Europe better placed than U.S. to defend against cord cutting

Internet media and research group IDATE has just published a study suggesting that cord cutting will spread from the U.S. to Europe, arguing that the same market forces will apply there. It contend, therefore, that European pay TV operators should learn from their U.S. counterparts how to defend against OTT players, especially U.S. invaders like Netflix.

While it is true there are some lessons to be learned by European pay TV operators, the central assertion that Europe is behind the U.S. over OTT as it has been over many emerging market and technical developments is not quite right, and certainly fails to account for the significant differences between countries. Some of them are not lagging behind the U.S. at all when it comes to online consumption of TV content. The U.K. population is well up when it comes to Internet viewing because of the phenomenal success of the BBC iPlayer catch up TV service, which is also available via the two leading pay TV platforms, MSO Virgin Media and DTH operator BSkyB.

Public service broadcasters have also driven OTT consumption in other European countries, particularly the Nordics, with Finland’s state-owned YLE providing catch up services through its Areena OTT service accessed regularly by well more than 500,000. In Sweden, state-owned broadcaster Sveriges Television was an OTT pioneer, launching its SVT Play in December 2006, followed a year later by a dedicated YouTube channel. This now offers more than 2000 hours viewing, with most of SVT’s content available for 30 days, along with some imported material from foreign broadcasters.

Some European pay TV operators have also been at the frontier for OTT, notably Viasat, the DTH company owned by the Swedish media conglomerate Modern Times Group, broadcasting from London to target markets in the Nordics and Baltic Countries. Viasat originally entered OTT in May 2007 as Viasat On Demand, an online video streaming service only, providing feature films, live sports events and TV series. But in March 2011, it was rebranded Viaplay to reflect its new status in catch-up as well, enabling customers to access pay TV content they have subscribed to from any Internet connected device by entering a single ID and password. The content selection was better than that available on many OTT services elsewhere in Europe, with live sports such as UEFA Champions League, Formula One, MotoGP, NASCAR Sprint Cup Series and the European Golf Tournament, as well as blockbuster movies, all available pay per view.

Far from having lessons to learn from the U.S., Viasat may have some wisdom to export, largely in terms of pricing and packaging. What the U.S. experience does tell us is that cord cutting is the inevitable consequence of uncompetitive pricing, and also perhaps the unwillingness of pay TV operators to allow customers to access major events on a pay per view basis rather than insisting on a subscription. Pay TV operators have feared that they will give up lucrative subscription revenues and also open the door to cord cutting by offering pay per view, but Viasat has shown that this need not be the case.

What is true, as the IDATE report points out, is that pay TV operators are caught between the desire to protect existing revenues and business models, and the urgent need to defend against cord cutting by introducing compelling OTT offerings themselves. But rather than waiting to learn from the U.S., European operators are quite familiar with the mistakes that have been made by major pay TV operators there, primarily by the leading MSOs such as Comcast and Time Warner, that have suffered most from cord cutting, although even DirecTV, the world’s largest DTH operator, has been starting to feel the ill winds at home.

The main mistake has been in raising prices at a time when, as IDATE acknowledges, OTT providers such as Netflix offer monthly subscriptions for the price of a DVD. Subscribers to cable TV services, on the other hand, tend to find that their bills are swollen as they sign up for new options or package upgrades, topped up further by VOD purchases. For many subscribers, especially those who have lost their jobs or had to take a pay cut during the economic downturn, there comes a point when they see that they can get much the same content from Netflix or Hulu for a fraction of the price, and then cut the cord.

This is hardly news to European operators, and some like Viasat have learned how to combat cord cutting, which is to be competitive on price, and allow pay per view purchasing. Like it or not, this is how operators will have to defend against cord cutting. Whether this will be enough to see off the looming threat posed by Google TV and other big players when they get their act together is another matter. That, though, will depend as much on content bargaining power than pricing, as all the OTT players know well. Hulu, for example, spent $500 million on new content in 2012, and attributed its runaway success to this rather than competitive pricing, posting revenues 65 percent up at $695 million. But then its prices are already competitive, so it does not need to become more so. Content may be king, but it is low prices that win the loyalty of its subjects.