It’s no secret that over-the-top (OTT) streamers have crossed the chasm into becoming mainstream sources of video entertainment, particularly given the ever-increasing penetration of smart TVs, smartphones, tablets and other connected devices. The OTT business model has begun to significantly evolve, given the Emmy-winning success of shows like House of Cards on Netflix, and ever-more investment is being made in creating original content across the board. It’s also becoming clear that the quest for differentiated programming on the part of Netflix, Hulu, Amazon et al is shifting their roles toward becoming more viable complementary counterpoints to the traditional pay-TV and broadcast sectors—and less of a competitive threat.
As the market evolves on a global basis, OTT subscription video on demand (SVOD) service providers like Netflix are striving to offer exclusivity and original programming to their subscribers while providing video content anytime, anywhere and on any device. MRG said that worldwide OTT SVOD subscriptions will reach nearly $8 billion worldwide by 2017. The continued adoption of smart TVs, smartphones, tablets and other connected devices has already pushed the market valuation to $4.7 billion, the firm said, while the number of SVOD subscribers exceeds 66 million. Subscription levels could surpass 120 million by 2017.
MRG wrote that “consumers are demanding a personalized video viewing experience and a large variety of content to be available on those devices.” Subscription services like Hulu Plus, Netflix and others that allow for multiscreen viewing are “well suited to fulfill these expectations,” MRG said.
SVOD content acquisition has always been a concerning issue considering that content has been only somewhat “monetizable” with most SVOD subscriptions coming in at under $10 per month. That left most players with a stable of “library content” from studios consisting of older films and past-season TV shows that would otherwise be sitting on a shelf in the studio.
In 2013, the business changed dramatically as most OTT players released originally produced content in earnest—Hulu was actually a first mover, releasing some series all the way back in 2011—and it began to gain real traction with consumers.
Netflix doesn’t reveal viewership numbers for its series, but research from financial services firm Cowen and Company two weeks after House of Cards’ launch showed that about 10 percent had watched the show, and on average, had streamed six episodes of the new original series at one time.
“The success of the Netflix-produced House of Cards and Google's leasing of a 41,000 square foot video production facility in Los Angeles -- plus other content production initiatives by players like Amazon, Hulu and others -- suggest that self-production now looks less like a fad and more like a trend,” Generator Research noted.
Also, release windows and terms began to improve for other content. For instance, last summer, CBS decided to let Amazon Prime air the hit Stephen King series Under the Dome within the same week as it showed up on prime time and cable VOD—with an exclusive on the online streaming distribution.
Part of the reason for the more favorable terms (and, in turn, more robust and attractive content libraries for consumers) is the fact that SVOD can claim a continuing escalation of scale—Netflix topped 40 million global subs in the fourth quarter, making it the largest pay video provider in the world. Also, broadcasters and cable networks are beginning to realize the existence of untapped segments like Millennial “cord-nevers” who have never paid for a satellite, cable or IPTV subscription.
But can the model work from a financial standpoint over the long term?
Content Investment: Not Enough to Take on Pay-TV
In 2012, Netflix spent about 48 percent of revenues on content acquisition, or about $1.7 billion, mostly focused on the acquisition of licenses to stream third-party content. The amount spent on the production of original content was relatively small: just $100 million for two 13-episode seasons of House of Cards as an example.
“On a proportionate basis, this is about what Comcast has been spending on content between 2007 and 2012: 32.4 percent to 41.7 percent of revenues,” Generator Research noted. “Interestingly, this is also approximately what the U.K.’s [Sky] satellite TV provider has been paying for its content between 2007 and 2012: 40.1 percent to 43.9 percent of revenues.”
It added, “We further think that there is little real difference between how the traditional pay-TV model works and how pay-OTT TV will work the future.”
In other words, the firm’s analysis indicates that Netflix’s content acquisition costs, marketing costs or content delivery costs aren’t getting out of control. “In fact, the numbers [through June 2013] clearly show that Netflix has been doing a good job of controlling costs while its business scales,” it noted.
What is a problem, however, is what Generator calls a “suicidal pricing strategy which we think severely undervalues the content and fails to acknowledge that the market can be segmented in order to maximize revenues.”
Generator estimates OTT providers like Netflix, Amazon, Google, Hulu and others spent about $500 million in 2013, and will spend $3.4 billion in 2017. That will represent barely 10 percent of the size of the broadcast TV industry.
“So, even by 2017, for every dollar that OTT providers will spend producing their own content, companies like Comcast will be spending $10 -- which is enough of a difference to keep OTT providers safely in their box,” Generator said. “At least for now.”
Content, the Most Critical Differentiator
In the last year, OTT video has needed to reinvigorate its business model as TV Everywhere rollouts from pay-TV providers and the broadcaster Web sites themselves have done a good job of offering multiplatform access to traditional network fare. As a result, having content that can’t be found anywhere else—as opposed to convenience, user experience, device support or anything else—is becoming the key differentiator over time.
And indeed, MRG said that the move to exclusive and original programming could push the market much further along than it already is: Netflix alone has said that it could hit 60 million subs in the United States within just a few years.
Accordingly, SVOD players are setting up for another bonanza year for investing in original content. Amazon for instance just unveiled its pilot season, with 10 new installments for viewers to watch and vote on. The most popular will be greenlit for production and added to Amazon Prime. The hopefuls are looking to replicate the success of Amazon’s first original primetime-style series, Alpha House and Betas, which were both some of the most-watched content on the service.
In addition to comedies, the new crop includes a handful of kids’ shows, including the first pilot to come out of the Amazon Studios’ open submission process. Gortimer Gibbon's Life on Normal Street was created by a preschool teacher.
Meanwhile, Netflix has formally announced plans to raise $400 million in aggregate debt to "significantly increase our investments in international expansion, including substantial expansion in Europe in 2014, and in original content.”
Netflix disclosed in its 2013 10-K that it plans to spend nearly $3 billion on content in 2014, and $6.2 billion over the next 36 months. Investment in original content will substantially increase in 2014, but still represent less than 10 percent of overall global content expenses. Still, successes like Orange is the New Black, Arrested Development and House of Cards are likely to be just the tip of the iceberg for the company.
Then there’s Hulu, which has a bit of a split identity. On the one hand, it’s owned by ABC, FOX and NBC, and therefore has exclusive deals for current-season prime time broadcast programming that’s viewable the very next day on either its free site or via the Hulu Plus paid service; on the other hand, as TV Everywhere takes over, it’s working on creating an identity of its own, outside the shadow of its corporate parents.
So, Hulu has announced second seasons of four shows it launched in 2013: The Awesomes, Behind the Mask, Moone Boy and Quick Draw, plus a new supernatural comedy that it is co-producing with Lionsgate Television, dubbed Deadbeat.
As a differentiator, it’s clear that viewers respond well to original content. Sony Pictures Television's subscription-free over-the-top (OTT) offering, Crackle, has set a record for itself with one of its original series, Comedians in Cars Getting Coffee. The show, which stars Jerry Seinfeld, has seen 25 million streams, taking the title for the No 1 original series on the service. Since the premiere of season one, Comedians in Cars Getting Coffee has grown tenfold and continues to grow quarter-over-quarter, Sony said.
In each 18-minute episode, Seinfeld picks up another comedian in his car, and they drive around bantering. Season three of Comedians in Cars Getting Coffee has showcased an all-star lineup with Louis CK, Tina Fey, Jay Leno, Patton Oswalt and Todd Barry. The season finale aired Thursday, Feb. 6, with Howard Stern.
Crackle also announced a fourth season of the hit earlier this year. The popular Web series will continue with six new episodes, available exclusively on Crackle platforms and the show Web site.
And finally, YouTube, which has been in the professionally-created original content game since 2011, launched a pilot program last year for a small group of content partners that will offer paid channels with subscription fees starting at 99 cents per month. It also leased studio space for professional production efforts.
“We’ve been building a YouTube partner program since 2007 that enables content creators to earn revenue for their creativity,” said the company, in a blog. “We’ve watched them build amazing channels that have made YouTube into a news, education and entertainment destination one billion people around the world cannot do without.” However, “one of the most frequent requests we hear from these creators behind them is for more flexibility in monetizing and distributing content,” it added. “We’ve been working on that.”
YouTube will share a portion of the subscription earnings back with programmers, in an effort to give content creators a new way to monetize their output. But the pricing—typically 99 cents to $2.99 per channel—also suggests that consumers can essentially craft their own bundles of channels—providing an a la carte approach that cable, satellite and IPTV operators can’t match so far.
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