New entrants have advantages, but will be tested by acquisition costs, fulfillment, churn and retention (Part 2 of 3)
It is certain that there will be more OTT offerings in the years to come.
Let’s focus on skinny bundles, though many of the challenges are the same for content creators deciding to go direct.
There are currently three types of bundles, they include: MVPD offerings, whose motivation is to learn the new field of play AND to try to maintain subs who would otherwise depart entirely; new distributors (e.g., Sony), who want to capture a piece of the new TV pie and capitalize on an existing asset (e.g., PlayStation boxes); and potentially collections of individual channels, who decide that they can’t do a direct offering themselves.
While the consumer dynamic and receptivity to big bundles is waning and there is now a plethora of choices, it is critical to understand the fundamentals of a direct business and the challenges. The announcement of CenturyLink’s exit from OTT demonstrates that the business is not for the faint of heart.
First, the dirty little secret is there is very little margin in OTT, even in the smaller packages, as evidenced by YouTube TV’s recent price increase. Even their superior advertising acumen could not achieve sufficient financial results.
Next, the business needs to be able to support the subscriber acquisition costs, known as SAC. YouTube’s sponsorship and spots on the World Series, Super Bowl and All-Star game are upping the arms race for promotion and the costs! With so many options, it is mandatory to cut through the noise in a big way to gain consumer awareness/customers. Targeting and leveraging owned and operated advertising channels such as online, or in Hulu’s and PlayStation Vue’s case, the existing customer channels help but will not be sufficient alone.
Providers need to either build or outsource both the technical and business infrastructure, including streaming, app development, marketing, billing and fulfillment. Additional critical challenges are managing churn and growing customer base.
In the “old cable” days, it was darn hard to cancel and/or switch providers, requiring appointments, returning equipment and long hold times. Now, with a few clicks, you can cancel and subscribe to a new service. Retaining customers will require diligent attention to service and being flexible to respond to viewer behavior changes and new competitive offerings.
The OTT, direct-to-consumer business is here to stay, so what does all this mean?
There will likely be other exits of major players, like CenturyLink, that decide the business model is not attractive, while other major programmers and MVPDs will see no choice but to enter the fray.
The first step is to go in with eyes wide open and a full assessment of likely margins, SAC costs, understanding fulfillment, ensuring technical quality/ease of use, and planning for churn and retention efforts.
Glen L. Friedman is president of Ideas & Solutions!, a Los Angeles-based firm helping media and technology companies transform to respond to the changing business landscape. This is the first of a three-part series. Click through to read Part 1, OTT: The Exciting, Scary Wild West.