Ideas

Potential consumer demand, revenue, strength of content, existing MVPD relationships factor into the risks (Part 3 of 3)

This blog is the third in a three-part series. Click through to read Part 1, OTT: The Exciting, Scary Wild West, and Part 2, OTT: Challenges and Opportunities.

ESPN has now joined CBS, HBO, WWE, Showtime and a few others that have blazed a trail to deliver their content directly to consumers.

Others, including Fox News, and Discovery (with Scripps), have also announced plans to also pursue the direct-to-consumer model. While CBS and WWE are finding this model compelling, others should carefully consider both the opportunity and the challenges. Many of the challenges are the same as outlined in my column on skinny bundles.

First and foremost, they need to analyze the market, potential demand, cost of acquisition and revenue for their services. Content creators must evaluate if their content is strong enough to go it alone or if they should join forces with other content creators.

One example of a successful go it alone entrant has been WWE. To date, they have been successful in changing their model from one dependent on traditional MVPDs to primarily going direct. Keep in mind, they have a global brand/market and a very passionate audience.

In most cases, programmers must consider the risk to the existing distribution through MVPDs.

CBS, with its tremendous leverage, has been successful in not losing distribution and truly building an incremental business.

As a result of the number of networks now available via OTT or announced, it is somewhat less risky and they’re unlikely to be dropped as result. Still, content creators must take into account that going direct may, in fact, weaken their leverage to protect both licensing fees and carriage, given risk of being dropped (perhaps temporarily) and/or moved to less favorable tier positioning.

Content creators must ensure they have streaming rights for the content or determine what content to replace. Further, to boost subscription some programmers are adding original or exclusive content increasing required investment. Content creators need to either build or outsource both the technical and business infrastructure including streaming, App development, marketing, billing and fulfillment. Most content creators do not have experience in marketing direct to consumers and instead have relied on distribution through traditional MVPDs.

Finally, content creators must understand and manage churn. Many direct-to-consumer providers are experiencing more than 100% churn in a year, meaning they have to replace current customer base just to stay even. Churn becomes even more challenging as initial demand and sign-ups wane.

In the years to come, it is foreseeable that most content traditionally delivered via MVPDs will be available direct-to-consumer as well as by virtual MPVDs. Navigating these changing business models will require not only intestinal fortitude, but new capabilities, willingness to take risks and less certain revenue streams than the old traditional business models.

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.

To survive in the new world of video, pay TV players must evolve and change (Part 1 of 3)

Remember the dot-com boom days? Uncharted territory with the promise of massive transformation. No norms, exciting new services, uncertain demand, unclear business models and a rush of investment. A mix of “old world” companies and brash newcomers. It was the Wild West.

It was a crazy time of trying approaches and offerings — and confusion for consumers. Over time, better offerings succeeded and norms for consumers and businesses emerged. Winning required perseverance, foresight, sharp analyses and clarity of vision combined with flexibility — and more than a little luck.

We are in another Wild West period — the boom of over-the-top services, including skinny bundles and direct-to-consumer services from content creators.

Three dynamics are driving it: consumer dissatisfaction with cable companies, especially price, as reflected by cord-cutters and cord-nevers; viable online alternatives; and advancements that allow near-seamless live streaming. Established players and upstarts alike are scrambling to negotiate content deals, assemble packages to appeal to targeted viewer segments, and drive subscription growth.

While there are now reportedly more than 5.5 million OTT TV subscribers and a huge number of consumers subscribing to Netflix, Amazon and Hulu, the vast majority of them still get a video offering from traditional multichannel video programming distributors. We expect major cable players to break borders and offer video services outside their franchised markets to compete with AT&T’s DirecTV Now, Dish Network’s Sling TV and others. We also expect programmers who cannot support a go-it-alone direct-to-consumer business will band together to form their own skinny bundles.

This new era will be characterized by several major dynamics: very low switching costs for consumers, much greater competition, a continually shifting landscape of offerings and pricing — and confusion for consumers, likely lower margins and potentially lower revenue/profit opportunity. Developing and maintaining relationships with viewers and flexibly responding to consumer/viewer desires will be essential.

So how does one proceed in such uncertainty that will be continuing for some time?

Among other things: Accept this will remain a thin-margin business. Be clear about motivations (e.g., profit or placeholder or other business enhancement). Understand viewer behaviors/segments and translate that into offerings that meet needs without costly extras. Develop retention strategies to hang on to customers. Persevere, yet be flexible — don’t hesitate to pivot as the landscape evolves.

These are scary times to be sure, but the reward for success is a foundational place in transforming the TV industry.