The big lesson for broadcasters, networks and pay TV operators for 2017: You still have a lot of work left to do if you want to stay relevant. That’s the gist of Ooyala’s “State of the Broadcast Industry 2017” report, released this week. Ooyala, a video, ad and media logistics solutions provider, identified two big trends in video for 2017: mobile and OTT.
For legacy TV content owners, mobile and OTT are two sides of a difficult coin to catch. What’s holding them back? Their business models. Consumers have moved away from linear TV, in favor of multi-screen, time-shifted and binge-viewing habits – all of which are antitheses to the traditional TV business model. Networks and operators have been forced to adapt or perish.
“OTT is now driving mainstream broadcast strategies,” said Paula Minardi, head of content strategy at Ooyala.
The viewing behavior shifts pay TV operators and broadcasters lament, have been driven largely by Millennials. These consumers are young enough to have had Internet access at a young age, and were tied to their laptops as teenagers just as Generation Z consumers are now tied to their smartphones. But what Millennials demand from their Internet-based entertainment services (multi-screen access, less advertising, personalized recommendations, among others) are now gaining traction among the other demographics. And that’s the bad news to legacy pay TV operators and broadcasters who are struggling to keep up. “Content value, costs, convenience and search are core consumer concerns,” Minardi said. “That’s not only driving pay TV churn, but SVoD churn as well.”
And there’s no reason to think that pace of change will slow in 2017. There are now more mobile devices, larger screens, more content, more broadband access, and consumers are getting more comfortable watching long form content on smaller devices.
For years, pay TV operators and networks ignored the rising demand for time-shifted access to programming in favor of trying to strong-arm consumers into watching linear TV. But instead of preserving their legacy business models, this decision has essentially driven away binge TV viewers who’ve been trained over the past five years by Netflix, YouTube and others to reject linear TV scheduling and advertising.
That turned out to be a bad strategy, because binge viewers are typically “superfans” – viewers that will eat up every ounce of content handed to them around a particular franchise, and will still be hungry for more. “Content owners, traditional operators and broadcasters are looking at bingers as must-have audiences,” said Jim O’Neill, who serves as strategic media consultant and principal analyst at Ooyala. “Bingers are totally involved, they spend a lot of time with the content, and are finding more and more representation outside of the traditional Millennial audiences.”
And bingeing is addictive. The more viewers are able to binge-view programs, the less willing they are to sit through commercials or wait for weekly releases of new episodes, O’Neill said. And this behavior is growing among non-Millennial demographics. “Look for these engagements to be refined further in 2017 by more consumer choice driving how video is created, delivered, viewed and monetized,” said Minardi.
Consumer preferences for OTT-style services are evident in the pay TV subscriber pool being slowly drained. Pay TV households have fallen below 100 million, while SVOD penetration is at 50% in the US now, according to Nielsen. We’re watching pay TV providers and networks respond in real time, in the form of so-called skinny bundles that enable consumers to stream live TV to connected devices. “Those are really smart moves by smart companies looking at a maturing market,” said O’Neill. “They’re trying to make lemonade out of lemons. They’re finding a way to stay relevant, sort of.”
But the rub, once again, is found in those legacy business models. “Hurdles still remain as companies determine the best way to package offerings and manage soaring licensing costs,” Minardi said. “And there’s been mixed success with that.”
Pay TV operators are facing big service model revamps, as they’ve found themselves competing with the likes of OTT providers like Netflix, new virtual MVPDs like PlayStation Vue, and networks that have gone direct-to-consumer. Most pay TV providers in the States are now offering a streaming pay TV package, a subscription service (with advertising), fashioned in a skinny bundle – to mediocre results. “I don’t believe they’ve scratched the surface of this evolution,” said O’Neill. “As interesting as those services are, they’re like rope bridges to the future. They’re just lightly-reimagined legacy pay TV offerings with bundles of content – the same bundles of content consumers have hated for years. That has to change, especially as more content providers follow the tracks.”
O’Neill pointed to Charter’s Spectrum TV, a skinny bundle of national broadcast networks and a few basic cable channels. “The problem is that for $20, it’s overpriced,” he said. “I might be willing to pay more, if it can be delivered to me as seamlessly as I want it to be delivered. And there are a lot of problems. It’s just the mash up of an artificially limited bundle that doesn’t respond well to consumers’ desires to just get the content they want.”
Networks and content owners are similarly looking for ways to bring the coveted bingers back to their content platforms. “Networks are starting to take a look at the binge model that you see on SVoD and trying to figure out how they can integrate that into their own structure,” Minardi said. Some of the braver networks, like CBS, HBO, Starz and others, have opted to take a direct to consumer approach. But again, these networks are struggling to find the best business model for their needs. As Hulu and CBS learned over the last year, advertising in subscription models don’t work very well.
Minardi noted that on-demand access is key to meeting consumer expectations, but advertising (the main revenue generator for broadcast networks) doesn’t necessarily fit into on-demand services. “I see on-demand as a way for them to do that, and maybe moving towards a sponsorship model or product placement. That’s a definite area where they can experiment and replicate those models,” she said.
Then there’s the Web video approach: Verizon, AT&T, Comcast and others have taken to commissioning original, short-form Web video for either advertising-based services or subscription services, as desperate efforts to keep younger viewers engaged with these companies and the services they offer. But pay TV operators are learning that they still have a lot of work to do if they want to stay relevant among younger viewers. It doesn’t help that the targets are moving. Consumer viewing behaviors are moving at Internet speeds; and the lumbering pay TV corporations are stumbling to keep up.
They’ll need to do better if they want to survive. O’Neill pointed out that in 2010, Netflix had 19 million subs, and only 9 million consumers were subscribing to other OTT services. In Q3 2016, Netflix had 86.5 million, and other SVoD services have grown to 116 million users. Meanwhile, the pay TV pool has steadily contracted. “That’s a trend we expect to continue over the next five years,” O’Neill said. And Minardi agreed. “The growth and future of video content is undoubtedly via OTT,” she said.