The Video on Demand (VOD) market is becoming increasingly congested as more and more content providers are joining the gold rush towards customers’ screens. New entrants like Paramount+, Pluto, DAZN, Peacock are some of the tens of apps that are joining incumbents like Netflix, Amazon Prime, and Disney+ in the VOD market. This includes subcategories such as Subscription Video on Demand (SVOD) for subscription-based viewing, Advertising Video On Demand (AVOD) for viewing with advertisements, Transactional Video on Demand (TVOD) for purchasing or renting a single title and the fasted growing new category of FAST (Free Ad Supported TV) services. Most content providers, from local broadcasters to major production studios, are looking to produce their own VOD apps to generate new customers. Moreover, content providers are pulling their content back from other VOD services or aggregators in a bid to differentiate their apps from competitors. But what are the repercussions of this great content migration and how will it unfold? Here’s how the content migration looks in the eyes of the consumer, content provider and Pay-TV operator.

The consumer perspective

Fragmentation of the VOD market means that consumers will have to subscribe to more apps to be able to watch their favorite content – but there’s a limit to how much money they would be willing to spend on subscriptions. Subscription fatigue, which is a decrease in consumer interest around subscription services over time, seems to be setting in. The healthy growth in subscriber numbers that Netflix and other SVOD services saw during Covid-19 is showing signs of slowing down. Subscription fatigue means that consumers will be far more discriminating about which apps they subscribe to and will hop from service to service to follow the content they really want. The churn rate is at 35% in the US and is already a major challenge for content providers.

The content provider perspective

As the market becomes more congested, content providers find themselves with fierce competition, chasing an increasingly smaller piece of the VOD pie. The top 9 VOD services make up 90% of the market while tens of other services are bundled together in the ‘other’ category and are competing for the remaining 10% of the takings. Differentiation is becoming more difficult, especially since the days of content aggregation are long gone and providers are forced to produce their own content.

The path to success for content providers’ own apps is via more and better distribution channels towards customer eyeballs – an effort that can be hampered by geographical constraints and form factor. A potential solution to increasing competition in providers’ ‘home’ markets is to try and expand in new markets, but that comes with its own set of challenges – namely increased costs in infrastructure, marketing and localization.

While the web offers a path to all consumers, TVs and set-top boxes do not offer the same convenience. The Smart TV market is also fragmented, meaning content providers need to support a very wide range of platforms and TV models to be able to distribute their VOD apps via the Original Equipment Manufacturer’s (OEM’s) native app stores. To disrupt the challenge of supporting multiple platforms, Sky has developed Sky Glass to own the TV experience. This solution comes without a set-top box as the TV apps are accessed from the screen itself. While it’s not an effort that can be mimicked by smaller providers, Sky Glass is not compatible with apps that aren’t available on Sky, reiterating an exclusion of other VOD providers and customers who can’t get everything they need. The success of Sky Glass is still yet to be seen.

Similarly, set-top boxes have their own limitations. The Android TV path has challenges relating to app discovery within the Play Store because it’s hard to cut through the noise of other apps. Meanwhile, the RDK path means that only three or four VOD apps will be able to ‘fit’ into the box due to memory constraints. A possible solution to both problems can be the abstraction of the app store to the Cloud, such as AppCloud from ActiveVideo, which would offer content providers an easier distribution path for new VOD apps. 

The Pay-TV operator perspective

Pay-TV operators have long been a distribution channel for content providers, either as content aggregators via linear or their own VOD catalog, or by offering an app store for VOD services. The new, fragmented landscape puts operators on the defensive. This is because Pay-TV operators will need to support a wide range of SVOD apps to reduce customer churn. There are three paths that operators can take to provide their customers with the latest SVOD service: 1) native integration into a customized set-top box; 2) integration on an open source set-top box platform such as Android TV or RDK; or 3) their own HTML web browser on a Smart TV platform.

Native integration of SVOD apps comes with cost and technical constraints, with integrating and certifying each app becoming a time-consuming and costly process. In addition, memory constraints mean that only a handful of apps will fit into the set-top box. Like the solution for content providers, a possible way forward can be to abstract the set-top box into the Cloud to reduce costs, minimize time-to-market and offer an unlimited number of apps. ActiveVideo’s AppCloud platform is aimed at resolving these issues and optimizing the app store virtualization. 

Android TV is an easy way for operators to provide their core TV service to consumers, while at the same time, supporting all VOD apps via the Play store. Google also supports the operator tier app which allows operators to place their own TV app on the home screen of the device and customize the branding and UI. On the downside, using operator-tier apps means that operators need to cede control of the box to Google since they have to offer the core Android TV services (Google Play, Music, Movies & TV, YouTube, and Google Assistant) without being able to customize or remove them. They are also reliant on Google’s roadmap for new features, with little to no chance for input into that roadmap. Also, this approach requires rollout of new set-tops to customers, adding significant cost to offering app-based content.

Finally, operators can forgo a set-top box altogether and offer their own TV app with their linear and VOD offering directly on a Smart TV. This is already in place for many operators. For example, TV neo by Sunrise in Switzerland has the advantage of minimizing costs by letting the TV manufacturer worry about offering an app store. However, this ‘side-car’ approach means the operator is giving up on their direct TV business to have a presence in the market while largely giving up their customers to the TV manufacturer. This path translates into a potential loss of advertising revenues, as operators will not benefit from any revenue-sharing opportunities from VOD apps. In this scenario, any revenue sharing is happening between the TV manufacturer and VOD content providers, while the operator is cut out of the equation entirely. 

The bottom line

It’s evident that this level of fragmentation is unsustainable in the medium to long term. The increase in the subscription market size is disproportionate to the number of new apps entering the market, so content providers will find themselves competing for a smaller piece of the pie while spending more money on acquiring new customers.

It remains to be seen whether this situation will lead back to market consolidation and the aggregation of content by the last apps standing, or to a more innovative approach such as offering bundles of VOD apps via operators or other aggregators to consumers. One thing is certain – we’re in the very early days of the great content migration and the future is still being written for another big year in the VOD market.

To find out how ActiveVideo is bringing app content to the TV, visit our AppCloud page.

Topics: OTT, VOD