Streaming video on demand and Pay TV players are looking across the fence and deploying strategies that mimic the other's traditional business and operational models. In this article, we consider four areas that blur the bounderies and create a new playing field for all. 

4 Ways Pay TV and SVOD Are Converging

By Tiffany Keung

Streaming video on demand (SVOD) services like Netflix and Hulu have given consumers a wider set of TV viewing options, leading to an accelerated loss of Pay TV subscribers. In the first three months of 2017 alone, the US Pay TV industry lost 762,000 customers, which experts cite as the worst Q1 in the industry’s history.  

Pay TV operators are responding by changing the way they do business – some operators are cooperating with SVOD providers, like Comcast’s integration of the Netflix and YouTube apps into the X1 platform. Interestingly, there’s a growing convergence between SVOD and Pay TV, with operators on both sides taking cues from each other on business and operating models, in addition to distribution methods and key features. Some of the major trends are laid out below.          

1. Pay TV operators are being forced to lower prices by offering skinny bundles 

Skinny bundles are pared down television packages that cost less than traditional Pay TV and offer a limited set of channels. Oftentimes, these are over the top television (OTT) packages, but not always. In 2012, Pan-European satellite broadcaster Sky launched Now TV. Their package targets customers with no existing Pay TV service, and offers limited live television streaming with on demand monthly passes in different genres, that customers can mix and match. In the five years since Now TV’s launch, Sky has limited cannibalization of their main services with only 2% of Sky TV customers joining Now TV.  The US side isn’t as mature, with Dish launching Sling TV in February 2015, starting at $20 a month for 30 OTT television channels. After acquiring DirectTV, AT&T launched DirectTV Now in November 2016 with an introductory offer of $35 a month for 100 channels, which increased to $60 a month once the promotion was over. Comcast is rumored to be launching an IPTV skinny bundle sometime this year, with pricing starting at $15 a month and increasing to $40 a month depending on how customers customize the package. All of these traditional television providers are trying to cut the bloat of traditional Pay TV packages to compete with SVOD providers who only charge $10 or less a month.

2. Select SVOD players are venturing into live TV

On the flipside, SVOD providers are blurring the lines by going beyond television on demand and offering live OTT streaming services meant to emulate the traditional cable experience. In early April, YouTube’s live TV streaming service launched in five US cities, offering 50 channels for $35 a month, including the original programming that comes with a Youtube Red subscription. Recently, Hulu launched a live TV offering for $40 a month with more than 50 channels, which also includes all of Hulu’s on demand content. Like traditional Pay TV, the Hulu package allows for DVR recording, but additionally offers rewind options for some live TV channels. This is an unsurprising move considering that Hulu is owned by multiple large television networks including Disney/ABC, 21st Century Fox, Comcast/NBC Universal, and Time Warner.

3. Original content has become more important than ever

A focus on original content has been seminal to the strategies of all SVOD providers, though Netflix and Amazon Prime Video, two major SVOD providers with no announced plans to launch live TV streaming, have invested the most aggressively in original programming. In 2017, Amazon will spend $4.5B on original content while Netflix will spend $6B, coming second only to ESPN.  Previously, distributing original content was firmly in the domain of Pay TV, but intensifying competition between SVOD providers has driven greater acquisition costs for exclusive rights to popular programming. Furthermore, networks like HBO and CBS have launched their own TV Everywhere solutions, which deters them from liberally sharing content and cannibalizing their revenues. As a result, SVOD providers can no longer rely on distributing content alone, but also have to produce content that they have exclusive rights to air. For Netflix, producing popular original content is even more important as they aim to increase revenue and subscriber count – while Amazon has a core retail business, and Hulu earns ad revenue, Netflix relies entirely on monthly subscription fees. Thus, Netflix depends on adding new subscribers to grow, which can best be accomplished by adding exclusive programming which gains enough popular or critical attention that new users are persuaded to sign up. So far, this has been a successful strategy, with Netflix adding 1 million domestic subscribers this quarter. At the same time, Netflix is not completely immune to the challenges that traditional broadcasters have faced. Although Netflix has embraced more niche shows and renewed nearly all of them, they’ve cancelled four of their original shows in the past seven months, proving that good television is difficult to make for SVOD players and traditional broadcasters alike.

4. Television distribution methods are changing 

Netflix made binge watching a cultural phenomenon by releasing entire seasons of new television onto their platform at once, leading many consumers to view all the episodes of a show in a single marathon session. A 2017 Deloitte report noted that 73% of US consumers and almost 90% of millennials and generation Z have binge watched video content.  Pay TV operators have noticed the change in TV viewing habits and are beginning to adapt accordingly. Since the beginning of 2016, Time Warner has been pressuring television networks to allow for full season stacking rights, which allow full seasons of shows to be made available for on demand viewing.  In a slight variation on this, Time Warner’s TBS network launched its new show, Angie Tribeca, by showing the entire 10-episode season in a 25 hour marathon.  And in summer 2016, BBC released every episode of the new drama, The Living and the Dead, onto their OTT platform before airing the series on television.  While more Pay TV operators are supporting this distribution model, at least one SVOD player is fighting this trend. For their most buzzed about show, The Handmaid’s Tale, Hulu followed a more traditional approach by releasing one episode a week on their streaming platform. Their motivations for this move are unclear, though it may have to do with the sensitive nature of the series, or it may have been a strategy to sign up more users who cannot rely on a free trial to see the entire first season.

Unsurprisingly, the rise of SVOD has helped transform the Pay TV market, forcing many cable and satellite operators to adapt to customers’ evolving expectations. More interestingly, SVOD operators are also taking a page from the cable playbook with their focus on distributing original content, with some offering live TV streaming as well. With the line between Pay TV and SVOD blurring, cooperative efforts may become less tenable as each platform tries to play in the other’s territory.<>