The analyst predicted that by 2020 the PC and tablet will be “a bit less significant,” smartphone penetration will plateau, and the most significant devices will be digital media adapters and connected STBs.
“By 2020, the variety of distribution options will be a sizeable consideration for developers,” Broughton said. “If you want to reach all of the desirable pay TV subscribers who are consuming most and spending most on home entertainment then you need to be on the STB along with two or three other devices and you will pretty much cover them all.”
Transactional spend has dropped off a cliff, declining from $16 billion to just over $6 billion in a decade. The reasons are apparent: Consumers are increasingly interested in consuming content on-demand, with SVOD revenues ramped up accordingly.
“We see the second screen SVOD market becoming saturated in the next few years,” Broughton said. “That doesn’t mean growth will stop entirely, but to maintain strong growth new audience need to be reached on primary devices not secondary devices.”
One quarter of all viewing in the U.K. is made in a nonlinear fashion, mostly by time-shifted DVRs, the use of which peaked in 2013 at 43 minutes per day in the U.K. Video-on-demand (VOD) options are growing in popularity, now averaging 20 minutes per person per day split 50/50 between long- and short-form video.
“We see a trend led by Facebook and YouTube to move into longer-form media which tends to be more sticky with consumers,” Broughton said.
Cable operators are suffering across Europe (apart from Spain where Telefonica has released an aggressive series of incentives) as a result of “encroachment” due to increased competition rather than cord-cutting.
“In the U.S., competition is more limited and the consumer proposition of less value than in Europe, where triple and quad play bundles are a lot cheaper,” Broughton said.
Nonetheless, nontraditional video companies like Amazon Prime and Netflix are ranking among the top three video providers in each of the major five European countries. In the U.K., for instance, Netflix has knocked Virgin Media from second place, only trailing Sky.
The silver lining for cable companies is the strong performance of broadband sales in almost all Western European markets, bar Ireland.
IHS also shared figures for ultra-high definition (UHD) video penetration in Europe. The area is still small, hovering at around 7 percent of households in the major markets. By the end of the decade, though, IHS expects it to rise to 27.6 percent in Western Europe, still lagging the 40 percent penetration in the U.S at which point “UHD stops being a niche product and becomes a proper premium format.”
However, erroneous marketing claims—such as offering upscaled HD as true UHD—are damaging UHD's reputation with consumers.
“It’s important to protect the consumer perception for the good of the whole industry,” Broughton warned. “Compression in delivery is one aspect, but another is a big loss of detail in VFX-heavy features. Often, these are rendered in 2K so when the file gets out of production it is no longer in the [4K+] resolution it was filmed in.”
More channels are creating over-the-top direct-to-consumer subscription services, changing the meaning of what a channel is and what it provides.
While some pay TV operators have seen increased customer satisfaction with Netflix integration, others will likely face lower average revenues.
Netflix is now available on 32 percent of all connected devices in the U.S., making it the de facto rival to any other video service in the country.