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23 November 2017

Linear overtakes VoD as fastest growing paid OTT segment

Linear is now the fastest growing pay OTT sector, especially outside the US where the SVoD brigade still dominate in terms of subscriptions at least. But the bigger picture is that OTT is spreading out across different revenue and business models while the distinction between on demand and linear is fading. It makes little sense to segment the pay OTT market into two boxes one marked SVoD and the other subscription linear, or SLIN, as one of our analyst peers has done.

The problem with SLIN is that it is really little more than “not Netflix” since its definition seems to include just about everybody else of any standing, save perhaps for HBO Now. Netflix has gone out of its way to preserve this lone status as a pure SVoD provider refusing to contemplate any linear offering at all and never mind live sport. At the recent OTT World Summit in London, VP Business Development Maria Ferreras repeated this message, with just the slight qualification that it is impossible to see beyond a year in this field and so even Netflix might change its mind after that. But for now it remains no live, no linear and no sports, the rationale being that this preserves Netflix’ status as the perfect partner for pay TV operators, combined with an ever-strengthening focus on original content, the budget for which is set to rise a further 33% to $8 billion for 2018, including $2 billion in Europe, according to Ferreras. A consequence of this is that Netflix will increasingly resemble a studio rather than a distributor and work towards packaging all its content into a highly searchable and navigable “non-linear channel” as Ferreras put it. The aim is to help partner distributors become what some large rival OTT operators are striving to be in their own right, a one-stop shop within which consumers can move with ease between broadcast linear services and Netflix’s SVoD app, united within a common UI.

Almost all other OTT operators then fall under this SLIN banner, given they are offering linear content of some sort. The SLIN term at least has the merit of helping identify the different types of service provider making a serious impact in OTT. The first category would be OTT extensions of the full pay TV catalog, which used to be known as TV Everywhere, such as Liberty Global’s Horizon Go. This category is slowly growing in audience size, but is of diminishing interest since virtually all operators have it and it is tethered to the main linear packages so that it is largely defensive.

Secondly come standalone linear OTT services from pay TV operators, such as Sky’s Now TV in the UK, Ireland and Germany, DirecTV Now from AT&T and Sling TV from Dish in the US, or Canal Play in France. Their role to date has been to create a new segment of customer with skinny bundles that are more affordable than the main package, although inevitably there has been some cannibalization. Sky is going further by making its whole catalog  available online from some time in 2018, aiming partly for homes unwilling or unable for conservation reasons to install a satellite dish, but also accepting the inevitable swing towards online. As some wag put it recently, Sky would rather eat its own lunch than allow some upstart OTT provider to steal it.

The third category is Direct-to-Consumer (D2C) from rights holders, bypassing traditional distributors and therefore a threat to legacy pay TV as well as some commercial broadcasters. This can be split into two sub-categories, one which is more regionally focused around premium content and the other tending towards niche content, but which may attract a significant audience worldwide.

The first type often distributes sports on a regional basis, where they are popular, as in the US with Major League Baseball’s or National Hockey League’s Some may regard hockey as niche, but in any case these two sub categories overlap in terms of distribution and content. This first sub category could also be said to include services from broadcasters or networks with premium rights, such as HBO Now and CBS All Access. HBO Now is closer to Netflix in that it is subscription on demand only, but unlike Netflix does provide access to some premium sports such as boxing after a few days’ delay.

The second D2C sub category is interesting in that it plays to the strengths of OTT as a global distribution platform capable of aggregating a sizeable audience around content that many local pay TV operators would deem too small to bother with, not registering on audience panels and therefore barely monetizable. One example is WWE Network, launched in 2014 as one of the first dedicated round the clock streaming services and based in Connecticut, US, offering a mix of reality shows, documentaries, a few originals and some second-tier sports such as wrestling.

One of the most successful global D2C services that is more in line with this ideal of reaching people in many countries is Crunchyroll, based in San Francisco, but serving a dispersed East Asian diaspora with anime, manga, drama, music and other content popular with that culture. Here a freemium model has proved successful with 23 million online community members worldwide, of which over 1 million have converted to subscriptions.

The final major OTT category that can be regarded as SLIN are streaming services designed for gaming, but which have added some non-gaming content. Such services have really been at the cutting edge in terms of performance, given that gaming is highly intolerant of latency and some have struggled to deliver on that front, especially in parts of Europe or remote areas where fast broadband is unavailable, either over the air or along the ground. This category is dominated by Amazon’s Twitch and YouTube Gaming in that order and between them generate more streaming traffic than any of the other SLIN categories at present.

Almost all of these SLIN OTT players also offer on demand content of some sort and so it is strange to define them as linear. It makes little sense either to separate SLIN from SVoD on the basis of content and windowing, since Netflix by definition offers its own original programming as first-run TV shows, while the release windows it obtains for movies have until recently been the same as other providers. It is true that Netflix has been a victim of its own success by pushing some of the studios towards becoming D2C OTT providers themselves, rather than letting their blockbuster movies out to third parties. Disney in August 2017 pulled its movies from Netflix as a prelude to launching its own streaming service in 2019 when current rights deals expire.

Rather than splitting OTT into two very unequal segments on the basis of a distinction between linear and on demand content, which is going to blur anywhere over the next few years, it makes more sense to consider platforms, business models and monetization methods. It is clear that Amazon is diverging from Netflix by becoming more of a platform than a distributor, with its content focused more on linear, even though there is some overlap there. This strategy may only be temporarily inconvenienced by the rumored reluctance by traditional networks to tear up long established business models for Amazon to distribute their content in the US.

Amazon meanwhile has adopted a three-part hierarchical approach after unbundling its video service from the Prime membership introduced primarily to give faster delivery and other perks to e-commerce customers. This bundling has helped Amazon grow a large effective video subscriber base – we estimate that about 40% of Prime members can effectively be counted as OTT video customers on the basis of regular usage.

By the same token video has helped sell Prime membership, but now Amazon allows separate subscription to that. Amazon has opened up a third level of hierarchy through its Amazon Channels under Prime Video, which could also, therefore be regarded as a purer form of SLIN, even though there is again plenty of on demand content. This arrangement is hierarchical in the sense that all Prime members get access to the video, but it is possible to subscribe just to the latter without gaining the other perks of full membership. Similarly Amazon Channels are available to Prime Video members but can also be subscribed to separately.

Apart from subscription there is also the ad supported model, freemium and pay per view, with some services combining two or even all three of these. Sky now offers a day pass to its premium sports channels which is close to pay per view in allowing users to access specific events on their own much more cheaply than via the main package. Operators have resisted demand for pay per view because they tend to make more money from ongoing subs given natural inertia, where some people go on paying when they are not watching much. For now Sky has at least retained a small cord since the day pass is only available to Now TV subscribers.

Over time it looks like the tide is flowing away from subscription towards pay per view, while some OTT service providers are looking instead towards the ad supported model. This is the case for the German OTT service called 7TV run jointly by commercial broadcaster ProSiebenSat.1 and Discovery Communications, with plans to bring other content providers on board and become the country’s leading OTT aggregator. Subscription was not deemed to play well with this strategy of amassing customers as fast as possible and so in May 2017 it switched to ad support, although that too can put consumers off.

There are signs that the subscription model will live on for now, in some cases alongside ad support as an alternative option, or occasionally combined with it in the same service. But this may morph towards free plus pay per view, perhaps with a little advertising thrown in. Spotify is a prominent example of a service provider that added a dash of advertising to freemium on the way to subscription.

Then it remains to be seen whether Netflix will hold out against linear, which is only likely if it does succeed in becoming a studio in its own right predominantly serving its own content.6