Russia’s pay TV revenues slipped by 1.9% in Q1 2016 to €235.6 million, the first quarterly drop for several years after sustained growth, but it is too soon to tell whether the longer term curve has turned downwards. That figure is still 12% up on Q1 2015 and the short term drop could be explained by seasonal factors. In fact, the fall can be accounted for entirely by the Q1 revenue reduction of 20% reported by Tricolor TV, the country’s largest pay TV operator with 29% of the market at the latest count. The other operators continued to enjoy revenue growth even over the last quarter, so we will need to see this fall sustained over at least one more quarter before we can say the market has turned, which does not look to be the case.
Whether or not pay TV is still growing as a whole there are clearly some shifts occurring with a swing towards VoD and OTT. Of course some of this activity is within pay TV but there is also churn to dedicated VoD and OTT players disguised by overall subscriber growth. A key factor is increasing saturation of the pay TV market with just short of 39 million households subscribing at our latest count – about 70% of the total. Growth has been slowing down accordingly, standing at over 11% in 2013, then 7.5% in 2014 and then 4.2% in 2015, so it may be that the Q1 2016 drop is not entirely off the curve.
Of the main sectors, IPTV is growing fastest, encouraged by improving broadband infrastructure, which has increased both QoS and the footprint. Another factor has been the strength of the leading IPTV provider Rostelecom. Satellite is still expanding the most in absolute numbers, while as in many other markets cable TV has hit the buffers.
VoD growth has clearly been very strong as indicated by the increasing number of services in the absence of clear consumption data on that. By the end of 2015 there were over 40 VoD services available, compared with about 10 five years ago.
We do have raw subscriber and revenue details courtesy of the European Audiovisual Observatory’s updated MAVISE database, indicating that the leading VoD provider by user numbers is ivi.ru with around 38 million regular users, receiving around 200,000 views per month on average – 10 ten times its closest competitor. However, its rival is Okko is ahead in revenues because it is a paid service, although still not a big sum at just over $9 million in the first half of 2015.
There has been a steady trend away from the advertising model towards subscription and transaction revenue for VoD which set in around 2011. Of those 40 VoD services going now, just 11 are still funded just by advertising, with 6 subscription only, 5 rental, and 19 some hybrid approach.
This mirrors a wider trend boosted naturally by President Putin’s draconian and misguided ban on commercials on pay TV, which came into effect on January 1 2015. The motive was to level the field for FTA (Free To Air) channels which can only make money through advertising, by ensuring that pay channels also had just one source of revenue.
This was based on flawed logic, because people tend to be more willing to tolerate advertising on FTA channels, which can also charge more if they attract higher aggregate audiences. Pay TV providers have to tune their mix of advertising and subscription to remain competitive and in any case they often carry FTA channels within their bouquets.
At any rate the Russian ban on commercial advertising was slated from just about everyone except the FTA broadcasters themselves. Pay TV operators naturally complained they would be unable to recoup their costs from subscription fees alone, while the presidential human rights council warned that the ban could lead to the “monopolization of the TV advertisement market.”
The Organization for Security and Cooperation in Europe (OSCE) feared it could cut off private smaller channels from their principal source of revenue, which for them was advertising, highlighting the point about pay TV channels needing to have freedom to tune their models.
This commercial ad ban led to some international channels that relied on ad funding via pay TV to pull out of Russia and must have exerted a slight dampening effect on the whole field, contributing the slowdown in growth.
The government was forced into some compromise by allowing operators with a FTA license in at least one of the country’s regions to be exempt, which allowed the business network RBK TV to continue showing ads. A few others then moved to obtain such a license, in effect setting up stall as regional operators.
As it happens there has been a global shift away from spot ad funding for pay TV, driven no doubt by the SVoD brigade led by Netflix. This has created an appetite for ad free content while tapping the base previously reluctant to subscribe to a bloated pay TV package. As markets approach saturation such OTT providers can target non pay TV households until that sector too becomes saturated, as has happened to a large extent in the US.
In Russia however there is plenty of room for OTT providers to grow among the 30% of households outside traditional pay TV, as broadband coverage expands. That has already happened, with seven significant national OTT providers, according to IKS-Consulting.
As with VoD in general there is a dichotomy in the OTT sector between numbers of users and revenues depending on the business model. Again ivi.ru is number one for users with 37.8 million in the first half of 2015 and 200 million views a month, but with revenues of only $8 million over the half year. This is more than twice the 17 million users of number two Zoomby.ru.
Yet it was Okko, only number six for users at 2.7 million, which was top for revenue at $9 million. Okko is the only one of the top seven with no advertising, relying just on rental, purchase and subscription, so that says something. It seems Russian consumers are happy enough to pay more for an advert-free viewing experience.
Two other aspects of Russian pay TV should be noted: one is that for such a vast country regional differences in trends are relatively small. It is true there are plenty of regional channels. Of the 2,370 TV channels that either operate in Russia or at least have licenses to broadcast, about 530 are regional representatives of national networks. But there is widespread demand by users for access to national channels, which is why Gazprom Media last year formed a company named Alcazar Content Service (ACS) that allows regional TV channels to access its content.
Secondly, related to the first trend, is a growing nationwide appetite for thematic channels, both international and home-produced. According to market research consultancy J’son & Partners, the audience for thematic pay TV channels grew by 61% in the period 2011 to 2015, spread out across Russia. The firm found that 85% of total demand for pay TV is for movies, children’s, educational and entertainment programs, with the five most popular channels being TV1000 Russian Cinema, TV1000, My Planet, Discovery Channel and Animal Planet.
Yet while this shows international channels have gained large audiences, this has not yet been mirrored by the major US OTT players. iTunes and Google Play launched there late in 2012, followed in 2013 by Amediateka, official distributor of HBO, but this has had little impact on the leading domestic OTT providers, which continue to dominate. Netflix only entered the Russian market in January 2016 and so it is too early to assess the impact, but with a lack of original Russian language content, it is unlikely to be dramatic.