Google’s announcement of a subscription service attached to YouTube coincided with the declaration by chairman Eric Schmidt that it had already won the battle with traditional pay TV. This prompted hoots of laughter given the stuttering efforts of Google TV to make any headway against traditional pay TV and as statements go was far more premature than rumors of Mark Twain’s death. The view was contradicted by recent data showing that pay TV subscriptions are holding up well in all the major regions, even if there are variations in the revenue and ARPU picture.
It is true that cord cutting is eroding cable TV in many markets but this is being offset by growth in satellite and IPTV. It is clear that pay TV revenues from subscriptions and on-demand combined will grow substantially in Asia Pacific this year, with estimates averaging at around 7% from the $32 billion at the end of 2012 to reach $34.2 billion by the end of 2013 and likely to push on to $45 billion by 2018, spurred by strong growth in China as well as south east Asia.
Even in the saturated North American markets revenues are at least still rising while subscriptions are about flat. In Europe we have almost the opposite situation that pay TV penetration is growing at over 1% per year while revenues are flat in the face of falling ARPU. Meanwhile Latin America remains the happiest hunting ground with subscriber numbers currently rising at about 5% per year driven by strong growth in its biggest market Brazil, only partially offset by a squeeze in ARPU.
Schmidt was talking about YouTube not Google TV, and that at least has been a roaring success having just passed the billion unique users a month mark, second only to Facebook and the Google search engine itself. This has led to Google increasingly aligning its TV strategy around YouTube after failing to maintain a coherent line around Google TV. This is why the introduction of subscriptions for some channels is significant, not just in marking the first time the online video portal has charged for content. It also signals Google’s entry into the realm of pay TV, which is why Schmidt wants to portray existing providers as a dying breed. The ludicrous nature of the claim can be seen by looking at the channels Google looks like it will be charging for, such as Onion, Howcast and WWE. The great pay TV powerhouses, such as DirecTV and Sky, have all built their empires around premium content, especially sports, which they then retain through financial muscle and where necessary legal action.
While this model may not be sustainable in the long-term in the face of the seismic upheavals rocking the industry, it is largely intact for now. This leaves the big OTT wannabes like Google, Apple and Amazon having to scramble their way up through the foothills before they can launch an assault on the mountain of pay TV.
For Google there is one particular problem if YouTube is going to provide the launch pad for such an assault. While Netflix, Amazon, Hulu and others have come in with a low cost subscription model, appealing to subscribers who cannot or will not afford a full blown pay TV package in tandem with FTA (Free To Air) content from state or commercial broadcasters, consumers are accustomed to YouTube being free.
Google is therefore emulating a number of print publications in setting up a pay TV firewall and attempting to learn the lessons of their experience in moving at least partly from an advertising to subscription funded model. The one clear lesson from the print world is that to begin with at least you cannot charge much and so Google will in turn have to undercut the likes of Netflix considerably, which is why we are talking of $1.99 per month for access to around 50 of YouTube’s popular channels. Another lesson is that the only hope of persuading subscribers to pay when they haven’t before, is to make the process as transparent and easy as possible so they barely notice they are doing it, which means enabling the likes of PayPal to avoid the need for time consuming signup and entering of credit card details.
If Google eventually wants to grow subscription revenues it will have to offer something that people really will be prepared to pay for, such as a premium sports channel or early release window for blockbuster movies. By the same token, Google can only attract high advertising rates by drawing in huge audiences for specific channels on the back of premium content. Currently YouTube advertising revenue is still dwarfed by that of the largest pay TV operators and broadcast networks despite the numbers of viewers, again confounding Schmidt’s view that traditional linear TV is dead. Digital video advertising will jump from $2.93 billion in 2012 to $4.14 billion in 2013 but still only account for 2.4% of all ad spending, according to eMarketer.
We may recall Schmidt himself still going out of his way in August 2011, 10 months after the launch of Google TV to distance the company from content creation with the aim then of convincing broadcasters and rights holders that it wanted to partner rather than compete with them. ‘We seek to support the content industry by providing an open platform for the next generation of TV to evolve, the same way Android is an open platform for the next generation of mobile,’ said Schmidt then. ‘Some have suggested Google should invest directly in TV content. To argue that misunderstands a key point: Google is a technology company. We provide platforms for people to engage with content and, through automated software, we show ads next to content that owners have chosen to put up. But we have neither the ambition nor the know-how to actually produce content on a large scale.’
It took just two months more for the inevitable U-turn, as Google realized that platform providers would only get the crumbs from the OTT revolution while the cream went to the content providers. Then Google revamped the platform itself to make it fit for interactive TV with a substantially upgraded UI. But it also announced its move into content, which it is hard to believe was not on the agenda when Schmidt made his earlier speech, by announcing that it was launching more than 100 new YouTube channels with exclusive material from big-name celebrities and news organizations. This was being funded by $100 million in advances and kindled speculation that a major acquisition was in the offing, such as Hulu.
This meant that Google was stoking the video content explosion on its own network, the most popular for video consumption in the world, while at last providing an interface suitable for viewing TV shows on the Internet. Since then Google’s content expansion has been underwhelming and we are still looking for major blockbuster deals. Meanwhile the platform has continued to advance, with a growing number of set tops and TVs supporting it, including Asus, Hisense and TCL, while we have seen new products from longer standing partners like Vizio, LG and Sony.
The updated platform now supports PrimeTime enabling users to flip through the best material on live TV, access favorite channels, see TV shows recently watched, and find other suggestions based on identified preferences. There is also voice search, allowing viewers to track down movies, sports shows and other content using voice commands. Another recent addition is the ability for a user’s devices to pair automatically for using Android phones or tablets to play YouTube videos on the main TV at a single click.
Google is also competing hard on another front that is a growing source of competitive advantage, which is standing up for Internet freedom and transparency. The big online companies are now slogging it out to score the highest marks on the Electronic Frontier Foundation’s (EFF) annual Who Has Your Back report. The EFF was founded as a non-profit group in 1990 to defend privacy and user data primarily from government intrusion, but only started publishing these comparisons of how the major online service providers compare in 2011. The report provides a simple dashboard scoring in six categories: whether the provider requires a warrant for access to content by some external agency; whether it tells users when a government requests data; whether it publishes transparency reports; whether it published law enforcement guidelines; and whether it fights for users’ privacy rights in court. In 2013 just one major player, Twitter, passed in all six categories, along with the Californian ISP little known outside the area, Sonic.net. Google has now passed in five of the categories but has actually back peddled, according to EFF, over giving users notice of law enforcement requests for their information unless prohibited from doing so by law or court order. While Dropbox, Foursquare, LinkedIn, SpiderOak and WordPress have joined Twitter and Sonic.net in achieving this grade, Google according to EFF has ‘introduced ambiguity into its policy and in the process losing the half-star it had earned in previous years.’
Of course Google is under greater pressure from governments and others on this count, but did win special recognition from EFF in 2013 for challenging a National Security Letter. While this is currently a US centric report, it is relevant to the future of OTT video because success will increasingly be determined by exploitation of Big Data, including a lot of user data, to optimize search and recommendation. If users can be convinced their data is safe in Google’s hands, they will more likely allow it to be collected.
In the immediate future Google’s major front is in getting its YouTube subscription model going. The timing may partly have been influenced by the recent success of the New York Times’ pay wall that confounded earlier predictions. In places like the London Times, the disastrous mistake has been to require payment for all online content, while others give some away free to show off the whole publication and provide a teaser to draw readers in either to the paid online or print versions. This line was adopted by the New York Times, which rolled out its pay wall in March 2011. After a stuttering start this has become a great success, to the extent that this year the company expects to make more money from subscriptions than from advertising for the first time ever.
Digital subscriptions are predicted to generate $91 million this year, accounting for 12% of total $768.3 million subscription sales. This will be around $50 million more than the total advertising take. A factor here is that online advertising only generates about 10% the revenue of the equivalent display in a print version, where the visual impact is greater, which is why publishers have been seeking to erect pay walls in the first place, in spite of the risks.
This means that the move online radically tilts the balance between advertising and subscription. Annual ad takings at the New York Times have fallen five years on the bounce, but it is in the happy and so far unusual position of seeing this more than offset by the rise in subscription revenues.
Video is a different market where advertising will remain predominant, but YouTube is hoping to emulate the New York Times model in rebalancing towards subscriptions. This will only be significant if Google increases its investment in content further.