What is the Future of PayTV Strategy?

TV Connect / Knect365

The priority in 2018 will, for much of the industry, remains defending a relatively mature and lucrative PayTV ecosystem. On the one hand, this means ensuring that PayTV retains a content and service advantage to all other video services in the market to justify high pricing. On the other hand, and according to analysts Ovum, this means crafting a “defensive hedge” against rapid subscriber growth deceleration by offering lower priced direct to consumer platforms to attract viewers deterred by traditional PayTV.

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PayTV providers have responded to the threat from digital first streamers with multiscreen TV Everywhere services, operator provided catch-up TV and a slimmed-down range of online channels and services that are provided for a lower fee, often with no fixed contract or set-up fees, as stand-alone services. Sometimes known as virtual MVPDs (multichannel video programming distributors), Ovum has split the field into three categories and dubbed them Subscription Linear (SLIN).

The SLIN first category, PayTV OTT, includes the likes of Sky’s Now TV, DirecTV Now, DISH-owned Sling TV, Hulu and YouTube TV while the second (Direct to consumer, or D2C) contain Starz, NHL.TV and NMA League Pass. The third brackets games streaming services such as Twitch Prime and Machinima.

Ovum suggests that such services currently generate a fifth of global OTT subs and that by 2022 this could rise to a third.

Embracing OTT

Looking at specific markets outside the U.S, Ovum forecast that in the UK there are currently 13 million OTT video subscribers, of which 9 million are SVOD and 4 million SLIN. In Germany the figures were 7 million (5 million v 2 million) and in France around 4 million (2.5 million v 1.5 million).

As well as making their own apps available on retail devices, a number of operators allow external apps to be incorporated into their previously closed set-top box-based ecosystems.

OTT TV has in fact proven additive to PayTV in Europe rather than resulting in the kind of cord cutting that has taken place in the U.S. Figures from IHS Markit, show that Netflix now has more video subscribers in Europe than any other single provider, but Sky is still the leading player in revenue terms, followed by Liberty Global, with Netflix third. Netflix has 46% of Europe's online video subs, followed by Amazon with 16% (per IHS Markit), but pay TV operators also have a significant share.

Consensus is that, with the right strategy, established operators can defend existing revenues while tapping into the consumer’s love affair with SVOD and the emerging consumer market for smaller, contract-free linear bundles.

Nonetheless, Media + Networks revealed key concerns such as “striking the balance between OTT, apps and linear delivery” and “creating a commercial model that meets the increasing demands of consumers.”

Both of these make sense, given that the future for PayTV is likely to be a hybrid linear/on-demand model. “PayTV service providers need total clarity regarding the positioning and go-to-market strategies for all the types and tiers of service they offer,” advises Ovum. “Strategies for each service offered must reflect defined commercial outcomes and positioning in increasingly complex markets.”

Is a service meant to drive raw subscriber growth converting unaddressed audiences in terms of paying for visual entertainment or by attracting subscribers from another TV service provider? Is the strategy intended to drive revenue growth from existing subs (by growing ARPU) or drive sales of a bundled proposition?

“Establishing what the strategic imperative is for a given service tier enables service providers to determine a host of other service and go-to-market factors,” states the analyst, listing these as branding, packaging, pricing, service, and infrastructure capabilities (UHD, nDVR or exclusive content investments).

PayTV service providers must also appreciate” the brutality of the competitive threats” emerging from digital media and technology. These include companies capable of operating services at negative margins in exchange for subscription and market share growth.

Such companies tend to enjoy very long investment horizons and persistence; for instance, in Ovum’s view, Google will never stop trying to dominate TV and video distribution.

“Such is the size and significance of human entertainment consumption, that Google must access the activity it generates in order to feed its core capabilities around search and machine learning,” asserts Ovum’s Tony Gunnarson.

Targeting targeted advertising

Media + Networks underscored the continued trend towards convergence. Broadcasters and traditional PayTV platforms are shifting into OTT and mobile while online players such as YouTube are seeing growth on traditional TV screens. In turn the opportunity to apply data-driven targeting and household-level addressability, as well the ability to apply programmatic trading to the TV market is galvanising advertisers, agencies and broadcasters across the continent.

While Sky has led the way in Europe with Sky Adsmart (and is reportedly on track to boost advertising sales to £1bn by 2020), it is the major commercial free-to-air broadcasters which are best placed to grow the connected TV advertising space.

Scotland’s STV has been using digital ad insertion since 2014. More recently, Channel 4 followed suit, and last November so did ITV.

Now, a pan-European initiative led by the DVB aims to scale the market dramatically. At TV Connect, DVB Chairman Peter MacAvock will explain how the Group is seeking agreement on a set of commercial requirements by June 2018. The DVB will use this to formulate a standard specification, based on broadband and linear TV platform HbbTV, in turn paving the way for the first market implementations in 2020.

There are aspirations that this targeted advertising standard will go global and that it will also benefit PayTV. Facing down the risk of fragmentation, standardization it is argued would lead to simplified trading and measurement for advertisers - and that’s a big selling point when judged against Facebook and Google.

Data the new oil

Data is the essential component greasing the TV business of the future. Data about consumption behavior, subscriber demographics and individual viewing preferences as well as wider search histories are already being used to commission programming and target ads. In the future, data will be so granular and crunched so instantaneously with Machine Learning algorithms that content will be packaged and distributed to us on a personalized basis.

Attention will have to be paid to the Global Data Protection Regulation (GDPR) is legally enforced this month. One impact of this should be to level the playing field between broadcasters and what they see as the less regulated internet landscape for digital ads.

The new EU ePrivacy Regulation, tied into GDPR, will require businesses operating in Europe to obtain explicit consent to use cookies and provide clear opt-outs to users.  The law should curb Facebook’s and Google’s ability to collect and use consumer data, restricting them from targeting ads based on data from OTT services such as WhatsApp, Gmail and Messenger.

With digital at the heart of their business the tech giants have a big head start and PayTV is playing catch-up. Sky’s plan to ‘ditch the dish’ and carry all its channels and on demand content over IP is part of its strategic. “This is a major development for Sky that will open up headroom in existing markets, improve our cost to serve for some customer segments, and offer a future way to take Sky into new markets,” explained CEO Jeremy Darroch.
Italy will be the testing ground for the new wave of online Sky services this year – although customers will still require a Sky box – followed by Austria with the UK following in 2019.

The move will initially target 6 million potential customers in Europe who live in properties that cannot, or will not, have a satellite dish.

Follow the discussion at TV Connect:

A quartet of executives from major European telcos -  Telecom Italia, BT, Deutsche Telekom and Telekom Austria - query the potential of providing content across multiple platforms in Operator spotlight: Going back to basics [9 May, 11:35 - 12:20].

PayTV cable satellite operators in central and east Europe go under the spotlight [9 May 14:50 - 15:30] with the CEO and founder of Viasat World, Irina Gofman.

What is the ceiling for data collection and ad personalisation? Matt Bryan, Head of Data and Insight for YouView explains all in Data: the new oil? [9 May 15:15 - 15:30]

Hear the DVB update attendees about its proposal for a standardized approach to tackling Targeted Advertising [9 May, 17:05 - 17:30].