2015 Prediction Update: At the end of 2014, we predicted a rapid rate of cord shaving and cord cutting driven by the adoption of Over-The-Top (OTT) services. In 2015, there has been a rise in OTT services, but how has this affected our Pay-TV consumption? We tke a closer look at events in the US over the past year.

- Industry Prediction Update

By Cole Wilson

Over-the-Top Services Become Strategic

Last year, we predicted a rapid increase in the rate of cord shaving (downgrading TV packages) and cord cutting (no longer paying a TV subscription). We thought the increase would be driven by continued adoption of Over-The-Top (OTT) services by consumers, and we expected the introduction of new linear services by major players as they begin to capitalize on the trend. We did see strong adoption of OTT services continue, such as Hulu’s 50% growth over the last year [1], and we also saw Pay-TV operators continue to embrace OTT services, including the release of new OTT products such as Dish’s Sling TV and Comcast’s Stream (Figure 1).

 Figure 1: Over-The-Top Entrants Timelineott-entrants-timelineStill, the increased adoption of OTT services by consumers has not replaced their traditional Pay-TV services: Netflix and Hulu have grown at about 30% per year since 2010, reaching nearly 50M US subscribers by Q1 in 2015, while US Pay-TV total subscriptions have remained constant at about 100M subscribers, with penetration decreasing by about 1% a year since 2010. (Figure 2). This indicates that the growth of OTT video has had a limited impact on the number of Pay-TV subscriptions.

 Figure 2: US Pay TV Subscribers vs Netflix Subscriberspaytv-vs-netflixStill, the adoption of OTT services is having a material impact on Pay-TV operators in other ways. IDC reports that Netflix’s customers are likely to spend more on their Pay-TV service - including having more channels, using a DVR, accessing premium content, and renting more video-on-demand (VOD). Consumer behavior is also changing, evidenced by the now-colloquial use of ‘binge-watch’[2]. This suggests Pay-TV subscribers are supplementing their packages with additional on-demand content, not abandoning Pay-TV entirely, increasing the significance of incorporating OTT services within a Pay-TV strategy.

How Pay-TV Operators are Responding

Pay-TV operators have taken different approaches to layering on OTT services. Dish’s Sling TV, for example, is a standalone streaming service available for purchase without a Dish subscription, offering about twenty channels with options to add more. Comcast’s Stream functions as a ‘second-screen’ service, available to Comcast internet subscribers with no extra charge. Verizon’s Go90 is an ad-supported, mobile-first video app that aims to promote sharing short-form content, but unlike YouTube it offers a curated list of content.

2015 Prediction: Over-the-Top leads to changes in the cable industry dynamic

These services aren’t direct alternatives to the OTT services from Netflix, Hulu, and Amazon. Instead, they offer more linear content and they aim to supplement the provider’s existing products. However, they do emphasize their mobile availability, one of the significant differences between the set top box requirements of Pay-TV services and the mobile-ready OTT services.

The Future of OTT Services

As OTT adoption rates begin to slow in primary markets, major providers are supplementing their growth by looking abroad. Netflix has invested significantly in its international presence over the past five years by expanding into Canada, Latin America, Europe, and Asia-Pacific. The company plans to continue its strategy by offering its streaming service in 200 countries by the end of 2016, with the notable addition of China. This aggressive growth strategy will improve the company’s buying position, but it will also shift Netflix’s subscriber base towards international users, requiring them to retain a larger and more diverse content library.

OTT video providers such as Amazon and Netflix have also been successful creating their own proprietary content, and will continue to invest in production. Owning content presents numerous advantages over licensing, including cost savings and differentiation relative to Pay-TV and other OTT providers, but carries the risk associated with a flop.

Major providers are also looking to incorporate more live content within their service – the most significant differentiator between their content and Pay-TV. For example, Amazon purchased the live-stream service Twitch in 2014, and Yahoo delivered an online broadcast of an American football game in 2015. Next year, CBS plans to offer a free online stream of the Super Bowl, one of the largest TV events each year. The trend is likely to continue as the quality of online distribution platforms improves, enabling OTT providers to more directly compete with Pay-TV operators.

Challenges Facing Pay-TV Operators

Incorporating OTT services brings a new set of challenges to Pay-TV operators. For example, Pay-TV operators will need to contend with credential sharing for the first time. Since an OTT streaming service is not tied directly to a set top box, and can be accessed with only an account name and password, there is potential for non-paying consumers to use the service: estimates have found that between 10% and 20% of OTT users share their passwords.

Pay-TV is also less popular with younger demographics, which may indicate their reluctance to purchase a Pay-TV subscription as they age, becoming ‘cord-nevers’. However, there may be economic factors that are causing younger generations to simply delay purchasing Pay-TV, making it difficult to conclude that their reluctance is necessarily due to a permanent change in their preferences.

Still, the current trends suggest that OTT services are unlikely to supplant traditional Pay-TV in the short term. More likely, OTT services will grow into an essential part of Pay-TV strategies, and the challenges facing operators will become significant advantages for those that can respond successfully.

Leading up to our Year End Review, read about the ten events and themes we believed would shape the technology, media and communications industry in 2015. Which ones are leading the transformation?

Read about:

Coming soon:

  • Cloud services
  • Wearables
  • The sharing economy

> Read our industry predictions for 2015 in our December 2014 Coordinates Newsletter

Sources:

[1] http://blog.oxforddictionaries.com/press-releases/new-words-added-oxforddictionaries-com-august-2014/

[2] http://www.theverge.com/2015/4/29/8513147/hulu-9-million-subscribers