The State of OTT 2022

Streaming Media

article here

The rapid growth we've seen in OTT over the past decade combined with recent major subscription video-on-demand (SVOD) launches may at last have reached peak acceleration. The market is expected to hold some of its COVID-related progression, but subscriber expansion is slowing—especially in the saturated domestic market.

Research firm J.D Power is among those reporting that the mass lockdown of 2020 acted as an impetus through 2021 for a shift in customer behavior that has permanently altered the way content is consumed. Based on a survey, it says that by June 2021, U.S. viewers increased their streaming subscriptions to an average of 4.5 SVOD providers, up from 3.9 providers in December 2020. A United Talent Agency survey from June 2021 notes that 71% of respondents plan to use more than one SVOD post-pandemic. "Pandemic behavior appeared to mostly stick, while the launch of other streamers like Discovery+, Peacock, and a rebranded Paramount+ helped increase both subscription online video homes and services per home," suggests S&P Global Market Intelligence research director Deana Myers.

According to research company Kantar, the number of American homes signing up for a new subscription was 3.9% between April 2021 and June 2021, down from 12.9% in the same period in 2020. Further evidence of slowing market growth includes Netflix's Q2 2021 gain of 1.5 million, which was down dramatically (85%) from the same period in 2020, when the company reported 10.1 million additions. Disney+'s lowly 2.1 million new subscriptions for its fiscal Q4 2021, which ended Oct. 2, 2021, are down from the 12.6 million added the previous quarter.

Disney has earmarked a whopping $33 billion for new content in 2022—about 39% more than WarnerMedia/Discovery, the industry’s second biggest spender.

Blame is attributed to stay-at-home gains petering out and dog-eat-dog competition, with consumers fatigued by choice while needing to manage their budgets. Still, U.S. homes with streaming subscriptions remained constant at 75%, translating to about 95.8 million households, according to Kantar.

The J.D. Power survey shows that average monthly household spend on all streaming services was $55 in August 2021, up 45% from April 2020. Disney, for example, raised the price of Disney+ in March 2021 to $7.99 per month, or $79.99 per year.

As observed in our article "The State of Video Monetization 2022," judging the success of SVODs on subscriber numbers alone can be misleading, since other factors, such as average revenue per unit (ARPU), are at play (and in the case of Amazon Prime Video, growth in the retailer's overall sales).

Although no new major streaming platform is expected to launch in the U.S. this year, the home market is locked in terms of growth. Streamers will have to adopt a variety of tactics just to stay in the game, let alone recoup multibillion-dollar content spends.

Streamers could pay less for content, but this doesn't seem to be happening. Content spend is rampant, with Disney earmarking $33 billion for 2022, nearly double that of Netflix' $17 billion and considerably larger than the combined WarnerMedia/Discovery war chest of $20 billion. Apple, which generated $365 billion in sales last year, has ample finances to blitz the market.

With churn at all-time highs of between 30% and 40%, content origination is one of the chief weapons in the streamer's arsenal. But to maintain growth, a massive increase in non-U.S. subscribers is essential. Other tactics include offering different service tiers, such as ad-supported options, as outlined in this issue's "The State of Monetization"; growing content libraries through M&A; wooing younger demographics with social engagement; and perhaps a more diverse content portfolio than film and TV shows. I'll explore these next.

Go Global

With Netflix and Amazon Prime Video available in most countries worldwide, competition among major streamers is now international. In 2021, Disney launched Disney+ in Hong Kong and South Korea. Peacock began its European rollout, as did HBO Max, albeit hampered by existing licensing deals—notably with Sky in the U.K., which means the U.K. market is off-limits to HBO Max until 2025.

Emerging markets in Latin America, Africa, and Asia tend to generate smaller margins for U.S.-based streamers. The Economist calculates that Disney+ makes less than $1 per month from subscribers in India, while The Hollywood Reporter says that Netflix was forced to slash its Basic plan by 60% in the same country to boost subscription growth and become less of a niche service there.

Even in richer countries, margins are lower than in the U.S. The average U.S. cable bill comes to nearly $100 a month, according to Ampere Analysis. In Britain, it is half that. And whereas Americans are ditching their overpriced cable packages in record numbers, freeing spending power for streaming, Europeans seem to be much more attached to their pay-TV subscriptions.

Increased reliance on international subscribers also means that more content is originating outside of the U.S. This process has been accelerating, with 27% of 2020's most popular titles coming from countries other than the U.S, up from 17% in 2019, Ampere Analysis' Rahul Patel reports in an article on the company's site.

In addition, Patel notes that "from January to October 2021, 37% of the 100 most popular TV shows were produced outside the USA, compared to just 9% of the top 100 movies. Canada, Japan, South Korea, Spain and the UK are emerging as production hubs of globally popular TV shows. The influence of Netflix Originals on this trend is particularly noticeable. Shows like Squid Game, Money Heist and Lupin exemplify the globally popular Netflix [Originals] produced outside the USA. Each became the top title on the platform in over 70 markets (out of the 85 tracked), with Squid Game maintaining the dominant position for at least 14 days in 75 markets."

Shows like Lupin have demonstrated the drawing power of Netflix Originals that were made outside of the U.S.

Patel continues, "This highlights Netflix's ability as a global OTT platform to promote its titles and make them worldwide hits. With more platforms, including HBO Max and Paramount+, expanding internationally, and Disney launching its suite of SVoD products in more markets, we can expect to see an increasing share of the year's most popular content coming from outside the USA."

Go Bigger

Quality, exclusivity, evergreen content, and quantity of content judged against cost are reasons consumers will duck in and out of OTT services—and why streamers are being forced to merge and acquire.

None of the current top five SVODs—Netflix, Amazon Prime Video, Hulu, Disney+, and HBO Max, as ranked in a survey by Whip Media—should be complacent. "Staying in that group will depend on having an abundance of both compelling original content and evergreen library content to satisfy users when certain originals inevitably decline in popularity," the company reports.

Apple TV+ is in the most precarious position, Whip Media suggests. That backs up a January 2021 MoffettNathanson survey that found that 62% of Apple TV+ subscribers are on a free promotional offer for buyers of Apple's hardware devices and are prone to churn. "Given the importance consumers place on having an adequate library, it's clear Apple's deficiency in this area is limiting its appeal," Whip Media asserts.

Apple has so far eschewed buying content catalogs, but that could change in 2022. Potential deals could be made for film collection Criterion, Lionsgate Entertainment, or AMC Networks, although these could also provide cannon fodder for Netflix. The May 2021 $48 billion merger of AT&T's entertainment unit, WarnerMedia, with Discovery has yet to unwind. Combining HBO Max and Discovery+ "may be awkward and possibly alienate either audience as the two have little overlap in terms of interest," suggests S&P Global Market Intelligence's Myers. However, David Zaslav, the head of WarnerMedia/Discovery who engineered the deal with AT&T CEO John Stankey, is bullish about amassing 200–250 million global subscriptions within 5 years.

"Discovery is to WarnerMedia what Fox was to Disney," comments Sarah Henschel, streaming analyst for Omdia, in a WIRED article. "Aggregation and consolidation are just going to be the fastest ways to be the biggest. I think we'll probably get to a top three to five companies and that's where the economics of these streaming services are going to settle."

The chessboard includes Comcast/NBCUniversal and ViacomCBS/Paramount Pictures, both of which have strong content assets, but not the scale to compete with the top five. The companies are uniting in Europe in 2022 with new streamer SkyShowtime, and a domestic pact is seen as a natural fit.

Going big also means gaining intellectual property with which to retain subscriber loyalty and spin off films, episodic TV, games, and metaverse-related interactions. Disney is the master, with its huge array of Marvel, Star Wars, and Pixar titles scheduled over the next few years. There's a land grab for intellectual property in particular that already resonates with the public—hence Amazon's $8.45 billion purchase of MGM, which includes the James Bond franchise and a hint by Amazon that it will create TV shows from the studio's catalog.

Amazon is already doing this with a mega-budget series based on The Lord of the Rings. AppleTV+ has chimed in with an adaptation of the sci-fi classic Foundation; Netflix has hopes for the dramatic series 1899; and HBO Max will launch the Game of Thrones prequel House of the Dragon in 2022.

WIRED suggests, "Controlling Hollywood stopped being just about who had the biggest opening weekend at the box office or a massive hit during prime time; a turf war over intellectual property became a land-grab effort to see who could bulk up their streaming service with the best library of content."

Go Interactive

An emerging challenge for video entertainment streamers is a growing competition for consumers' free time—especially younger viewers. Video gaming is a prime target and may be one reason why Netflix is launching a games unit in 2022, with a Stranger Things spinoff as one of its first releases.

"OTT companies are increasingly recognizing games as their new competitor," finds Parks Associates. "Long term, gaming will either prove to be a challenge—or an opportunity—to players in this space."

It's as fundamental a challenge as reinventing the way we consume long-form video as a passive, lean-back experience. Streaming video in its current state doesn't satisfy the desire of consumers to socially interact, which is one reason why Millennials and Gen Z are spending increasingly more time on other types of digital and mobile entertainment.

Certainly, streamers of all stripes are expending huge amounts of effort on highly sophisticated engagement campaigns to reach consumers on social media. Eight streaming services—Netflix, Amazon Prime Video, Disney+, Hulu, HBO Max, Paramount+, Peacock, and CW Seed—captured more than 227 million followers across Facebook, Instagram, TikTok, Twitter, and YouTube in 2021, according to a Conviva study. Facebook is second to Instagram in overall engagement, with TikTok set to outpace Meta's network in 2022.

"While streaming platforms' pages are the cornerstone of a streaming publisher's social strategy, it's the individual show pages that can truly build the brand affinity craved by publishers," says Keith Zubchevich, Conviva's president and CEO. "Streaming show accounts on social have become intimate forums where fans feel they can truly connect with the show's cast in ways that would normally be reserved for close friends."

Deloitte Insights suggests in its annual Digital Media Trends survey that streamers need to go further to secure their long-term survival. The report says that "younger generations have grown up connecting through digital networks, engaging with digital and interactive entertainment, and relating to the world through a social lens. Gaming is meeting these expectations with unique, immersive experiences that can put players in the starring role. For streaming video providers, understanding social gaming and creating strong relationships with gamers may be critical to future growth."

Streaming video will likely continue to be a dominant force, Deloitte Insights emphasizes. However, any social elements are deferred to the second screen, mobile—which, for many, is really the first screen. "It may or may not make sense for SVOD to offer social and interactivity directly in their services, but they will likely face greater competition in courting younger generations and keeping them as lifelong subscribers if they don't integrate a social element in some way," notes the report.

Bridge the Broadband Divide

It became apparent during the pandemic how reliant we all are on the internet, so it's alarming just how great the digital divide is. This was starkly illustrated in June 2021 when the U.S. Department of Commerce's National Telecommunications and Information Administration (NTIA) released a digital map revealing that in many parts of the country, broadband speeds fell below the Federal Communication Commission's (FCC) benchmark of 25Mbps download, 3Mbps upload.

"Given that the FCC's benchmark is pretty low, … this is pretty terrible," comments Matt Wille for Input. "No, that's an understatement—it's a total failure. The many, many red areas on the map just have no access to high-speed internet at all."

For example, in a working-class Latino area in east Oakland, Calif., more than a quarter of people do not have internet access, even though commercial providers exist, NBC News finds. That's compared to a "wealthier and whiter neighborhood" nearby, where only 6% of people lack access to broadband internet.

S&P Global Market Intelligence estimates that more than 18 million occupied U.S. households did not subscribe to broadband as of mid-2021. With this in mind, some $20.4 billion of the federal budget is being spent on deploying broadband to close the divide over the next decade. S&P Global Market Intelligence projects $112 billion in U.S. broadband revenues in 2022, up 25.2% over 2019 levels, when the idea of broadband connectivity as an economic lifeline had not yet been put into practice.

[Editor's note: This article first appeared in the 2022 Streaming Media Industry Sourcebook.]