Ott video report


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Ott video report

  1. 1.   Over the Top video Over the Top (OTT) video services came into the spotlight in recent years with the success stories of different players positioned in different market segments. Netflix, the leader in streaming video ondemand (SVOD), earned $3.2B in worldwide revenues in 2011. Hulu, the centralized catch-up TV /ad supported VOD platform, is the number one video website in terms of ad impressions, far ahead of YouTube despite having only a fifth of the audience of YouTube. iTunes rules the transactional VOD (TVOD) market with a 60% market share despite the efforts of competing heavyweights with deep pockets (Amazon, Wal-Mart/Vudu, Microsoft/Xbox Live, Google/YouTube rental store). What all these services have in common is that they are delivered over unmanaged networks. They also all leverage premium content that has demonstrated its ability to garner a large audience. Finally, they all have an international reach, providing distribution agreements with content owners. In each of these verticals the competition is not based on price. TVOD services have a similar price point ($3-4 for a rental and $15 for an electronic sell through (EST)). Instead, they compete on the device environment that goes with the service. One key to iTunes’ success is the ease of accessing content on different devices. SVOD services average a $6-8/month price point, and leverage exclusive content through output deals with movie studios for the pay TV window and original content. Hulu is uniquely positioned in the catch-up TV segment, thanks to its content owners’ stake hold, but this status as a stand-alone service is compromised over the long-term: content owners are starting to strike distribution agreements with pay TV operators to integrate Hulu-like services with pay TV bundles. Entering any of these verticals is tricky. Would-be TVOD services need a platform of installed devices to leverage. SVOD hopefuls are entering a business where expensive exclusivity deals drive low margins, original content brings risk, and catch-up TV services are controlled by TV networks which either keep control (Hulu, or strike deals with their natural allies (pay TV operators). On the technical side, the big challenge of OTT video services is the need to navigate the fragmentation of connected devices. HTML5 could be the solution to this problem but it is not ready for prime time. A common approach is to use an infrastructure that is compatible with low margins, and can easily scale by outsourcing to Amazon Web Services while customizing open source software layers. As far as user experience is concerned, the most innovative services are Netflix and Hulu. Both rely on data-driven approaches to iterate their service, and increase consumer engagement and consumption. Both utilize A/B testing to test the website interface, and both leverage user ratings and preferences to make recommendations. This report will analyze some of the main OTT video services on the following dimensions: 1. 2. 3. 4. 5. 6. 7. 8. High level comparison of the main services Content acquisition strategies Revenue and pricing models Infrastructure Approach to HTML5 User interface User experience and consumer satisfaction International expansion and consumer acquisition
  2. 2. Introduction   What is “over the top video”? “Over the top” (OTT) video refers to video services that decouple access to the content from access to the delivery infrastructure for said content. In contrast with pay TV, where subscribers compensate pay TV operators for building and maintaining a delivery mechanism (cable, satellite or telecommunications network), OTT video services offer access to content only; their users must subscribe to a third party network operator to enjoy this content. For the purpose of this report, we will limit our analysis to TV and movie content. User generated content, music videos and non scripted professional web content are outside the scope of this report. What is not OTT? Multi-device video delivery is not, in the strictest sense, OTT video. Services that require users to have an existing subscription with a pay TV operator are not, for the purpose of this report, considered OTT. While some of these services have on-the-go features (the content might be delivered through a third party network), the business model cannot be considered OTT. Such services include Streampix (the new SVOD service by Comcast Xfinity, available for Comcast subscribers only) and HBO Go (which requires authentication). This report provides a picture of the current landscape of OTT video in the US, in terms of available content, usage and revenue streams. This report does not address the balance of power between OTT providers and pay TV operators and it does not answer questions about cord-cutting. In summary, the overwhelming majority of OTT video is time-shifted content rather than live broadcast. As a result most of the available content is scripted content, which has a longer shelf-life than news, sports, or reality TV. A major factor in the rise of OTT services is the increasing number of connected devices within US households. A study by Strategy Analytics conducted in Q3 2011 found that 51% of Americans watch TV shows / movies on the internet either by streaming or downloaded said content. Of these 51%, 89% access the content via PC, 58% watch the content on a TV display, 23% do so on their smartphones and 16% on a tablet (NB: totals do not add up to 100% because respondents have the option to pick several devices; these results also highlight that internet video viewers do not choose between screens: they watch their internet video content on a variety of screens). While the PC remains the most popular device for internet video consumption, viewers enjoy a growing number of options to connect their TV to the internet for the purpose, among others, of online video viewing. Among those viewers who watch internet video on their TV screen, 60% did so by using a connected game console (there is an installed base of 75 million game consoles in the US, and 20-25% of the time spent using these consoles is dedicated to video viewing), 58% connected their PC to their TV via HDMI and 35% did so using a home network, 30% used a connected blu-ray players and 22% an internet media player (these players, often referred to as OTT boxes, have an installed base of 12 million, half of which are used on a daily basis), 20% relied the built in connectivity of a smart TV. Internet video viewing goes beyond the TV screen however. Twelve percent of US households view internet TV and movies on their Smartphone (Half of Americans with a mobile phone own a Smartphone) and 8% do so on a tablet (35-40 million installed base in the US). The proliferation of connected devices makes OTT video services more compelling for users. The OTT video services studied in this report can be classified in four different categories: 1. 2. 3. 4. Transactional VOD: iTunes, Amazon VOD, Vudu, YouTube Ad supported VOD: (catch up TV): Hulu Subscription VOD: Netflix, Hulu to a certain extent, Amazon Prime Original web programming: Netflix, Hulu, YouTube
  3. 3. 1. High Level Comparison of the Main Services: OTT video services are positioning themselves to be the new Wal-Mart, the new Blockbuster or the new HBO.   Netflix   streaming   Positioning    EST  /  rentals   EST  /  rentals   SVOD   Extensive  catalog   Extensive  catalog   Original   (movies  and  TV   (movies  and  TV   programming   shows)  including   shows)  including   new  releases   new  releases   Price   iTunes   Amazon  VOD   Transactional   $7.99/mo   Rentals  $4   EST:  $10-­‐$15   TV  shows  for  EST   only,  no  rentals   $3   Catalog   Transactional   Rentals  $5   EST:  $15-­‐$20   TV  shows  for  EST   only,  no  rentals   since  August  2011   $3   14K  movies   Users   n/a   n/a   Usage   Movies   30M  EST   transactions/year   (80K/day)   100M  VOD   transactions/year   (270K/day)   Revenues   $550M  in  2011  (E)   Movies=  $310M   ($180M  EST  and   $130M  VOD)   TV  shows=  $220M   (EST  only  since   August  2011)   Content   spending   n/a   100K  titles   Amazon  Prime   SVOD   Original   programming?   *Prime  is  first  a   program   offering  free   delivery     $79/year   30K  titles  (US)   17K  titles   23.5M   subscribers   worldwide   (21.7M  US  and   1.9M  int’l)   Movies   Q4  2011:  2B   2M  EST   hours   transactions/year   streamed   (5K/day)   (1h/day/sub)   7M  VOD   transactions/year   (20K/day)   $40M  in  2011  (E)   Domestic:   Movies=  $25M   $1.5bn  (E)   ($12M  EST  and   ($150M   $13M  VOD)   operating   TV  shows=  $15M   profit  (E))   (EST  only)     Int’l:  $83M   revenues   ($103M   operating  loss)   n/a   $2.32B    (2011)   Hulu   Hulu  Plus   YouTube   Catch  up  TV   Original   programming     Catch  up  TV   Original   programming   SVOD   Rentals  (movies)   Original   programming     Ad  supported   $7.99/mo.   And  ad   supported   Transactional   (movies)  $2-­‐$4   Ad  supported   (original   programming)   25K  TV   episodes  (E)   30K  titles  (29K   5K  titles  (E)   TV  episodes   100  channels   and  1K   original  prog.   movies)   1.5M  paid   n/a   subscribers   5M  (E)   30M  monthly   (not  all  of   users   whom  might  be   using  the  SVOD   service)   n/a   Average  time   spent  on  the   site:  3h10m   n/a   n/a   n/a   $420M   $100M  (E)   (including   subscription)     $320M  in   revenues  only   (E)   n/a   n/a   $500M  (E-­‐ 2012)   $100M  (original   prog.)   n/a  
  4. 4.   iTunes   Margin   30%  (gross   margin)   30%  (gross   margin)   Connected   iOs  devices   devices   Footprint   International   2. Amazon  VOD   Netflix   Amazon  Prime   streaming   11%  (operating   n/a   income)   Amazon  is   rumored  to  lose   $11/user  with   Prime,  mostly   because  of  the   shipping  costs   200  devices   80  devices   300  devices   International   47  countries:   US,  Canada,   UK,  Ireland,   Mexico,  etc   US   Hulu   Hulu  Plus   30%  (gross   n/a   margin)   NB:  if  ads  are   sold  by  partner   networks,  Hulu   doesn’t  cover   any  of  the   costs  involved   Computers   300  devices   only   US   US,  Japan   YouTube   n/a   Browser   equipped   International     Content Acquisition Strategies: Content is key for OTT services, and the increasingly competitive landscape impacts negotiations with studio partners. The key question for OTT video services is the relationship with content owners, who command the value of rights acquired. 2.1 Transactional OTT video services are the new Wal-Mart Transactional VOD services (iTunes, Amazon VOD and YouTube rental stores) are always welcome by studios. They constitute an additional avenue to reach potential customers, while respecting the traditional model of paid transactions on which home entertainment has been thriving since the 1980s when VHS was introduced. Vudu is Wal-Mart’s effort to preserve revenues from home entertainment as DVD sales decline. 2.2 SVOD services, struggling with increasing content costs for newly released movies, have to shift to episodic TV and original programming SVOD services are trying to imitate the success story of premium TV network HBO. Launched in 1970, the network transitioned from older catalog content to premium studio content via exclusive output deals with major studios (20th Century Fox, Universal and Warner movies are first released on TV on HBO exclusively) and sports content. As HBO’s model proved profitable, competitors started to emerge and outbid HBO for content from other studios (Starz deals with Disney and Sony, while Showtime deals with DreamWorks, The Weinstein Company and Summit). HBO had to start betting on original programming. Producing original content is riskier than licensing content that already has an audience but the payoff, if the content is successful, is greater. 2.2.1 Netflix’s spending on content grew 36x between 2009-2011; Netflix is ideally positioned as the repository of serialized TV dramas Netflix’s approach to content acquisition is heavily data driven. Observing patterns of consumption helps Netflix content executives determine how much money they should spend based on how much interest the subscribers will have in the content. Between 2009 and 2011 Netflix’s spending on streaming content grew 36 fold, from $65M to $2.3B. By contrast, the volume of content available grew only 2.5 fold. With competition from Amazon Prime, Hulu Plus, and the incumbent TV networks, Netflix
  5. 5. opted to (1) license more TV content instead of movie content, and (2) develop original programming. The value of focusing more on TV content is dual: First, the episodic nature of TV content encourages long term engagement and reduces churn (TV accounts for 60% of viewing time on Netflix streaming compared to 20% for the DVD by mail part of the business), and second, the economics of TV make it easier for Netflix to license content at a cheaper price. As a SVOD service, Netflix is looking for full seasons of canceled shows or past seasons of current shows. As such, it competes with the cable networks that usually acquire TV content for syndication. But cable networks, which don't have a dedicated following that will tune in every day at a specific time, favor sitcoms or procedural dramas, whose episodes can be seen independently of one another. Serialized dramas (Lost, 24), with complex story arcs developing over the course of the full season, require viewers to be very engaged. These are not a good fit for syndication but they are extremely appealing to Netflix. True to its catalog on-demand nature, Netflix makes full seasons of its original shows available at once, betting that addicted subscribers will view several of them back to back. It is also picking branded projects: the licensed Norwegian show Lillyhammer features Steven Van Zandt of The Sopranos’ fame, House of Cards is the remake of a British show directed by Academy Award nominee David Fincher with Academy Award winner Kevin Spacey, and Arrested Development was produced by Academy Award winner Ron Howard among others, and aired on Fox between 2003 and 2006 to an average 3-4 million viewers. Netflix is not giving up on movie content but the service emphasized the need for exclusive content. It won’t be able to outbid all the premium TV networks for exclusive output deals with Hollywood studios, and it needs TV content to sustain viewer engagement. 2.2.2 Hulu was an experiment that highlighted the market potential of ad-supported catch-up TV; strategically, its TV networks owners should partner with pay TV operators for such services Hulu (and Hulu Plus) is an anomaly; Hulu was created when TV networks perceived YouTube as an outlet for infringed content, and it was designed to provide a legal (and revenue generating) avenue for time-shifted TV consumption. Hulu, a joint venture of three of the major TV networks ABC, Fox, and NBC, is relatively shielded from content price increases. Additionally its positioning as a catch-up TV service, focusing on TV content, makes it an alternative to the DVR. The content available expires (the latest five episodes of a show are available) and partnering networks can establish rules as to availability (Fox makes some shows available the day after airing, only to authenticated Direct TV subscribers). Hulu Plus extends the amount of content available (full seasons and movies) but the main benefit of Hulu Plus is it’s availability on connected devices (tablets, Smartphones, consoles, connected TVs etc). Hulu is opting for a TV-like approach: new episodes are released each week at a specific date/time, similar to a TV station schedule. In early March, Hulu struck a deal with international TV production and distribution company Fremantle to distribute some of its original programming in foreign territories where Hulu doesn’t operate - a common practice for TV networks.
  6. 6. 2.3 YouTube and Amazon are playing catch-up Amazon entered the SVOD game late and it is ramping up its Prime video catalog (17 thousand titles). Originally, the service was designed to offer free two-day shipping to Prime subscribers. The service is rumored to cost Amazon, but it is unclear if this is due to the free shipping or to the licensing fees for content. Amazon is the main driver of content price inflation for Netflix. The importance of original content is not lost on Amazon: in March 2011 the company hired an alumnus of 20th Century Fox and Comedy Central whose title briefly appeared online as VP of Original Television. Netflix, which is built around the video viewing experience only, invented the queue system for users to manage their viewing. In contrast, Amazon SVOD service is just a simple player linked to a catalog, similar to the Amazon VOD player, without the charge for authenticated Prime members. Finally, YouTube is making the boldest move, launching 100 channels aimed at niche audiences. YouTube’s ambition is to compete with the cable TV industry, which includes hundreds of TV networks focused on niche markets. YouTube is investing $100M in original programming and working with professional TV players (Disney, Reveille Production) as well as household names (skater Tony Hawk, and singer actress Madonna). The investment is an advance on ad revenues; YouTube will recoup its investment once marketers spend money on ad spots in the newly created channels. The goal for YouTube is to create sustainable audience numbers in known places, and then let advertisers buy the ad space around this audience, instead of chasing the new hit video and then playing catch-up by going after advertisers. Each channel offers 25 hours of programming daily. To put this into perspective, each year a broadcast network may develop 20 pilots for new TV shows, for a price tag in the $100M range for all pilots combined. 3. Revenue and Pricing Models: OTT services have similar price points for similar value propositions, and increased competitive in the SVOD landscape is bringing the margins down. Services are differentiated by price, not content available. Transactional VOD services are mostly undifferentiated: rental prices are around $4 with a $1-2 premium for HD. After purchase, rented titles can be seen during a window of a month; the window decreases to 48 hours once playback of content has started. The critical component is the device environment. iTunes is the leader in the online TVOD market - with 60% market share - because it can rely on the installed base of Apple devices. To gain market share, challenger Vudu (3rd with a 7-8% market share) negotiated a deal with studios regarding Ultraviolet; Wal-Mart will be the exclusive provider of “disc to digital conversion” until fall 2012, and DVD owners will be able to get digital copies stored in a Vudu account in exchange for a $2 conversion fee. SVOD services have a similar price point: Netflix Streaming and Hulu Plus cost $7.99/month while Amazon Prime subscriptions cost $79/year (for $6.58/month the service provides free twoday shipping in addition to the video catalog). In the online world, commanding subscription fees is already a challenge and pricing higher than $10/month is hard. With rising streaming content licensing fees, margins on SVOD services are small: Netflix streaming has a 12% profit margin, compared with 50% for the DVDby-mail business.
  7. 7. 4. Infrastructure: Key to the OTT Entertainment success is infrastructure and the deeper relationship with content owner. the low-cost OTT services address a mass market, not a marginal audience. Netflix is priced at $7.99/month much lower than pay TV’s average revenue per user of $70/month. The strategy for OTT services like Netflix is to offer tier-2 content (with limited tier-1 titles) at a very low price, and scale it to millions of users globally. OTT players like Netflix know that they can’t reduce the content acquisition cost, so they work very hard to reduce capital and operating expenses. Following is a quick analysis of the infrastructure of the two key OTT players. Netflix: Public Cloud for business agility and unpredictable growth 4.1 Netflix is a global company with 25 million subscribers in 40+ countries streaming 2 billion hours in fourth quarter 2011. Customer base in first quarter 2011 grew 69% over Q1 2010, and API requests went up 37 fold between Jan 2010 to 2011 to almost 20 billion requests. Netflix employs only two thousand employees. Netflix deployment on Amazon Web Services (AWS): • • • Video masters are deployed on EC2 (virtual server)/S3 (virtual storage) combination. These video masters are delivered using Akamai, Limelight and Level 3 CDNs. Logs: Netflix uses open source bigdata tools (Hadoop, Cassandra, Hive) to conduct business intelligence and personalization. These tools are also deployed on AWS’s virtual machines and storages. APIs: Netflix exposes APIs for Metadata, device configuration, and other movie playback functionalities.
  8. 8. Hulu 4.2 Hulu has approximately 30 million unique users/month. Like Netflix, Hulu serves billions of hours of videos per month. Their last speculated employee strength was around 380. Hulu also uses open source components like MongoDB, Memcache, or HTML5. Hulu’s system has three main components: • • • Data Sync: Data sync layer is to minimize load on the main database; Web service: The web services are load balanced and serve the majority of metadata (in XML or JSON) found on Hulu devices; CMS: The CMS component has a front-end UI written in JavaScript with jQuery and uses Jinja HTML5 templates. One of the key problems with OTT is quality of service. Hulu has built custom solutions that serve that purpose. Video players periodically send beacons to the back end QOS system with various parameters. This is used to identify problems that need resolution.                   5. Approach to HTML5: HTML5 can be a savior but a solution is needed for the lack of DRM and the “brewing conflict” between Google’s WebM and MPEG LA’s H.264. Fixed and Mobile connected devices offer great opportunity and challenge for the TV ecosystem. In 2011 alone, over 100 new tablets and 400 new Smartphones were introduced. As a result Netflix, a must have OTT service, tested its service on over 1000 Android devices before releasing it. While the Xbox, PS3, Roku, iPad and iPhone penetrations are well known, smart TVs are not far behind. Samsung, Sony and LG each shipped 20 million units in 2011. HTML5 can be a
  9. 9. savior in this fragmented ecosystem, but before that can happen HTML5 itself needs saving. Content protection is the biggest flaw in today’s HTML5 ecosystem. It is clear to content and pay TV providers that HTML5 is the superior presentation format, but HTML5 is far from being a complete, standardized and acceptable solution. For now, a combination of HTML5 for UI, HLS encryption for security/DRM, and HLS for video delivery can convince tier2/3 content providers, or lastwindow (broadcast) content. But true DRM like Flash Access 2, Widevine or PlayReady are needed for tier-1 premium content such as pay TV programming. Recently Google, Microsoft, and Netflix submitted a draft proposal to the W3C to add encrypted media extensions to the web standard's spec. Video codec is in competition with HTML5; Google is throwing its weight behind its open source VP8 video compression format via WebM (an audio-video format designed to provide royalty-free, open video compression for use with HTML5 video). VP8 is in direct competition with MPEG LA’s H.264.      
  10. 10. 6. User Interface: proposition. Building web based embedded UI is not a straight forward The device landscape is extremely complex. While WebKit is emerging as the standard for embedded browsers, fragmentation is still a big problem. For example PS3 uses WebKit, Philips uses Opera (close to WebKit), Samsung uses Maple but is switching to WebKit 2012, LG, Google TV and iPad use different variants of WebKit, Panasonic uses JavaScript (not browser), Xbox uses Silverlight and Roku uses BrightScript. Netflix is testing their android app on almost a thousand devices.   This gets further complicated as CPU for these devices can range from 600MHz to 3.2GHz and memory can range from 88MB to 512MB. Simply put, UI’s memory budget can be calculated by subtracting memory requirements of OS, browser, SDK and network buffer, which is miniscule in many cases.    
  11. 11. 7. User Experience and Consumer Satisfaction: The challenge for OTT services is to move beyond a dead-end experience and create increased consumer satisfaction and loyalty. The very nature of TV is to be a very lean-back experience requiring little interaction. It builds on the passivity of viewers. By contrast, OTT services need to bridge gap between the leanforward/on demand model and the lean-back model to carry consumers beyond a “dead end experience” (the experience stops when the video stops). 7.1 Netflix built on its recommendation engine to keep users captive and reduce churn Netflix leverages a database of 5 billion user ratings to feed its recommendation engine. Recommendations are heavily personalized, and the first step after sign up is to rate a number of movies to give Netflix and idea of the new user’s tastes. Netflix’s goal is clearly stated: increase consumption to reduce churn. The logic of the recommendation engine works like CTR forecast for ad/search results. Since Netflix pays a flat fee for streaming content, it might as well push as much consumption as possible. In contrast, their DVD-bymail service comes with increased shipping and administrative costs if consumption increases. 75% of Netflix users select movies based on recommendations. Recommendations are generated based on explicit data (user’s ratings), and implicit data (consumption profile, recent plays, completion rate, etc). They also factor in freshness of content (new catalogue additions) and diversity of suggested titles (capping the number of TV titles suggested). The best illustration of work on personalized recommendations is found in the “personalized genre” rows. The first screen presented after log-in features rows of suggested titles organized in different genres that are customized based on each individual user’s consumption pattern and interests. The screen shot below shows Netflix recommendations: Classic Movies about Marriage from the 1950s, Independent Dramas based on a Book, Critically-acclaimed Suspenseful Movies. Each row is accompanied by elements of “context” and “evidence” that explain the suggestion to the user by demonstrating past interest in similar titles. This transparency reduces user’s confusion.
  12. 12.   Netflix found that personalized genre becomes very important for member satisfaction: moving personalized rows to top of the home page on connected devices increased retention. Netflix keeps on improving its user experience by adopting a very data driven approach: they make a hypothesis about the impact of a new feature/design on member engagement, design a test to confirm or infirm this hypothesis, run the test and let the data prove or disprove the hypothesis. Netflix historically enjoyed a very high consumer satisfaction rating. Netflix angered many customers in summer 2011 when it announced it would separate DVD and streaming plans (resulting in up to 60% price hike, from $10 to $16/month), and made several PR blunders. As a result its score on the American Consumer Satisfaction Index slid from 88% to 74% between 2010 and 2011. But Netflix seems to have recovered from this debacle: a Citigroup survey conducted in March 2012 found that 81% of customers still report some level of basic happiness with the service (extreme satisfaction, however, is down to 10% from 50%). 53% said they were not at all likely to cancel Netflix in the coming month (up from 46% in December 2011 and 43% in May 2011). Usage of the service was stable with 82% of users reporting similar usage level as when they started subscribing (9% reported much heavier usage and 9% reported much lighter usage).
  13. 13. 7.2 Hulu uses auto-play and cross promotion to deepen usage of the service Hulu monetizes content using ad impressions. For Hulu, increasing consumption means increasing revenues (more views = more ads = more revenues). This differs from the Netflix strategy of minimizing churn. Hulu’s solution to counter the dead end experience is to roll out an auto play feature: the service will automatically launch a new video after a user is done. Hulu sometimes uses some of the inventory to do cross promotion (viewers of this show are X times more likely to like this other show) or announces the video clip it picked to show after the program the user is currently watching is over. Finally, Hulu offers personalized options to viewers who want to have deeper control of their ad viewing. The ad selector offers users a choice between three different Ads, usually for the same brand (see the example on the left). Viewers can also “swap” ads (prompting an overlay of alternative ads to appear) and can educate the system by indicating whether the currently playing ad is relevant to them.
  14. 14. 8. International Expansion and Consumer Acquisition: Device and content acquisition strategies are key to achieving TV scale, but traditional TV advertising and operators’ bundles are required. Contrary to traditional media players, OTT video services cannot leverage a partner’s platform to get reach. Premium TV networks such as HBO and Showtime benefit from their alliance with pay TV operators in the form of promotional operations led by those operators (such as HBO free for 6 months for new triple subscribers), as well as marketing effort (mailing etc). The nature of OTT providers is that they have to manage this effort on their own. Consistent with its broadcasting owners’ nature, Hulu opted for traditional advertising. Hulu famously aired a 60 second ad during the Super Bowl 2009, where 30 second ad-spots cost around $3M. In contrast, Netflix built its DVD-by-mail service then added streaming service using online direct response advertising. The company now extends to radio advertising as well as TV advertising. Growth fueling growth, Netflix’s domestic subscriber acquisition cost (SAC) went down from $110 in 1999 to $15 in 2011. Both services led international launches: Netflix in Canada, then Latin America, and recently in UK/Ireland, and Hulu in Japan. Details on the marketing campaigns for these launches are scarce; no numbers, in terms of subscribers’ base or engagement, are available regarding Hulu’s Japanese launch. The two main requirements to decide which international markets to target for an expansion, aside from size of the market, are quality of broadband infrastructure and available rights to content. To the second point, a key parameter to take into account is the prevalence of piracy in target countries. Some countries are lost territories for Hollywood (the pirated DVD market in China is estimated at $6bn/year to be compared with Chinese box office of $1.5bn/year; India reportedly loses close to $1bn/year on pirated content). If OTT providers can create a legal alternative in these markets with high piracy rates, it would be easier for them to negotiate rights with studios. As far as Netflix is concerned, these launches seemed successful. Launched in September 2010, Netflix Canada had 800 thousand subscribers in a little over 6 months. Out of these 800 thousand subscribers, 130 thousand were free subscribers with a 30 day free trial period; that’s a 16% free-to-all-subscribers percentage (similar to what Netflix had in the early years of its U.S. launch). Six months after launch, more than 60% of Canadians were aware of Netflix, and 6% were subscribers. 60% of those who signed up for the free trial of Netflix became paying subscribers. Key elements of a successful launch, in addition to advertising, are the breadth of content available, and the number of connected devices on which the service can run. At time of launch, Netflix Canada had 7.5 thousand titles and was available on PCs, PS3, Wii, iOS devices and various Blu-ray players from Samsung and Toshiba. The growth slowed after Q1 2011, forcing Netflix to focus on increased content acquisition. In March 2011, Netflix signed a groundbreaking five-year deal with Paramount to be the exclusive distributor of 350 upcoming new releases in the pay TV window. Using the Canadian launch as a blueprint, Netflix started signing deals with independent giants Lionsgate, MGM, Miramax, and local content owner BBC Worldwide, as early as November 2011, for a January 2012 launch. 8.1 Netflix’s natural direction, in the long term, is to be available in operators’ bundles Netflix is currently considering evolving its stand alone strategy. In a public presentation, Netflix CEO Reed Hastings mentioned that the company is setting a goal for 90
  15. 15. million U.S. subscribers. This is more or less the whole landscape of pay TV subscribers. Hastings also said, at the Morgan Stanley Technology, Media and Telecom Conference, “Many (cable service providers) would like to have a competitor to HBO, and they would bid us off of HBO. [For Netflix to become a premium TV network] “…is not in the short term, but it is the natural direction for us in the long term.” Hastings said, in a public presentation, that the total estimated market for Netflix was 90 million U.S. subscribers - meaning Netflix thinks it can be in almost every TV household in the U.S. He emphasized the importance for Netflix to maintain its brand, but basically opened the door to a future partnership with pay TV operators that could - similarly to what they currently do for premium networks such as HBO - bundle Netflix with a pay TV, broadband, or dual play subscription. Comcast, the leading pay TV operator in the US, said on the record that it wasn’t interested in such a partnership; Comcast announced its own multi device SVOD service, Streampix, available for Comcast subscribers only (and therefore not OTT according to our definition). 8.2 Hulu should be dissolved in the different operators’ catch up TV/free VOD offers - a $6B opportunity Hulu, however, is a different animal: a joint venture between three leading broadcast networks, Hulu was designed to keep control over premium programming (distribution, quality and online ad revenues) by creating a legal alternative to YouTube. As such, it succeeded brilliantly. The website has a fifth of the unique viewers YouTube manages to gather in a month. A Hulu viewer spends 3h10m/month on the site, compared to 7h30m for the average YouTube viewer. But Hulu ranks as the first online video network in terms of number of ads served. Thanks to its primetime TV programming, Hulu gets the advertising dollars of the major marketers. Hulu proved that there was a market for time-shifted ondemand programming. Moreover, it defused the threat of DVR - a key problem for broadcasters - by satisfying viewers’ appetite for time-shifting, while preventing users from fast-forwarding through content. It protected the existing business model. There is no clear long term strategy for Hulu, a joint venture headed by three different media moguls with diverging views on the terms according to which they should put content online. Fox wants to reserve the full-week window-of-availability for pay TV subscribers only. A more logical approach for pay TV operators would be to design a better catch-up TV service that would mirror Hulu. Comcast is already licensing TV content from the major broadcasters for day-after airing availability, but these deals are not comprehensive, and are by no means standard. As insiders in the TV world with deep pockets, pay TV operators could license the content of their existing partners, and create a comprehensive catch-up VOD offer for their subscribers. A recent report by research firm The Diffusion Group came to the same conclusion, adding that pay TV operators had “fumbled a $6B opportunity” by not working on ad supported VOD.