App-driven content is here to stay. According to the Conviva State of Streaming Q4 2020 report, consumers spend two-thirds of all streamed viewing on the big screen, making the TV the most important screen for apps. The move to app-driven TV viewing is sparking huge change, upsetting industry business models, driving rapid technological development and radically changing consumer viewing habits.
These forces have conspired to revolutionize everything from consumer expectations, the way programming is delivered, to the balance of advertising investments funding the industry.
The team at ActiveVideo provide their perspective and insight to some of the most important factors in delivering the different types of Video on Demand (VOD) programming today.
VOD is one of the fastest-growing industries globally. Leveraging OTT (Over-the-Top), web-streaming technologies, providers such as Netflix and Amazon have expanded their reach worldwide, delivering a broad range of content, from movies to TV shows, and more. There are several different ways providers use to monetize their OTT services:
Overall revenues expected to increase substantially and the complete OTT content distribution chain is looking to capitalize - Advertisers are adjusting accordingly, transitioning budgets towards what they recognize as a more targeted and effective medium. This conspires to further pressurize revenues of traditional PayTV providers.
In Part One of 'The business of OTT', Ed Lee and Chris Linden review the very latest on Content Providers, apps and new business models, including the growth of AVOD and ad-supported offerings.
The challenges of delivering OTT VOD services to subscribers can be summarized as follows:
A critical challenge facing OTT content providers is cost-effectively maximizing the reach of OTT apps and content in the context of huge variability in device types, operating systems, and middleware.
According to the Conviva Q4 2020 State of the Streaming Industry report, consumers globally spend 66% of all viewing hours on the big-screen (Connected TV devices or Smart TV’s), making TV the screen of choice by far. However many set-top boxes and Smart TV’s don’t meet the processing and memory demands of OTT apps - Enabling apps on these devices, more often than not requires a new set-top, a third-party OTT device, or an HTML5 app, back-ported to the existing device.
In the case of an Operator rolling out new services, replacing devices adds tremendous capital expense and long timescales for large deployments. Equally, for both OTT providers and Operators, the complexity and cost introduced to the development life cycle by supporting just one OTT app across multiple hardware and operating system configurations extend development times, add cumbersome updates, and create inevitable, inconsistent user experiences across platforms.
Consumers are constantly exploring how they access new OTT content services via their remotes. From streaming sticks/dongles, gaming consoles, smart TVs, and modernized set-top boxes, the big-screen is the new “portal” for all TV and OTT experiences.
However the increasing number of devices, combined with the different middleware and operating systems puts tremendous pressure on optimizing, launching and maintaining apps for every device type. Often developers find themselves prioritizing platform choices based on the fit of their content offering to device-using audience; subscriber acquisition and loyalty on that platform; and technologies - such as DRM, Advertising, and analytics.
Flexible coding languages provide a degree of ‘write-once, use-everywhere’ code automation however they rarely integrate with base-level hardware capabilities native and unique to every device type (such as Network, DRM, Buffer/Codecs, GPU or IO etc) - Neither do they address extensive app/device testing and validation.
In essence, the challenge crystalizes in more apps, more devices, more OS, more complexity… This conspires into a forced trade-off between reach of the app, or operating expense associated with porting and maintaining apps across multiple platforms.
The consumer motivation to switch from traditional PayTV services was fuelled in a large way by the desire to gain more control over their viewing - in terms of selecting what content they want to watch, when, where and how they want, while also reducing monthly subscription costs. However as each new SVOD OTT service drives demand through their unique content offering, consumers are expected to pay additional subscription fees - For some, these monthly fees quickly escalate beyond the original costs they sought to reduce.
The United States is a market where these dynamics are in sharp focus - According to the Antenna Streaming Growth Report, Q3 2020, SVOD subscriptions have grown 37% annually to Q3 2020, up 4% from Q2. During this time, a study by Deloitte (digital trends survey, 14th edition) identified that an ‘average’ US consumer had 12 paid media and entertainment subscriptions, peaking among millennials who subscribed to an average of 17. Of these the study found an average of four were SVOD services.
So while these subscriptions included more than OTT Video (incorporating cable, music, gaming etc.), the rapid adoption and market growth of subscription services surfaces the issue of subscription anxiety - 40% of Millennials described feeling ‘overwhelmed’ by the volume of their subscriptions and 43% intending to reduce them. This applies to SVOD - Fatigue starts to manifest itself in the monthly churn rates, with a quarter over quarter increase in Q3 2020 to 6.2% monthly.
SVOD fatigue does not affect all providers equally however - Netflix, with 35% of the US market at time of writing, demonstrating the most loyal subscriber base. While the market continues to grow, this may not present a challenge to OTT providers but the moment growth slows or stalls it will become painfully acute, and likely to drive considerable consolidation.
The OTT market is both large and growing. Titans such as Netflix and Prime have already established benchmarks for content breadth, user experience and subscription costs, in the minds of consumers. For any prospective new entrants, a clear point of differentiation must exist - A growing contingent of viable, niche providers are gaining traction, opting for more unique content curated and targeted to well-defined fan bases. Inherently these niche services have limited reach in a single geographic market (a report from BCG, studying new, US 2020 SVOD adds, no niche service gained more than 5% share) however the approach presents another way to gain a foothold in the market.
Within these niche providers, new variants of business models have started to appear - One of note is a ‘tipping’ model - namely making content both ad and cost-free, however providing a payment platform to viewers who want to make a contribution for the content they enjoy. There is no substantive data at this time to support whether this will work or gain traction, but the innovation exists and is being tested among niche content offerings.
FIPP/CeleraOne Global Video Streaming Services Subscriber estimates. (Chart produced from data collated by FIPP/CeleraOne in their Global Digital Subscriptions Snapshot.) Note at time of publishing Netflix had exceeded 200m subscribers, though that is not reflected in the data given timing.
Clarifications provided within that report:
Local content and local language also presents a viable angle for differentiation - While many western viewers may not have heard of iQIYI, Tencent or Youku, they represent three of the top-5 video streaming services globally, serving dominantly the China market. With more than 320m subscribers according to the FIPP/CeleraOne Global Digital Subscription Snapshot, their combined audience rivals Netflix plus Amazon Prime. These established western brands are not standing still of course, and seek to rapidly globalize their own offerings either through developing and syndicating local language content to expand offerings and appeal in new geographies.
One mostly unaddressed area for providers is with the millions of subscribers around the world using legacy set-tops for viewing. It is estimated there are more than 300m legacy devices deployed globally which were never designed to deliver TV app-level functionality. That does not necessarily preclude access to this market however - While the devices themselves may not be able to host or run apps, virtualization solutions present a clear solution to the problem.
in Part Two of 'The business of OTT', Ed Lee and Chris Linden explore the motivations and economics driving content providers to build app-based distribution models, including the need to rapidly achieve scale and time to market, delivering the very best user experience.
There are many publications forecasting the value of the video streaming market, with publically available, well-reported data. The graph below addresses the range in forecasts for the value of OTT VOD markets, providing an indication of consensus. These forecast 11% CAGR from 2020 to 2025 for SVOD and AVOD markets to approximately $100Bn and $60Bn respectively, with TVOD (in this case, combining Pay per view and DTO/EST) growing at approximately 7% CAGR to $17m over the same period.
Consensus suggests continued strong growth of the global VOD market in a range between $160Bn-$190Bn by 2025.
Chart illustrates the forecast range (high-low) of the value of VOD Market. Data from publicly reported sources referenced in fair-use to support editorial commentary: Digital TV Research (cited in Broadband TV News and nScreen Media), Statista, Strategy Analytics, Ampere Analysis (cited in Hollywood Reporter) and ActiveVideo internal estimates. Timing of the reports may account for the large range in the 2020 AVOD market, as the overall advertising market was negatively impacted by CoVID19. The CAGR was calculated on 2020 midpoint to 2025 midpoint of the range in each category.
Consensus suggests SVOD will grow at 11% for the foreseeable future, and with its higher revenue starting point, it will continue to outpace revenue for AVOD and TVOD. Indeed, three of the five FAANG stocks chose SVOD as their model of choice.
But why does the subscription model perpetuate? To make AVOD a viable alternative to SVOD requires substantial scale - Applying some basic math to top-line statistics of Netflix and YouTube (the main AVOD service of the Google/Alphabet business):
This is a classic equation of value vs scale - Youtube has 10x the number of users of Netflix however Netflix secures >12x the revenue in subscriptions vs advertising revenue for YouTube.
Perhaps it’s also worth remembering in 2017 YouTube launched 'YouTubeTV', its $65 per month subscription-based, live-streaming TV service in the US. At time of writing estimates suggested the subscriber base had grown to more than 3m! Those 3m subscribers generate the equivalent advertising revenue of 12% of the regular Youtube user base!
Transition from linear TV advertising budgets are fueling a disproportionate rise towards Connected TV (CTV). CTV advertising represents pre-roll or in-stream advertisements, specifically for viewing on a connected TV. This is different from the umbrella of OTT advertising which may also be viewed on Phone, Tablet or Computer for example. As CTV is inherently big-screen, it is more likely to be seen by more than one individual, increasing reach and efficiency over OTT advertising.
An October 2020 study of CTV advertising expenditure in the US, eMarketer suggests a growth of 27% to $8.11 billion through 2020, and a CAGR of nearly 23% YoY to $18.29 billion by 2024. While the US is one part of a global advertising marketplace worth more than half a trillion dollars, the trend is undeniable - And for good reason.
CTV advertising is extremely effective at targeting an audience and delivering a relevant message, enhancing RoI by incurring cost only when the ad has been consumed. Fusing the forensics and quantifiability of digital with the richness of video, CTV advertising presents a major boost on traditional linear TV advertising.
From the perspective of an advertiser, ad effectiveness can be measured on the fly, allowing different creative executions to be tried, tested with the most effective prioritized. It also provides for audience retargeting, so an ad consumed on the TV may then be repeated on a different device, in a different medium, at a different time.
Source: eMarketer October 2020. US Connected TV Ad Spending through 2024, $B and %Total media ad spending. Digital advertising that appears on CTV devices including display ads that appear on home screens and in-stream video ads that appear on CTVs from platforms like Hulu, Roku and YouTube. Excludes network-sold inventory from traditional linear TV and addressable TV advertising
We have seen several US based and International media companies publicly signal their global intentions for both SVOD and AVOD services to reach audiences globally. DAZN, Apple+, Netflix, Disney+, Pluto TV, Tubi TV, Paramount+, and many more are reorganizing and investing heavily in deploying a “World Tour'' ideology.
Netflix in an October 20, 2020 shareholder letter made their intentions clear - ‘We strive to be a global entertainment service that can satisfy the needs of members all over the world. Commissioning and producing local language content is an important part of that.’ As the world’s most popular SVOD streaming service, Netflix saw revenues from LATAM, EMEA and APAC operations grow to $13.3Bn in 2020, representing 54% of total revenues, over the same period - The largest regions contributing to growth over 2020 were APAC (57% increase in paid memberships and 61% increase in revenues) and EMEA (29% increase in paid memberships and 40% increase in revenues).
Similarly Amazon Prime Video in their Q3 2020 quarterly statement confirmed not just their commitment to Amazon Studios original movies, but a dedicated focus on local language programing, including ‘Putham Pudhu Kaalai’ in India, ‘Peep Time’ and ‘Documental S8’ in Japan, ‘Pan y Circo’ in Mexico, and ‘All or Nothing: Tottenham Hotspur’ in the UK. They also confirmed live international rugby games will be exclusively available to UK Prime customers including the Six Nations.
With this ambitious globalization effort comes several challenges - Not just requirements in language and localized content but perhaps most importantly, selecting and negotiating distribution with a growing multitude of CTV app stores, TV devices, and pay TV distributors options. For AVOD services there is also the need to evolve internet type CTV advertising ecosystems on a country-by-country basis which are both targeted and real-time data-driven vs the more traditional broadcast TV models.
TV was largely built on the currency of advertising - With the maturing of SVOD we are seeing the introduction of ad supported tiers to more broadly increase reach. And while in value SVOD revenues exceed those of AVOD, in terms of time watched, AVOD continues to accelerate. According to Nielsen, AVOD is growing faster than SVOD in the US where more than 100 million people watch YouTube and YouTube TV on their TV screens each month.
A crucial element in favor of AVOD is targeting efficiency and supporting performance data for advertisers. Data drives decisions. The ability to pinpoint a target audience combined with the assurance of ad serving and consumption provides a prospective advertiser with security in their investment. This is something linear programming can only offer at best by proxy.
Trends such as SVOD fatigue, suggest reduced barriers to content access will help early adoption and market foothold. The business opportunity is hardly modest - addressing the AVOD ‘elephant in the room’, Google's YouTube, which accounted for about 11% of the company's total revenue, reported $20 billion in revenue through 2020.
While many contenders gasp at such performance, the AVOD model offers a logical opportunity for all OTT Providers to establish their businesses. Quite apart from the YouTube example above, viewership is growing across the board - In the US services such as Pluto, Tubi, and Vudu have rapidly gained active users and so the advertising dollars have followed. Consensus suggests a 11% CAGR YoY to 2025 in AVOD revenues.
As indicated in What is AVOD / SVOD / TVOD / PVOD?, there are three basic models that OTT Providers use to commercialize services and justify higher fees. These however are constantly evolving and hybrid models have emerged which bridge or blend the basic AVOD / SVOD / TVOD pillars.
There are three to four points of service differentiation representing the main influencing factors for price:
Investigating some of the most popular services in the market today, starting with a pure SVOD billing model, Netflix charges a functionality-focused Good / Better / Best service fee. The core content offering remains the same for all subscribers. The basic service offering however starts with Standard Definition viewing on one device for $5.99 monthly, scaling to through HD to uHD and four simultaneous streams for $18.99 per month.
iQIYI, the China-based, pan-Asian entertainment offering leverages a hybrid model, starting at zero-cost to local viewers however with subscriptions for content offerings and viewing functionality. A basic package delivers standard definition, single screen, ad-supported content. A ¥19 ‘Gold’ subscription, goes ad-free, 1080p on up to two screens - It also unlocks early access to content. The ¥40 Star-Diamond package grows to four screens, uHD, Dolby Surround and exclusive, premium and downloadable content.
Hulu also delivers a hybrid model, with a basic $5.99 monthly ad-supported subscription, viewable on two screens, This scales to $11.99 with no-ads, and upwards to $70.99, with an ad-free, LiveTV service as a credible replacement to cable offerings. It doesn’t stop there - Subscribers can opt for premium add-ons ranging from Starz, Showtime, Cinemax and HBO Max at various prices up to $14.99 per month each. Unlocking unlimited screens and CloudDVR functionality adds another $14.99 monthly. YouTubeTV also follows this service and pricing approach.
Amazon Prime however introduces the prospect of a basic Video-only service for $7.99, scaling to full $12.99 Prime offering, including free delivery of purchases from Amazon, early access to shipping deals, Prime Music, limited Prime Reading, Prime Photos, Audible, and discounted Twitch games. In addition to this, users can add channel subscriptions and access TVOD services for video rentals or purchases.
Given the different approaches taken by market leaders, their chosen pricing model lends itself to their core strengths - In the case of Netflix, the breadth and freshness of content, For Amazon the augmentative strengths/capabilities and for iQiyi the scale of content relevant to a pan-Asian audience.
Looking past commercial models, the primary incentive for any prospective subscriber always remains access to a relevant and desirable content catalog. These consumers justify costs by a better viewing experience, be it ad-free viewing, higher resolution, content mobility etc. or the perceived value of the total offering.
Conversely the challenge facing OTT providers is maintaining profitability and loyalty, while increasing subscriber base and ARPU - The successful find the balance between scale (driven by catalog and accessible fees), and revenue (driven by value-add up-sells). For both subscribers and providers however the service price ceiling quickly comes back into focus as total subscription costs stack close to the original premiums of the PayTV providers that motivated people to cord-cut in the first-place.
TVOD in the form of pay-per-view has long played a role in live sporting events such as Boxing, Wrestling and Premier-league Football (soccer) - 2020 however saw it really start to make an impact in the realm of movies.
Universal's ‘Trolls World Tour’ was the first film from a major studio to skip a planned theatrical release since the forced closure of cinemas in the wake of Coronavirus. The day before its scheduled launch, Universal made the movie available for home rental for $19.99 and in doing so, it became one of the most successful PVOD releases of recent times. After 3 weeks on-demand, "Trolls World Tour" earned more than $100m in rental fees, doing more for Universal than the original Trolls movie achieved over five months in theaters. It was a trend set to continue.
Two months later, after a postponed theatrical release, Disney launched it’s live-action remake of the 1998 animated movie, Mulan on the Disney+ streaming service - For a $29.99 early access fee, subscribers could watch as many times as they wanted. In the opening weekend the movie became No.1 on the streaming site, reportedly generating $35.5m revenue for Disney.
Putting this into perspective, a studio may yield 60% of US and 20%-40% of international ticket sales in an opening weekend. While $35.5m may not qualify the movie as a run-away success in traditional terms, a vertically integrated production, launch and distribution changes traditional movie economics substantially - not just because every dollar earned was a dollar for Disney, but because Disney reportedly also saw a 68% increase in subscriptions to its service, driven by the movie launch.
As the lingering tail of Coronavirus continues to impact theatre venues around the world, putting the pressure on the $40B+ global box office for films, it’s reasonable to assume more major releases will launch direct to TVOD/PVOD.
AppCloud can directly help OTT providers of VOD services deliver more revenues in three unique ways:
Expand reach: AppCloud has been designed to work with any GPU-enabled IP device carrying the AppCloud client - That means your app can reach more devices, faster including hard-to-reach Operator clients which you might never have been able to previously access.
Ready for Distribution, everywhere: ActiveVideo integrates your app into a pre-configured AppCloud instance. That means your app is immediately available and visible to consumers as soon as they access AppCloud, without anyone having to download and install it.
Performance: As AppCloud runs apps in the cloud, it delivers consistently better performance on any device. That means the UX is delivered precisely the way it was designed. Sharp, snappy user interfaces and no waiting - That drives better user adoption and engagement, meaning more ad-impressions and more revenue.
It doesn't stop there - AppCloud also helps streamline operational efficiency:
Reduce the number of platforms an OTT provider needs to support: AppCloud helps overcome the need to develop and maintain apps on multiple OS and middleware, meaning development resources can focus on one OS - Android, dramatically reducing overall budget
Overcome the hurdles of porting and certification to different devices: As AppCloud leverages the existing APK, there is no need to undertake the time consuming and costly process of porting, certification, and updates to multiple clients
Free the app from limitations of hardware: As AppCloud runs apps in the cloud, performance is not limited by the capabilities of the client device. This means apps do not need to be designed to lowest-common-denominator hardware, delivering best-in-class performance and user experience every time!