The European OTT market will end up being dominated by big players that can achieve scale but at the same time deliver premium local content for each individual country. This is the verdict of the latest OTT report from worldwide management and technology consultancy Arthur D. Little (ADL), which also contains advice for the other key parties in multiscreen distribution, broadcasters, Telcos, content owners, Consumer Electronics (CE) makers, and traditional pay TV operators.
The report, "Over-the-top Video – First to Scale Wins," highlights how the big U.S.-based Internet players such as Hulu and Netflix have stolen a lead by establishing superior, large scale, distribution platforms that deliver better user experiences through getting ahead in search and distribution. Some, such as Netflix, are starting to build their own CDN (Content Distribution Network) having first moved their video transmission infrastructures up into the cloud to achieve global scale and reduced costs for multiscreen distribution.
Netflix decided to use the Amazon Web Services (AWS) platform as it was the leading provider of shared infrastructure on a global basis, but Amazon has since launched a competing OTT video service called Amazon Prime. Given that Google, another provider of cloud services with its recently launched Compute Engine, is also in pay TV, the ADL report highlights such conflicts of interest as a possible reason for dedicated OTT providers to build their own CDN infrastructure, especially if they operate on a global basis and so can trade off peaks and troughs in demand across different territories to avoid over provisioning to handle surges in traffic or processing.
But, the key to success in OTT lies in content. And here, the ADL report noted that Netflix had been quick off the mark in learning that the European market is very different from the other big regions, such as Latin America and even Asia Pacific, in being more culturally diverse and marked by a greater number of different languages. Another distinguishing factor about Europe is the existence of different release windows for movie content that makes it hard for an operator to obtain rights and apply them consistently across the continent. This, argues the ADL report, creates opportunities for national operators that understand their own market and culture to succeed, but will also reward big players that adopt distinct content strategies in each country.
For this reason, both Netflix and Hulu have started to invest in original content, aiming to gain exclusive rights in individual countries without having to pay over the odds for wider geographical coverage. This trend should be good news for independent producers around the globe, according to the report, citing the cooperation between Netflix and Norwegian public broadcaster NRK on the TV show “Lilyhammer” as an example.
The value of Europe’s big national markets is also leading the established pay TV operators with substantial cash flows to outbid invading competitors to acquire or maintain premium sports rights, in the expectation that OTT will generate increased revenues. This led Sky Deutschland to secure the rights to the German Bundesliga football with a bid that looked over the top, costing the operator at least €275 million ($360 million) a year for the four seasons starting 2013/2014, up 10 percent on the €250 million it is paying now. Despite being loss making and seemingly unable to afford this, Sky Deutschland’s shares leapt on the announcement, reflecting the fact that failing to acquire the rights would have been a much bigger blow than paying over the odds for them, given that in Germany (as in some other European countries including Spain, France, Italy, the UK and the Netherlands) football rights are the absolute jewels in the content crown, guaranteed to bring in large numbers of subscriptions as well as top advertising rates during live games.
In the UK, BT also spent heavily to win a package of English Premier League rights from ESPN, shelling out £738 million ($1.15 billion) to show 38 live games per season over three years from 2012/13. EPL rights cost more than twice the German ones despite the UK’s low population, reflecting the country’s even greater addiction to football, costing £600 million per season.
This concentration of premium rights among local broadcasters and operators will ensure that the likes of BSkyB and Sky Deutschland will hold off the OTT invasion for some time yet. As the ADL report highlighted, they have a better understanding of, and relationship to, local content “gold nuggets”. These local players can also tie-in an OTT video offer to their existing package and use tested marketing channels to drive adoption and critical mass. Then to restrict risk and for time-to-market reasons, the report argues, national players can seek services of content rights aggregators, such as London based content acquisition service Ondemand!, and Czech Republic based video services company KITdigital, to gain access to a large library by negotiating with just one counter-party rather than with multiple studios directly.
A client of a content rights aggregator, such as a national broadcaster, can benefit from lower content manipulation and promotion costs, the report argues. Aggregators also typically provide ready-made marketing material, as well as fully versioned content ready to be integrated into the client’s platform, including clean and relevant metadata to facilitate navigation and recommendation as well as content management.
According to Karim Taga, global leader of ADL’s TIME Practice, the OTT market in general will be characterized by low prices for some time yet as all players, including incumbents and new entrants, aim to gain market share by being cheap. This will, in the short term, play into the hands of established pay TV operators that can defend their turf by spending heavily on content rights. Over time, though, operators will face competition as external OTT services invade the living room.
To start with, OTT was a PC-based phenomenon involving viewing of catch up and on demand content, but increasingly tablets and other IP enabled devices are coming into direct competition for attention with linear TV, as they are mainly used during weekends and evening hours. The ADL report gave figures from audience measurement firm Médiamétrie, indicating that 44 percent of people in France who own tablets stream TV programs in realtime using catch-up services or accessing video-sharing platforms, and 28 percent use video-on-demand services on the Internet.
Traditional operators must embrace this trend, and seek to capitalize on the parallel development towards simultaneous use of tablets and traditional linear TV, which partly explains the rise of OTT at peak times. A study by Nielsen revealed that in the US, UK, Germany and Italy between 70 percent — 88 percent of respondents used their tablet while watching TV at least once a month.
Usage here includes scanning through news or social networks, consuming complementary online content to the linear TV programming of the main screen, and another family member using the tablet as a full-fledged second screen. Viewers are multitasking in their media usage more and more, even for video, and such "second screen" models are being strongly pushed by advertisers looking for ways to preserve their TV audiences and avoid it fragmenting, by adopting innovative TV-tablet interactivity models.
The ADL report also provided specific advice on OTT strategy to broadcasters, cable TV or satellite operators, and Telcos. Broadcasters are advised to acquire full rights that include OTT distribution from now on, and also, if possible or relevant, form partnerships with OTT distributors with large subscriber bases to secure lasting influence on an emerging national platform, while limiting investment and avoiding fragmentation across multiple services.
Cable TV and DTH operators are urged to launch compelling OTT video services for their own subscribers if they have not already done so, and attempt to lock in their subscribers by acquiring multi-screen rights. This should involve bundling OTT services with triple-play offerings, and provision of access to services outside the home, making it less attractive or convenient to churn. Along the same lines, strong promotion of HD and 3-D TV will help see off Telco and OTT competitors that lack the bandwidth to provide high resolution content.
Telcos meanwhile should exploit their strong bank balances and growing broadband subscriber base for selling OTT as an extra, while seeking to acquire premium content as BT has done in the UK. Telcos can also score by launching new wholesale services for software-based OTT players, as Netstream has in Switzerland.