5 online video trends to watch in 2015
Get a peek at the the online video trends that will shape 2015
- 1. 5Online Video Trends to Watch in 2015
- 2. 2 Industry pundits, bloggers and analysts have been prophesying the rise of a la carte OTT services for the past several years, certain that it was just around the corner. Well, it looks as if the corner will finally be turned in 2015, with traditional Pay TV networks like HBO, Showtime and Starz and traditional ad-supported networks like CBS recently announcing their intention to launch OTT services next year. Here’s what we know: HBO will launch an a la carte service that targets the 80 million U.S. households that do not currently subscribe to its service — especially broadband-only households. HBO is the gold standard for Pay TV, so this announcement carries a lot of weight. There is some hope that an attractively priced, standalone HBO subscription could also dissuade freeloaders from pirating the service but that will likely hinge on pricing and packaging, as yet unknown. Forrester analyst, James McQuivey predicts that the service will likely be priced at about $15 per month, affordable enough for broadband-only consumers to justify but expensive enough to discourage cable TV subscribers from defecting. Presumably, Showtime and Starz would follow suit with similar pricing and plans. CBS has already announced that its OTT service will be priced at $5.99 per month, a curiously high price point for content much of which can be consumed for free via antenna or as part of a basic cable plan. CBS is likely banking on the fact that most viewers no longer have antennas installed and couldn’t use them to view live programming on mobile devices anyway. Big broadcasters eliminated that option when they successfully took legal action to shut down Aereo, a service that equipped subscribers with miniature antennas that could stream and record over-the-air programming to mobile devices. 1 Broadcasters get serious about a la carte OTT services
- 3. 3 While the looming launches of a la carte monthly OTT services from the likes of HBO, Showtime and CBS are significant, it does not spell the end of the cable bundle as some imply. Broadcast networks and multichannel video programming distributors (MVPDs) have little to gain from blowing up the bundle. The broadcasters like bundling because it allows them to leverage the equity in their premium brands to obtain distribution and carriage fees for secondary offerings. The MVPDs like bundling because they can package a grab bag of programming into a multitude of flat-rate pricing packages that have high perceived value with many consumers. Plus, bundling provides distributors with a nice, dependable revenue stream. With the average cable bill currently hovering around $90 per month, it wouldn’t take long for a la carte OTT services to eclipse that figure. So, rather than being the death knell of cable, these OTT offerings are likely to be additive, appealing largely to“cord cutters.” The real test will come when enough of these a la carte services have launched to gauge their impact. If they are successful, they will encourage other broadcasters to launch their own OTT services. This is where things could get very interesting, because while broadcasters are not looking to kill off the cable bundle, they are looking for leverage to negotiate more favorable revenue splits with operators. Successful standalone services could give them just that. Implications Click to Read
- 4. 4 As competition intensified between the major subscription video on demand (SVOD) services like Netflix, Hulu and Amazon Prime, they rolled out expanding libraries of original content in 2014 to differentiate themselves and stem churn. Look for them to continue this content arms race in 2015, especially as they face the prospect of new competition from a la carte OTT subscriptions. Netflix has benefited the most from its investment in original content, striking gold with “Orange Is the New Black” and “House of Cards.” Look for it to double down on this strategy so that it can — in the words of its Chief Content Officer — “become HBO faster than HBO can become Netflix.” True to its word, Netflix has signed Adam Sandler to an exclusive four movie deal and announced some big forthcoming programming for 2015, including: • An adaptation of “Lemony Snickets’ A Series of Unfortunate Events” and a remake of the 1970’s sci-fi thriller, “Westworld,” • “Marco Polo,” an epic 10-episode series from The Weinstein Company. • “Bloodline,” a family drama from the creators of FX’s “Damages.” Demonstrating its commitment to original content too, Amazon just announced a formidable slew of seven new programs slated to pilot in 2015, including: • “Point of Honor,” a drama from Carlton Cuse, the executive producer of “Lost.” • “The Man in the High Castle,” from renowned director, Ridley Scott whose credits include “Alien,” “Blade Runner,” and “Thelma & Louise.” In a novel crowdsourcing twist, Amazon plans to debut the first episodes of each of its seven programs for free on its Instant Video streaming service, then solicit viewers to cast their votes for which shows they would like to have made into full series. 2 SVOD services will double down on original content Original Content
- 5. 5 Watch for Hulu to up the ante too, especially on the heels of Rupert Murdoch’s recent pronouncement that he intends to turn Hulu into a “serious competitor” to Amazon and Netflix. As a shot across their bow, Hulu recently announced “11/22/63,” a straight to video series from acclaimed director, J.J. Abrams based on Stephen King’s 2011 novel. It then followed it up by inking a deal with director, Jason Reitman (“Up in the Air,” “Juno”) for the new comedy series, “Casual” slated to air in 2015. Since Hulu is owned by the alliance of Fox, Walt Disney Company and NBCUnivesal, it finds itself in a bit of a predicament, however. It needs top notch original content to become a more viable competitor to Netflix yet its owners need for traditional TV to continue to reign supreme. As SVOD increasingly becomes the first choice for viewers, it siphons off viewers necessary to maintain TV revenues. Whether the owners of Hulu can thread this needle remains to be seen. The power of original content will not be limited to the current big three SVOD players either. Samsung is reportedly investing millions to create original video shorts especially for mobile devices. Sony is also getting in on the action, debuting its first original content series, “Powers” exclusively on its PlayStation Network. It will leverage the show to try to upsell PlayStation Plus memberships. YouTube would likely be the most disruptive new entrant in 2015, either with a subscription or ad-supported VOD service. YouTube has already invested heavily in retaining top content creators; launching a subscription service is certainly plausible. 2 Netflix forecasted that it will spend $6.6 billion for content in 2015. If it spends 10% on original content, as it projected it would in 2013, it could pay out nearly $700 million for its own programming in 2015.
- 6. 6 In 2014, the leading SVOD services leveraged original content to increase the perceived value of their services and differentiate their offerings from one another. With the planned introduction of a la carte OTT subscriptions from Pay TV heavyweights, existing SVOD services will be under increasing pressure to also differentiate their offerings from these cable brands and to justify their continued share of wallet. Given this new context, subscription video on demand services have little choice but to increase their investment in exclusive original content in 2015, as it becomes an even more important strategic asset. Not only to ward off competitors but to also give themselves a pathway to raise prices in the future to pay for all that content. Expanding libraries of original content will also provide them with leverage against spiraling content licensing fees, which are estimated to total $6.8 billion in 2015. But with series like “House of Cards” rumored to cost nearly $8 million per episode, just how much original content can SVOD services afford to underwrite? And how much can they produce until the networks and studios who supply the bulk of their content cry foul? After all, they don’t want to be perceived as a direct threat. Suffice it to say, subscription video on demand services will have to straddle a fine line in 2015 to differentiate their offerings without being perceived as encroaching on the terrain of their suppliers. Implications
- 7. 7 MVPDs are seemingly being attacked from all sides. The rise of SVOD services. The planned launch of broadcaster OTT services. And the continued friction from broadcasters escalating demands for retransmission fees. In the last few years, broadcasters have seemed to gain the upper hand in this battle, demanding that MVPDs compensate them for programming across every device. For instance, Pay TV operators even need to pay for retransmitting content that is delivered free over the air. When they have balked in these negotiations, broadcasters have pulled their content; a strategy that has caused subscribers to direct their wrath at the operators, increasing the pressure to capitulate to the broadcaster demands. Witness the infamous 32 day standoff between Time Warner and CBS in 2014 where CBS prevailed. Now CBS is embroiled in another battle, this time with Dish Network. CBS appears to hold the ultimate trump card since it holds the rights to AFC conference NFL games including the home market of Dish’s local pro football team, the Denver Broncos. This lack of leverage in retransmission discussions portends even tougher sledding for TV Everywhere, the initiative by MVPDs to authenticate and deliver their content across all the devices that their subscribers use. TV Everywhere is viewed as a pivotal strategy for cable and satellite Pay TV providers to keep their subscribers from fleeing to free or low-priced SVOD services, but has experienced only modest success. Requiring that MVPDs negotiate separate contracts with broadcasters for distribution across each device type will stifle its success, especially since they will be hard pressed to pass the costs on to its subscribers. 3 Retransmission battles will grow even more heated (if that’s possible)
- 8. 8 When it comes to high demand content from blue chip broadcasters, MVPDs may have to concede to retransmission fee demands in the short term. Look for them to try reset the balance of power in 2015, however. The most significant happening that would provide operators with more leverage is pooling more negotiating power through consolidation. That’s already in the works. The announced merger of Comcast and Time Warner Cable is currently undergoing review by the FCC, as is a second blockbuster proposed merger between AT&T and DirecTV. Neither is a sure thing. The specter of reduced competition or diminished consumer choice may derail the mergers on anti-trust grounds. The recent push by President Obama to reclassify broadband providers as public utilities could also waylay the mergers or introduce unfavorable conditions for approval. With the recent shakeup in the U.S. Congress, look for Pay TV operators to also push for a legislative solution, especially if merger talks fail. The Satellite Television Access Reauthorization Act of 2014, a bill to reform retransmission fees has already been introduced in both houses of Congress and is awaiting next steps. Not surprisingly, programmers like CBS and Disney are using their substantial lobbying clout to derail the mergers. With Q3 TV ad sales down 0.5% YoY, they are increasingly reliant on retransmission fees; CBS aims to quadruple theirs by 2020. Another option is for MVPDs to simply reject retransmission fees with some of the secondary broadcasters. DirecTV and AMC may be headed for such a scenario by end of 2014. If DirecTV lets AMC fade to black without a meaningful hit to its subscriber base, look for other cable and satellite provides to be likewise emboldened. Implications CBS has publicly stated that it expects to grow retransmission fees to $1 billion by 2017 and $2 billion by 2020, a fourfold leap from today.
- 9. 9 Viewers have generally been forgiving about online video quality to date, but that’s about to change as the stakes get higher. • More big budget original programming is set to go over the top. • Existing Pay TV brands are launching OTT options. • Technologies like 4G LTE are conditioning consumers to expect lower latency and HD quality. Online video is growing up and with it heightened expectations and less forgiveness from consumers, programmers and advertisers. Viewers — especially paying subscribers — are fast coming to expect the same quality of experience (QoE) with OTT that they’ve come to expect with traditional Pay TV. That means crisp, consistent picture quality and low latency. Programmers are dropping big bucks on new shows featuring celebrated directors and actors, none of whom will accept a second-rate viewing experience. And for those programs that are ad-supported, the expectations by advertisers will be equally lofty. They will not tolerate a viewer experience that doesn’t positively accentuate their brand. Key to establishing high QoE levels for all these stakeholders is the need to create high user engagement levels. After all, if a viewer is actively engaged with the programming, they are likely to be more satisfied with their experience. Slow load times and frequent buffering in particular have proven to be the fastest way to send viewers scurrying for the exits and to disengage. Solving this problem will be essential to OTT success. 4 Online video quality will become the linchpin for OTT success or failure
- 10. 10 Clearly, the forecast for online video is bullish. But it isn’t a forgone conclusion that it will become a truly viable alternative to traditional Pay TV until it can consistently provide a fast loading, uninterrupted HD-like experience. If they hope to present a serious challenge, OTT providers will need to measurably improve QoE levels to the satisfaction of viewers, programmers and advertisers. That will require a significant IT investment, particularly for content delivery networks (CDNs) and transparent caching which help reduce network congestion and improve QoE levels by caching content at the network edge. This places content nearer to viewers, removing the problems that lots of network hops over long distances can introduce. It will also require that internet service providers (ISPs) continue to build out their infrastructure to accommodate the demand. But who will pay for that? Beset with diminishing revenue on legacy services and mounting costs associated with increasing bandwidth to meet OTT demand, ISPs have begun to demand that content owners pitch in to help subsidize that build out. To back up their demands, some ISPs have throttled traffic from bandwidth hogs like Netflix, degrading their stream unless OTT services pay to directly interconnect. Faced with unhappy customers and a poor user experience, Netflix has been coaxed into reluctantly signing paid peering agreements with ISPs like Comcast, Verizon and AT&T. These agreements enable it to bypass the the often congested connection points between the ISPs and transit providers like Level 3. Look for Netflix to continue to lobby the FCC to regulate interconnect fees, especially on the heals of President Obama’s call to treat the Internet as a utility. Implications Click to Read
- 11. 11 Programming bundles for Pay TV haven’t changed much in recent years, in part because they didn’t really need to. With all the recent flux in the marketplace, however, look for new and novel bundles that cater to changing consumer preferences and serve as a counter to standalone OTT and SVOD services. Verizon just announced an offer that bundles broadband with HBO, Showtime, Netflix and basic local programming from its FiOS IPTV service for just $60 a month. Conspicuously absent from this offer are sports channels and the accompanying high carriage fees that add significantly to Pay TV pricing. Sony just waded into Pay TV as a “virtual MVPD” with the beta rollout of its PlayStation Vue service that will be delivered over the top through its gaming consoles. It will start with about 75 channels, with the service priced in the $60- $80 per month range. Unlike most competitors, Sony will not require that consumers be shackled to a contract, a feature that should play well to cable, satellite and IPTV subscribers weary of long term commitments. Dish Network also plans to launch a virtual MVPD service but with a twist that it hopes can keep pricing low. Dish will encourage prospective subscribers to access free over-the-air programming like NBC, CBS and ABC by using an antenna. Doing so will enable Dish to avoid expensive retransmission fees, freeing it to potentially provide an OTT bundle of programming from the likes of Disney, A&E Networks, Scripps and others for as low as $30 per month. And not to be outdone, Amazon is rumored to be mulling a separate low-priced, ad-supported OTT service decoupled from its Amazon Prime service. 5 Pay TV bundling will get creative
- 12. 12 By rolling out a variety of new programming packages and pricing options, multichannel video programming distributors like Dish Networks and Verizon are signaling that they plan to aggressively defend their turf. By testing concepts like the virtual MVPD, service providers are also signifying that they plan to retain their dominance in Pay TV regardless of the mechanism and technology with which programming is delivered. This is an important development. While OTT has disrupted the Pay TV status quo, cable, satellite and IPTV providers have often seemed constrained by their technology to effectively marshall a counter attack. TV Everywhere has been their only credible option thus far. Despite huge investment, however, only 21% of Pay TV subscribes use it at least once per month according to findings from an NPD Group study. Given this tepid rate of adoption, look for traditional Pay TV providers to begin placing more focus on delivering what consumers want and how they want it, rather than trying to jury-rig their existing solutions. These new virtual MVPD offerings are an initial step in what will be a longer evolution that ushers in a hybrid approach and a migration to Internet delivery. It is also a tacit acknowledgement that packaging broadband access with programming bundles is the future of Pay TV. With Moody’s projecting that cable companies will have more broadband customers than Pay TV customers by 2015, it’s conceivable that programming could be used as a loss leader to drive more broadband consumption and accompanying higher priced monthly broadband plans. Implications By 2015, cable companies will have more broadband subscribers than video customers. Source: Moody’s Investor Service report
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