Regional differences show up in Nagra pay TV innovation forum

Competition for premium content is intensifying all over the world and there is a common trend towards separation between platforms and services, but there are also stark regional differences in both strategy and consumer attitudes. This is well illustrated in the latest annual pay TV innovation from Nagra based on interviews and appraisals of 228 service providers spanning 42 representative and mostly large pay TV markets including the US, France, Germany, UK, Brazil, India and Japan.

The strengthening focus on content is revealed by 83% of executives interviewed agreeing that competition for premium film, TV and sports content will increase much further, with ever more companies fighting over a finite pool of the most attractive rights. This has stimulated investment in original content production not just by Netflix and other SVoD providers but also the larger pay TV providers, which are keen to ensure they retain the ability to offer exclusive content to their subscribers.

High-end drama has become a critical differentiator for the bigger operators seeking to attract and retain audiences as well as ensure their stake at the high table of content, which is becoming an essential foundation for lasting success. On the drama front Netflix and Amazon in particular have exerted upward pressure on production budgets, focusing power ever more towards the largest players, while others have been squeezed out into niche markets where at least OTT offers hope of aggregating adequate global audiences.

But this brings out the first contradiction to emerge perhaps unwittingly from the Nagra report, between the rise of global OTT players and continuing demand for relevant local content. On the one hand the report quotes Luciano Ramos, VP Technology and Product, Liberty Latin America, insisting that “the pay TV industry needs to find a way to become more global – that’s one of the advantages that major OTT players have over pay TV providers. The pay TV industry should explore how it could become a global services network. This could help generate savings on product and technology.”

But then Wim Ponnet, Chief Strategy Officer of Endemol Shine Group, a Dutch-based TV production company, argued that local content was still incredibly important as a differentiator not just for pay TV operators but also OTT providers with global aspirations. That is why the leading OTT providers are investing in local content at least in the larger markets they have entered, but until now pay TV operators or national broadcasters have maintained an edge on that front by virtue of their established position and local knowledge of their audiences.

Clearly at least some global consolidation will be essential for success at the top tier 1 end and even Liberty’s Ramos admitted this did not have to mean an operator has to be present in all the major countries. It just needs economy of scale and distribution, combined with some focus on local needs. There is nothing really new here for national broadcasters and to an extent pay TV operators have always combined blockbuster or premium content with appeal across their whole audience through local programming such as regional news and sport.

One of the regional wrinkles emerging in the subtext of the report, which we can confirm from our data, is the varying rate of decline in traditional pay TV. There is no decline at all in Asia Pacific where both revenues and subscription numbers are increasing in most of the main countries. The regional total stood at just over 600 million in 2017 and is still rising with our expectations that it will put on at least 10% by 2023. Revenues are growing at a higher rate in line with expansion of leading economies, likely to rise from close to $50 billion in 2017 to almost $70 billion by 2023. China is likely to account for about 55% of this growth and India 25%.

Increasingly Asia Pacific is a regional outlier to the rest of the world, given that global pay TV revenues peaked in 2016 and subscription numbers about a year earlier. In keeping with history in many tech sectors, the US was ahead of the curve with decline in subs there starting around 2011. Revenues continued to climb at first reflecting the initial wave of churn coming mostly from basic subscribers, which of course boosted ARPU, but after a few years even that started to fall. So US pay TV revenues peaked a year earlier than the global total, at $102 billion in 2015 and are likely to be over 25% below that at around $75 billion by 2023.

This dichotomy between Asia Pacific and the US in particular shows up on the OTT front. While in Asia Pacific OTT viewing is still well behind traditional pay TV in the US it is closing in. There are now 97 million traditional pay TV subs in the US while Netflix has 58 million and about 32 million of the 97 million Amazon Prime subscribers view significant amounts of video. There are also 2.3 million subscribers to Sling TV and 1.8 million to DirecTV Now, so these four alone account for 94 million, which means that the OTT total is probably ahead.

Europe is somewhere between the poles of the US and Asia Pacific but in the UK OTT has already overtaken pay legacy TV according to the country’s regulator Ofcom. The three most popular online streaming services, Netflix, Amazon Prime and Now TV, had 15.4 million U.K. subscribers between them for the first quarter of 2018, compared with 15.1 million total for Sky, Virgin Media and BT, the three dominant pay TV operators.

One silver lining for US pay TV operators noted by the Nagra report is that because they have had to address ballooning churn earlier they have progressed well ahead of their peers in other regions by offering more advanced and diversified product and service portfolios. This at least places them well for the necessary migration towards combining original content production and revenue sharing with other rights holders.

Premium sports are also becoming a major competitive faultline and were a significant driver of Comcast’s Sky acquisition. Too much was made of how the last round of the English Premier League rights auction delivered lower revenues than expected, perhaps because there were hints of similar levelling off in amounts paid for other premium sports. As the Nagra reports suggests, this is probably just a hiatus, a short plateau on the continuing ascent of premium sports rights, even if the gradient will not be as steep as before when the climb resumes.

There was a clear signal from the big OTT players that they were not willing to pile into a feeding frenzy, with Amazon and Facebook nibbling around the edges, while Apple and Google have yet fully to declare their hand. They are still trying to work out both how to accommodate premium sports in their business model and also which rights to acquire across the different categories and regions. Yet Amazon in particular has already given sufficient notice of its intent with the acquisition of one of the English Premier League packages and there is no doubt that live sports will become a major battlefront that will keep prices paid rising, albeit within the obvious constraint of what consumers are actually willing to pay.

The one other significant point raised in that report is the need to combat the latest round of piracy associated with the rise of illicit redistribution of both on demand and live content. The report yields little insight beyond a call to diffuse piracy by ensuring legitimate content is always available at an affordable price, but that is a little defeatist and itself a constraint on revenues. The need for better coordination is obvious, as is a commitment to dynamic forensic watermarking that recognizes pirates have worked out countermeasures so that systems need to be constantly updated. Only that would ensure that infringing streams can be detected and taken down in near real time, as is necessary to defend premium sporting rights.