The OTT Market Expands, Contracts

February 24, 2016

One of the hallmarks of a new market that has staying power is the appearance of dozens of competitors. But the clearest sign that that new market is well and truly established is the beginning of the process where initial experiments are shut down, rival services consolidate, and the boundaries of the market are tested. This is where the OTT market finds itself today.

The news that Cox Communications’ Flare services are closing down probably shouldn’t be that surprising, if only because so little was known about it. Yet, it had some 300,000 users, which until very recently would have been seen as a big win.  The official Cox statement noted, however, that “we were unable to monetize the user interest and web traffic to the level needed to sustain the business”.  That an OTT service now must pay its own way is really the story here: this is no longer a space in which the players can experiment, but rather is a playing field upon which victory must be assured in order to justify continued investment.

Meanwhile, YouTube Red had a bit of a coming-out party, headed by current It Girl Lilly Singh (if you don’t know who she is, shame on you, go find out more here). YouTube Red is Alphabet’s attempt to turn YouTube into a (partial, at least) subscription platform.  As VideoInk noted, if the company can persuade even 1% of its billion users to the $9.99 monthly subscription, this could be a $1.2B revenue stream – not huge in terms of the $23.1B trailing twelve month revenues of Alphabet, but still no small potatoes. This shift to a different business model tells us very clearly that the trend toward streaming viewers preferring to pay with money rather than time spent staring at ads has not gone unnoticed at the Don’t Be Evil company. The challenge here is that this is a categorical change: YouTube has always been free, so to ask its users to flip the switch and see it as a paid source may be a bridge too far, especially as the service actually does a better job than many in seamlessly delivering ads. Again, though, we see the realization that this isn’t just the web being wacky – it’s time for the Internet’s favorite source of skateboarding lemurs to pay its own way.

Dish Networks is certainly looking for the streaming business to continue its rapid expansion.  According to a research note from Zacks, the company is seeking to offset the continued demise of traditional satellite subscribers with subscriptions to its SlingTV service, as well as sales of digital ads. The key here, it seems, is going to be data: with access to the habits of every single one of its subscribers, Dish can offer way more targeted access to advertisers, with a presumed growth in the value of those audiences. Advertisers will likely pay way more to reach a consumer who is deeply engaged in a show (and will therefore likely actually consumer embedded ads) than those who are simply snacking (and will therefore likely abandon as soon as the commercial break kicks off). The growth of SlingTV’s library to include Sony Pictures Television content suggests that Dish believe in this gambit, and that consumers do, indeed, want to enjoy the benefits of the traditional TV service without being anchored to a set top box (STB)in the living room.

And speaking of the STB, we can’t let the week close without noting the decision by the FCC to insist that traditional Pay TV providers allow other manufacturers to construct 3rd party solutions. Imagine – instead of paying Big Cable Co Inc $10 a month to rent a box, consumers will be able to buy a $100 gizmo from Best Buy and have it ‘just work’. Actually, of course, this is probably a boon to the cablemakers with innovation on their mind: Comcast, for instance, is apparently ramping up production of its new STBs. Why? Because, when it’s more than just a thing consumer have to rent, it becomes something that can be chosen – and if the service offers the best experience, that drives adoption not only of the box but also of the MSO. While the pundits predict a huge business for 3rd parties, the core companies now have an unprecedented opportunity to move the venerable STB out of the commodity column, and place it at the head of its differentiators. This is likely good news not only for Comacst, but also for MSOs and TiVo who are working together to expand the range of consumer options: just this week RCN announced their first-in-the-nation option to use HBO Now on company-rented, TiVo-powered STBs.

Finally, let’s recognize that we can see more than ripples in the OTT pond, but can now see clear paths to achieving goals.  Discovery, in the recent earning call, confidently predicted that by next year, the company will sign up over a million direct-to-consumer subs, bringing in an additional $100M in annual revenue. This would be about the same number (in a longer time, in fairness) reported by HBO for HBO Now. Sure, in the context of a $400B global TV market, $100M isn’t a huge chunk – but as CEO David Zaslav notes “if we can get to amillion, I think culturally, it could be a tipping point for us…If we can get to a millions, why can’t we get to three?”. Why indeed.