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ADL Exane BNP Paribas 2015 Telco Media OTT

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ADL Exane BNP Paribas 2015 Telco Media OTT

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ADL Exane BNP Paribas 2015 Telco Media OTT

  1. 1. Telecom and Media – how to ride the OTT wave May 2015
  2. 2. Content Executive summary 3 1. Significant shifts in media consumption – the beginning 8 2. New players and new business models: too big to ignore 15 3. Is content still king? 26 4. Serious threats to traditional media 33 5.Three possible market scenarios 43 6. Growing strains on networks 45 7. Opportunities for telcos: not a one-size-fits-all 50 8.Telco revenues: return to growth finally in sight 62 Author: Principal Contributor: Bertrand Grau Arthur D. Little grau.bertrand@adlittle.com Antoine Pradayrol Exane BNP Paribas antoine.pradayrol@exanebnpparibas.com Acknowledgement for their support and valuable input: Julien Duvaud-Schelnast, Ingomar Lang, Marlene Schlagbauer, Karim Taga, Clemens Schwaiger, Michael Williams, Agathe Martin, Kohulan Paramaguru, William Beavington
  3. 3. 3 How to ride the OTT wave Executive summary The telecom and media space is going through significant changes as the way we consume media evolves. In 2014, the move to content digitalization accelerated and we received confirmation of the emergence of key players in the video and music distribution industry. In this report, which draws from more than 110 interviews with executives from the telecom, media and Internet sector, we focus on the evolution of audio and video content delivery, and on the relationships between the major players in this ecosystem. ƒƒ The megatrend towards online nonlinear video usage will only accelerate in the coming years. ƒƒ New internet-based players compete with traditional ones in all segments of the value chain and are far too big to ignore. ƒƒ Content remains king. We expect the rise in OTT to drive further content cost inflation. ƒƒ Traditional media, both pay-TV and free-to-air,TV and radio, are threatened by pure OTT players. We explore three market scenarios with varying impacts on the different types of players, and we propose responses, including surfing the OTT wave, by launching their own OTT services. ƒƒ For telecom operators, we see the OTT wave first and foremost as a growth driver for superfast broadband usage – with monetization opportunities in access, but also in proposing value added services to traditional media players and medium-size pure OTT providers. ƒƒ We believe that a return to growth in European telcos’ revenues is finally in sight. Significant shifts in media consumption – the beginning The way we consume media – in particular, audiovisual content – is changing dramatically, with two concomitant trends: a strong increase in the number of digital devices such as smartphones and tablets, which are used more and more to watch videos and listen to music, and the rapid development in nonlinear usage. Beyond the fall in physical sales, the impact of the “digital revolution” on traditionalTV and radio is not evident – yet. A number of smaller channels have started to disappear and the profitability of largeTV channels has suffered, but so far they seem to have been impacted more from audience fragmentation and economic recessions than from the rise of pure online players. In addition, pay-TV penetration and revenues are still growing, with no evident slowdown recently. Conversely, telcos’ connectivity revenues have continued declining due to continued pressure on ARPU. However, the generational gap between traditionalTV viewers, radio listeners and digital natives is huge. We believe that in the coming years, these secular trends are likely to accelerate rather than slow down, creating massive opportunities and threats for all types of players in the value chain – the traditional ones as well as the emerging ones.
  4. 4. 4 How to ride the OTT wave New players and new business models: too big to ignore In all parts of the media delivery value chain – from content rights to distribution – a number of new actors have been emerging, leveraging new digital and online technologies to compete with traditional players.These new players include Internet giants such as Google (YouTube), as well as Amazon, Apple, Deezer, Spotify and Netflix. Their scale is already an order of magnitude bigger than that of traditional players in the value chain, even compared to large pay-TV or telecom operators.This is true both in terms of operational metrics (e.g. geographic footprint and audience) and in financial terms (market capitalization, ability to finance themselves). In each European country, many players have emerged and are competing in the online content distribution markets, with several business models (such as free-to-air, freemium, subscription based and transaction based).The largest and most successful players so far are global Internet leaders: Netflix, which is growing quickly on a global scale and accompanying its rise with large content investment;YouTube, owned by Google, looking beyond its free model; Apple, with further ambitions in streaming; and Amazon, which recently launched its Prime Instant Video service proposing S-VoD services. Is content still king? The evolutions of the ecosystem in the past few years have led to content producers capturing a growing share of value in the value chain. Will this trend continue with the rise of online services in the coming years? Not all content is alike: we show the huge range of value attached to different types of video content, the real king remaining the global sporting events or national football championships. However, beyond premium sports and live news, exclusive series have an increasingly important role.This format is perfectly suited for OTT S-VoD providers, so we expect more along these lines. Our analysis shows that unless one assumes Netflix’s customer bases in European countries will rapidly triple – reaching penetration of c.50% – which seems unlikely, even the leader in the OTT space will not have the scale to compete with the pay-TV leaders (such as BSkyB) for the whole range of their content line-ups. Still, our industry experts anticipate that overall content costs will continue rising in the coming years – and we agree. From a qualitative point of view, we expect the key words to be “exclusivity”, “series” and “attractive”. Finally, international content should continue to grow, even though the global-versus-local content battle remains undecided in Europe, with preferences varying by country. Serious threats to traditional media The rise of pure OTT players is a challenge for traditionalTV players, both pay-TV and free-to-air – but not all are equally placed to face these challengers. We believe that the largest and most innovative pay-TV groups will be able to adjust, but with rising costs, and leading free-to-airTV
  5. 5. 5 How to ride the OTT wave channels will also keep high advertising revenues.The most challenged players are smallTV channels and low-end pay-TV. Traditional pay-TV is facing competition from pure OTT players on multiple content segments, mainly on price. Also, with the rise of on-demand programs, there is less value in aggregating a large number of channels.The long tail of channels is therefore losing interest from users. As a result, we believe that the long tail of large pay-TV bouquets will be under growing pressure. Pure OTT players also compete with premium series production – hence, pay-TV players will be able to maintain their leadership in content, but they will face pressures on both prices and costs. Some Industry experts believe that there is a serious risk that pure OTT services may cannibalize traditionalTV in the long-term – i.e. that pure online video players have the scale and potential to move up the ladder and become the new pay-TV. Leading pay-TV groups should be able to adapt, fending off pure OTT competition by launching their own OTT services and leveraging their key assets, such as brand, relationships with content providers, technical skills, and last but not least, intimate and long-established relationships with their customer bases. However, this will require more costs (in content but also in new services) and probably some price adjustments. Finally, on the advertising revenue side, the move to online consumption is a threat to broadcasters’ advertising revenues. We believe that fee-to-air leaders should remain attractive to advertisers, and that innovative players will be able to capitalize on digital innovations, which can also enrich the advertising market. However, the new world will be a challenging one for smallerTV channels, which will not be able to amortize the growing cost of exclusive and attractive content for a sufficiently large viewer base. Three possible market scenarios The evolution of theTV market will depend on two main factors: 1) the level of virtualization in the edition and aggregation functions, versus the traditional programming function based on the manual analysis of audience; and 2) the share of the edition and aggregation market that the Internet players will capture – depending on the speed of change in behavior, Internet players’ ability to capture premium content, and the brand power and adaptability of traditional players. A strong parameter influencing the market’s evolution will be the strength of the local content in terms of its availability and users’ appetency for it in each country. We therefore see three scenarios for the evolution of the competitive landscape: ƒƒ Scenario 1: local and premium content continues to “win”, enabling a leading pay-TV operator to keep its leadership versus pure OTTs, limiting Internet players to a long tail of content with relatively lower value; ƒƒ Scenario 2: a few global pure OTTs manage to reach the scale necessary to compete with pay- TV on premium content; ƒƒ Scenario 3: global pure OTTs take over not only pay-TV, but the wholeTV market, attractive massive audience and advertising revenues.
  6. 6. 6 How to ride the OTT wave Growing strains on networks A much-talked-about consequence of the growth in online video is the massive increase in data traffic carried over the Internet, and hence over telcos’ networks. Ensuring that the quality of the viewing experience remains up to standards requires players to continuously upgrade their equipment. Key investment areas are the core networks, the interconnection between different players and content delivery servers. Local-access operators (telcos, cable operators) are very vocal about the need for content providers (e.g. Google – the owner ofYouTube – and Netflix) to contribute financially to the required investment. We expect continued jockeying on this subject – which is tightly linked to regulation (see Annex), but the situation has already evolved significantly. Indeed, we show that pure OTT providers are also investing a lot in their own delivery infrastructures (worldwide CDNs) and also that, in a growing number of cases, in the US as well as in Europe, they have struck financial agreements with local-access operators. Opportunities for telcos: not a one-size-fits-all The balance between risks and opportunities associated with the rise of online video appears much more favorable for telecom operators than for traditionalTV players. Indeed, telcos have much smaller vested interests than traditionalTV operators, and their network assets and advanced positions in the digital revolution are key assets that they can – and should – monetize. First, all telcos can create value through an “enabler” role, monetizing their network assets – i.e. turning the growing strains on networks into an opportunity. Regardless of the market scenario for the development of pure OTTs and its impact on traditionalTV players, telcos should benefit from the rise in online video usage in two core ways: ƒƒ Charging customers for faster speeds and/or data traffic.There is demand for this; ƒƒ Monetizing their network assets with global OTTs – basically charging them for a quality delivery. In addition, in a market scenario in which pay-TV players and smaller OTTs succeed (closer to scenario 1), telcos have the opportunity to provide additional services beyond the pure network connectivity to these players, becoming their partners of choice in their migration to the new online video world.This is a value-added wholesale model. Second, the revolution in theTV market can also be an opportunity for some telcos to generate revenues, not only as enablers, but also as direct players in online video and/or pay-TV. In our view, this is not for everyone. Our analysis shows that the opportunity for a telecom operator depends on two main factors: ƒƒ The operator’s scale, local and global; ƒƒ The market context, including: who the established pay-TV operators are; how developed the market is; how successful the pure OTTs will be; the customers’ appetite for local versus global content; the cost of content. Overall, opportunities forTelcos to actually create value by investing in content and/or their own pay-
  7. 7. 7 How to ride the OTT wave TV platforms will be the exception rather than the rule. Only the largest operators in specific market contexts can actually create value in such moves. For the majority, the preferred route should, in our view, be to partner with OTTs and local media players such as Pay-TV and FTA channels – sharing the risk and the upside with players that will have greater scale, both locally and globally. Telco revenues: a return to growth finally in sight As we anticipated, the sector revenue trend remained negative in 2014 (-3%), but this was a milder decline than in 2013 (-5%), thanks to improvements in both mobile and broadband. We have left our estimates for 2015–2016 virtually unchanged, with -1.5% in 2015e and stabilization in 2016e. Optimism has returned to executives across Europe, and we expect the sector to return to growth from 2017e, with 1% growth per year in the longer term and a +0.6% CAGR over the 2016e-2020e period. Figure 1: Evolution of European telecom industry revenue in eight European countries1) 111 104 94 89 87 87 88 89 91 93 86 85 82 80 79 78 77 76 76 75 24 25 26 26 27 28 28 28 28 28 0 50 100 150 200 250 197196 2013 202 2012 214 2020e2016e 192 2015e 193 20142011 221 2019e 195 2018e 194 2017e 192 -3.4% +0.6% In EUR billions Mobile service revenuesPay-TV Fixed-line revenues CAGR Changed (larger) and inserted in exec sum Source: Arthur D. Little/Exane BNP Paribas note: 1) Germany, France, UK, Italy, Spain, Netherlands, Belgium, Portugal
  8. 8. How to ride the OTT wave 8 1. Significant shifts in media consumption – the beginning The way we consume media – in particular, audiovisual content – is changing dramatically, with two concomitant trends: a strong increase in the number of digital devices such as smartphones and tablets, which are used more and more to watch videos and listen to music, and the rapid development in nonlinear usage. Physical sales – e.g. DVDs – have been falling off a cliff for a number of years, but the impact of the “digital revolution” on traditional TV groups is not evident. A number of smaller channels have started to disappear and the profitability of largeTV channels has suffered, but so far they seem to have been impacted more from audience fragmentation and economic recessions than from the rise of pure OTTs. In addition, pay-TV penetration and revenues are still growing, with no evident slowdown recently. Conversely, telcos’ connectivity revenues have continued declining due to continued pressure on ARPU. However, the generational gap between traditionalTV viewers and digital natives is huge. We believe that in the coming years, these secular trends are likely to accelerate rather than slow down, creating massive opportunities and threats for all types of players in the value chain – the traditional ones as well as the emerging ones. More and more time spent with digital devices In just four years (2010 to 2014), the average time spent on major media using smartphones and tablets in the UK has grown from 12 minutes (per day per person) to almost two hours (76 minutes on smartphones and 32 on tablets). In the same period, average TV and radio usage time has shrunk slightly. See Figure 2. In minutes In percent Average time spent per day1) with major media 2010–2014, UK adults 200 197 195 108 122 130 95 89 86 76 37 32 +5.7% 2014 519 2012 455 10 2010 415 11 1 2014 37.6% +22.8% 519 25.0% 16.6% 14.6% 6.2% 2012 455 43.3% 26.8% 19.6% 8.1% 2.2% 2010 415 48.2% 26.0% 22.9% 2.7% 0.2% CAGR Figure 2: Evolution of traditional and digital media consumption Source: eMarketer Oct 2014, note: 1) regardless of multitasking
  9. 9. How to ride the OTT wave 9 These UK statistics, even though potentially more advanced than the European average, are, in our view, very representative of the evolution of media consumption across Europe, with: ƒƒ A continuous increase in the total time that we spend each day consuming media content: +5% per year, on average; ƒƒ A shift from traditional devices such asTV sets and radios to new devices such as computers, smartphones and tablets – which now account for almost half of the total time spent on major media. Still, despite the strong growth in time spent on computers, smartphones and tablets, traditional devices (TV and radio sets) have so far seen only a small decline in their daily usage (by 2.9% per annum), continuing to capture more than half of users’ time, on average. Growth in content consumption mainly driven by growth in nonlinear usage The total time spent watchingTV and listening to radio has been increasing in European countries. For bothTV and radio, the increase in consumption is on linear as well as nonlinear content1 . However, nonlinear content has seen much stronger growth than linear content, and reached 10% of totalTV consumption in 2014. In minutes/day In minutes/day Evolution of linear and nonlinear TV consumption 2008–2014, Europe1) Evolution of traditional and online radio consumption 2008–2013, UK 219 219 226 230 233 232 232 2014 26 2013 22 2012 18 2011 14 2010 10 2009 7 2008 4 Linear averageNonlinear average 169 166 167 170 181 174 2013 11 2012 9 2011 6 2010 5 2009 4 2008 3 TraditionalOnline Figure 3: Evolution of average time spent viewing videos and listening to radio Source: IHS Electronics Media, Ofcom, Arthur D. Little/Exane BNP Paribas, note: 1) average of France, Germany, Italy, Spain, UK Generational gap The above-mentioned statistics are averages across the whole population.The evolution towards an increasing share of digital devices and nonlinear content is by far more evident when comparing behaviors of different age groups. In the UK, viewers between 1 LinearTV refers to service in which the viewer has to watch a scheduled program at the time it’s offered.The opposite of this is nonlinearTV, including video on demand. This is independent from the device used to watch the content (such asTV, PC, or tablet) and the distribution network. (LinearTV can be watched over the Internet on a tablet.)
  10. 10. How to ride the OTT wave 10 16 and 24 years old reduced their viewing time by 12.5% between 2010 and 2013, while the average viewing time of the entire population dropped by 4.3%. (Source: BARB for Ofcom) Younger age groups show a much stronger appetite for digital devices and nonlinear content. Although the above-mentioned evolutions affect all age groups, the younger generations are likely to maintain their consumption habits as they age – and this should further accelerate the overall trend. Physical sales are falling off a cliff The increase in online media usage has already strongly impacted the consumption of content on traditional physical supports. Both in volume and value, this market is dropping rapidly.The number of DVD and Blu-Ray rentals has fallen by 16% per year since 2008, and the market value (including rentals and purchases) has dropped by 9% per year over the same period. Physical video1) transactions 2008–2013, Europe2) Total revenues from physical video1) 2008–2013, Europe2) Total number, millions EUR millions 730 910 2013 5,802 2012 6,588 2011 7,177 1,036 2010 7,750 1,154 2009 7,936 1,243 2008 8,774 1,421 -9% Video salesVideo rentals 784 768 722 672 599 529 430 385 350 298 473 231 20122011 2013201020092008 -10% Video salesVideo rentals CAGR CAGR Figure 4: Evolution of physical video transactions and generated revenues Sources: International Video Federation, note: 1) including DVD and Blu-ray discs, 2) 23 European countries Impact on traditional TV groups is not evident… The analysis of the evolution of traditionalTV providers’ revenues, both free-to-air channels and pay-TV bouquets, shows that about half of the major EuropeanTV networks have seen their revenue drop or stagnate since 2008. In this context, only a limited number ofTV groups, essentially pay-TV players, such as Sky in Germany and the UK, have managed to significantly grow their revenue over the period. According to our interviews, this decline in revenue is mostly attributed to the appearance of newTV channels on the audiovisual landscape following the introduction of DTT – i.e. the fragmentation of audience, as can be observed, for instance, in France, where audience shares of traditionalTV channelsTF1, France 2 and France 3 have been declining in favor of the free DTT channels. (See Figure 6).This factor has been more important than the move to online consumption so far. In addition, a big factor explaining the weak revenue trends atTV stations has been the tough macroeconomic backdrop over the past few years. Free-to-air channels, which derive revenues from advertising, are particularly sensitive to the level of economic activity and business confidence.
  11. 11. How to ride the OTT wave 11 Evolution of revenues of main FTA and Pay-TV networks 2008–2013, Europe 2008.0 2008.5 2009.0 2009.5 2010.0 2010.5 2011.0 2011.5 2012.0 2012.5 2013.0 170 160 150 140 130 120 110 100 90 0 70 80 Basis 100 in 2008 RAI Mediaset Mediaset España Sky Germany Channel Four Television TF1 Group RTL Group ZDF France Télévisions ProSiebenSat.1 Media Atresmedia Televisión BBC Canal+ Group ITV Network Ltd Sky UK Figure 5: Evolution of media players’ revenues Source: Company reports, MediaDB, Arthur D. Little/Exane BNP Paribas Market shares of TV channels 1995–2013, France 0 5 10 15 20 25 30 35 40 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 4.4 2.8 11.6 9.5 2.0 14.0 1.8 37.3 14.3 23.8 17.6 3.3 11.5 5.5 22.0 3.3 10.8 22.8 2.9 Other channels Free DTT channels Thematic channels 2.3 DTT HD channels Free DTT channels’ market shares: 3.4% 3.2% 2.9% 2.2% 2.1% 1.9% 1.8% 1.7% 1.3% 0.8% In percent Source: Conseil National de l’audiovisuel France Figure 6: Market share of TV channels
  12. 12. How to ride the OTT wave 12 This activity lull has had a big impact on profitability for traditionalTV players in the period – see Figure 7 below. However, they have managed to recover, maintain or even grow their EBIT margins by adapting rapidly. Overall, at this stage, it is therefore difficult to affirm that the secular trends that we have described above have had a significant impact on the revenue of traditionalTV players. 2007 2008 2009 2010 2011 2012 2013 2014 50 15 10 5 0 -5 -10 -15 45 40 35 30 25 20 -130 Evolution of EBIT margins of main FTA and Pay-TV networks 2007–2014, Europe In percent TF1 Group Channel Four Television Corporation RAI Mediaset S.p.A. BBC [~ EBIT] Atresmedia Televisión France Télévisions ITV Network Ltd Sky Germany AG Canal+ Group ProSiebenSat.1 Group Mediaset Espana Comunicación Mediengruppe RTL Germany Sky Britain ZDF [~ EBIT] Figure 7: Evolution of media players’ EBIT margins Source: Company reports, Thomson Reuters, Arthur D. Little ... but a number of channels have disappeared Following the quick ramp-up in the number of channels across Europe in the wake of the development of digital terrestrial, cable and ADSL distribution, we have started to see a reversal of the trend, with a number of channels now disappearing. In France, for example, 2014 saw Stylia,TF6 and M6 Music Black stop broadcasting, and Canal+ announced the shutdown of Cuisine+, Home+ and Jimmy in 2015. These disappearances are probably due to the massive market entry of players in the earlier years, following the opportunity created by the switch to digitalTV – i.e. not everyone could survive, especially in a difficult macro-economic context in whichTV groups have to make tough choices (the need to recover profitability, as shown above). Still, this new trend shows that the business model of a number ofTV channels is fragile. A decline in revenues, driven by a decrease in audience and/or of share of advertising dollars directed to traditionalTV, could easily trigger a further drop in the number ofTV channels across Europe.
  13. 13. How to ride the OTT wave 13 Country Channel Owner Genres covered Lifetime Comment FR Stylia TF1 Lifestyle 1996 - 2014 Lifestyle programming is now broadly available via FTA TV channels TF6 TF1 M6 (50/50) Series and entertainment 2000 - 2014 Dwindling audience M6 Music Black M6 Music 2005 - 2014 Heavy competition and difficulties negotiating carriage by various platforms (Canalsat, Free, Bouygues, SFR) Cuisine+ Canal+ Lifestyle 2001 - 06/2015 Competition from FTA lifestyle channels in that genre Home+ Canal+ Lifestyle 2006 - 06/2015 Competition from FTA lifestyle channels in that genre Jimmy Canal+ Series and Entertainment 1990 - 06/2015 Content was partitioned into other Canal+ channels UK BBC Three BBC Series and Entertainment 2003 - 2015 (fall) Move to online distribution and reallocation of financial resources (savings of GBP 50 mn per year, of which GBP 30 mn will go into drama on BBC One) Crackle Sony Pictures Television Movies, series and entertainment 2010 - 2014 Sony would not clarify the reasons for shutting the online channel Argos TV Argos Tele-shopping 2011 - 2013 Reallocation of resources towards digital offer ES La Sexta 3 Atresmedia Corporación Movies 2010 - 2014 Supreme Court ruling that cancelled out the concession of additional channels to existing broadcasters, on the grounds that the concession was made without a public bid and that new operators were thus deprived of a chance to join the market - and 8 other channels from various Spanish broadcasters Figure 8: List of channels that have disappeared Source: Press releases, Arthur D. Little/Exane BNP Paribas Pay-TV is still growing As shown in Figure 9, we estimate that pay-TV revenues in Europe have continued to grow steadily in the past few years, by c.+3% per annum since 2010 – including pay-TV revenues of all types of players. Examples include satellite-based operators (DTH), cable operators (TV component of the triple-play packages) and telecom operators (pay-TV revenues derived from ADSL-based triple-play customers). Revenues Pay-TV 2010–2014, Europe1) EUR billions 2011 25.7 2012 24.8 2013 2014 26.4 +3.4% 24.0 2010 23.1 ARPU Pay-TV 2010–2014, Europe1) EUR -0.5% 2014 24.0 2013 24.7 2012 24.6 2011 24.6 2010 24.5 CAGR CAGR Figure 9: Evolution of pay TV ARPU and total revenues in Europe 2010–2014 Source: Arthur D. Little/Exane BNP Paribas Industry Model, note: 1) incl. FR, DE, UK, IT, ES, BE, NL, PT .
  14. 14. How to ride the OTT wave 14 The pay-TV ARPU has been broadly stable over the past five years, declining by c.0.5% per annum, as the increase in ARPU of traditional pay-TV providers has been diluted by the lower ARPU generated by new non-premium pay-TV offers.This has been led by telecom and cable operators and their triple-play offers, as well as new pay-TV players such as beIN Sports in France.This small ARPU decline is therefore more than compensated for by an important increase in pay-TV penetration. Connectivity revenues have been under pressure The ARPU of pure connectivity services provided by telecoms operators in Europe has been steadily decreasing since 2008, with a -3% CAGR over 2010–2014. However, average download (and upload) speeds have significantly increased over the period, leading to a decrease in total broadband revenues of 2% per year over the same period. ARPU Connectivity 2010–2014, Europe1) Fixed line, EUR 10.9 10.1 2010 34.8 46.6 35.7 -3.1% 2014 41.1 8.1 33.0 2013 41.9 8.8 33.1 2012 43.6 9.4 34.2 2011 44.9 Broadband Voice Revenues Connectivity 2010-2014, Europe1) Fixed line, EUR billions -2.1% 2014 81.0 34.3 46.7 2013 82.0 36.8 45.2 2012 84.6 39.6 45.1 2011 86.3 42.3 44.0 2010 88.3 45.6 42.6 VoiceBroadband CAGRCAGR Figure 10: Evolution of connectivity ARPU and total revenues in Europe 2010–2014 Source: Arthur D. Little/Exane BNP Paribas Industry Model, note: 1) incl. FR, DE, UK, IT, ES, BE, NL, PT
  15. 15. How to ride the OTT wave 15 In all parts of the media delivery value chain – from content rights to distribution – a number of new actors have been emerging, leveraging new digital and online technologies to compete with traditional players.These new players include Internet giants such as Google (withYouTube), Amazon, Apple and Netflix. Their scale is already an order of magnitude bigger than that of traditional players in the value chain, even compared to large pay-TV or telecom operators.This is true both: ƒƒ In terms of operational metrics, e.g. geographic footprint (billions of people versus tens or hundreds of millions) and audience; ƒƒ In financial terms, e.g. market capitalization in hundreds of billions versus tens of billions. In each European country, several players have emerged and are competing in the online content distribution markets, with several business models (free-to-air, freemium, subscription based, transaction based). The largest and most successful players so far in terms of viewership are global Internet leaders: Netflix, which is growing quickly on a global scale and accompanying its rise with large content investment;YouTube (owned by Google), looking beyond its free model; Apple, with further ambitions in streaming; and Amazon, which recently launched its Prime Instant Video service proposing S-VoD services. New players across the value chain We look at the media delivery value chain by segmenting it into five parts, in addition to the final user (see Figure 11): ƒƒ Content rights owners, e.g. movie producers,TV program producers, or music majors that own the content and sell the distribution rights to editors; ƒƒ Editors, traditionally theTV channels, purchasing content and organizing it in a consistent stream, eventually with advertising, following a specific editorial line; ƒƒ Aggregators, traditionally the pay-TV bouquets, compiling several streams from editors or content into a bouquet or library that is distributed via different platforms; ƒƒ Distributors, traditionally the satellite and cable operators, bringing the offer to the client and as well as taking care of the physical distribution of the audio/video stream to the screens; ƒƒ Terminal manufacturers, which produce the devices that display or play the content, or enable the content to be played on a screen (e.g. the set-top box). Increasingly, in addition to traditional players, new actors from the Internet are becoming active in the role of delivering content to end users. Actually, we believe that all five segments in the value chain are seeing the emergence of new types of players leveraging new digital and online trends. 2. New players and new business models: too big to ignore
  16. 16. How to ride the OTT wave 16 Content rights owner 1 Editor 2 Aggregator 3 Distributor 4 Terminal manufacturer 5 User 6  Movie producers  TV programs producers  Music majors  Users  OTTs and telcos commissioning original content  TV channels  Radio channels  Pay TV bouquets  Satellite operator  Cable TV operator  DTT multiplex/ technical broadcaster  Physical store  Radio broadcaster  Traditional TV set  Radio set  Linear TV viewing/radio listening  DVD/CD purchase/rental  Free-to-air or subscription based pay-TV  Online channel  OTT bouquet providers  OTT media library  OTT platform  Smart TV  Set-top box  PC  Tablet  Smartphone  Web radio set  Streaming  Nonlinear  Subscription based Traditional players New online players  Telecom operators  IPTV providers Figure 11: Value chain of media delivery Source: Arthur D. Little/Exane BNP Paribas New content providers are establishing themselves as global giants To understand the scale of the phenomenon, it is interesting to compare the sizes of the different types of players active in this market. For instance, looking at market capitalization of different types of groups, we show that the largest publicly listed telecom operators operating in Europe are each worth USD70–95billion.The largest content owners are worth USD65–185billion, and the three largest Internet players have market capitalizations of USD200–370billion, 2–4 times larger than the other players. Figure 12: Market capitalization of top 10 telco and cable companies, content providers and Internet players in Europe in 2015 Vodafone Group PLC 95,404 Walt Disney Co 185,290 Google Inc 368,311 DeutscheTelekom AG 85,915 Time Warner Inc 69,003 Facebook Inc 220,498 Telefonica SA 76,311 21st Century Fox Inc 67,088 Amazon.com Inc 198,790 America Movil SAB de CV 69,921 Vivendi SA 34,774 eBay Inc 70,411 BT GROUP PLC 60,648 Thomson Reuters Corp 32,106 Priceline Group Inc 62,903 Liberty Global PLC 44,870 CBS Corp 30,503 Yahoo! Inc 41,376 FranceTelecom 43,889 BSkyB Group PLC 28,662 Netflix Inc 34,267 Telenor ASA 36,101 Viacom Inc 26,499 LinkedIn Corp 25,379 TeliaSonera AB 27,109 Pearson PLC 16,663 Twitter 24,540 Telecom Italia 21,174 RTL Group SA 14,220 Rakuten Inc 22,566 Source: Thomson Reuters, Arthur D. Little/Exane BNP Paribas, note: 1) as of 11th of May 2015 Market capitalization of players active in Europe (Top 10 per sector, as of 20151), in USD millions) Telecom and cable operators Content Internet Total: 561,342 (26.3%) Total: 504,808 (23.6%) Total: 1,069,041 (50.1%)
  17. 17. How to ride the OTT wave 17 Furthermore, content and Internet players have global scale, while network operators often operate on local or regional scale. For instance, Netflix is present in 53 countries, with an addressable market of 1.3 billion people; Spotify is in 58 countries and has 1.7 billion potential users; while Vodafone, the largest telecoms operator in Europe in terms of market capitalization, is addressing a potential market of 1.7 billion in 20 markets. Also in terms of financing, companies such as Spotify recently raised EUR450m, while major European radio stations have much more limited means. (Annual revenue of French radio group RTL is EUR175m). In terms of audience,YouTube.com is the most visited web domain in Europe, with a total of 260 million unique visitors in February 2014 (Source: ComScore). At this date, Vodafone had ‘only’ around 125 million European customers (Source: Vodafone). A large number of platforms are emerging and the market is booming In each country, several players have emerged and are competing in the online content distribution markets. In particular, a large number of video-on-demand (VoD) platforms have emerged in Europe, often on a very small scale. In the MAVISE database, registering at European level, on-demand audiovisual services have more than 3,700 entries (Source: Observatoire Européen de l’Audiovisuel). Video illustrative Music Figure 13: Global video and music platforms Source: Arthur D. Little/Exane BNP Paribas
  18. 18. How to ride the OTT wave 18 France Germany Spain Italy UK Figure 14: Local video platforms per country Source: Arthur D. Little analysis illustrative The main business models observed for the online delivery of media content are illustrated in Figure 15 below. No significant offering No significant offering No significant offering VoD service categorization by business model InternetTelecom and cable operators Purely free (ad based, public funding) Freemium Subscription (SVoD) Transaction based A B C D Content Figure 15: Video platforms per type of player and business model Service selection Source: Arthur D. Little analysis, note: boxes indicate access to local content, e.g. national sport events, newsHighlighted
  19. 19. How to ride the OTT wave 19 A – Free-to-air model. In this model, the user does not pay directly for the content.The revenues are generated through advertising, by financing from public funding, via cross-subsidy from other services, or often by a combination of these three sources of revenue B – Freemium model. The user does not pay for the services, but has restrictions until he switches to a pay model. C – Subscription based. The user pays a fixed monthly fee for unlimited use of the service. Usually this model is based on streaming and the user cannot download the music/video on his terminal. In some cases in which downloading is possible, the user has some restrictions and can watch/listen to the content only when his subscription to the content is active. D –Transaction based. The user pays a fee each time he uses the service. Usually the user can download the content on his terminal. We can then differentiate two main models: download to own, in which the user owns the content and can listen to/ watch it an unlimited number of times for an unlimited time; and download to rent, in which the user can watch/listen to it a limited number of times over a limited period. Customer spending on VOD is exploding, in particular in S-VoD The VoD market recently witnessed a strong increase. In value, consumer spend on VoD has grown more than 70% per year since 2010. The first large-scale S-VoD models appeared in Europe in 2011, and enjoyed immediate success. Figure 16 depicts the significant shift in consumer spending from physical rental to online VoD services, which developed along various pricing models, such as download to own (DTO), download to rent (DTR) and subscription based (SVoD). The parallel analysis with the decline in the DVD market is striking. Consumer spend on VoD per transaction model 2009–2013, Europe1) EUR millions 2013 1,183 2012 686 2011 364 2010 236 2009 200 +71.1% Online DTO-VoDOnline SVoD Online DTR-VoD Consumer spend on physical video rental 2009–2013, Europe1) EUR millions 730 910 -12.4% 201320122011 1,036 2010 1,154 2009 1,243 CAGR Sources: TV Video Yearbook 2014, note: 1) 23 European countries, DTO = Download to own, DTR = Download to rent Figure 16: Evolution of consumer spend on OTT VOD services per business model On-demand music is rapidly moving to subscription-based services In the music market, download services still represent 52% of online music revenues, but revenues from subscription-based music- on-demand-services (MoD) are growing at a fast pace, contributing an estimated 29% (EUR460m) to the total spend on online
  20. 20. How to ride the OTT wave 20 music so far in 2015. Subscription services for MoD have already gotten ahead of download services in terms of usage in a number of European markets, e.g. Sweden, France and Italy. Consumer spend on online music per type of service 2008–2015e, Western Europe In EUR millions 1,600 18.9% 52.4% 28.7% 2014 1,297 23.2% 53.9% 22.9% 2013 1,233 27.5% 55.5% 17.0% 2012 1,201 31.4% 56.8% 11.9% 2011 1,001 34.3% 57.3% 8.4% 2010 933 36.8% 57.2% 6.0% 2009 779 37.5% 57.8% +14.3% 2015e 4.7% 2008 629 38.5% 57.2% 4.3% Personalization services1) Download services Subscription services Internet users using music subscription/ download services in the past 6 months2) (2014), per country In % CAGR 12 22 32 36 47 21 33 15 9 7 DEUKITFRSE DownloadsSubscriptions Figure 17: Evolution of consumer spent on MOD services per business model Sources: Gartner, Ipsos MediaCT, Arthur D. Little/Exane BNP Paribas, note: 1) ringtones, ring-back tones, 2) also includes free users of subscription services Companies such as Spotify, Deezer and Rhapsody/Napster are proposing similar catalogs. Around 30 million songs are proposed for unlimited usage at around 10€/month (including VAT). Differentiation between these platforms is difficult, and mostly driven by the conditions negotiated by the content owners, which enable limited marketing creativity for the distribution platforms. Case study – Netflix, the rising star New players such as Netflix,YouTube, Apple and beIN Sports are representative examples of the business model innovation undertaken by fully digital companies. Netflix, perceived as the rising star, launched its services in Europe in 2012, and in January 2015, it claimed that it had about 9m subscribers in Western Europe. Netflix history and business model Netflix started in the US in 1997, first by renting out physical DVDs and delivering them by post.The Netflix model then evolved to online, and has met significant success over the years. As described in Figure 19, Netflix is a pure OTT service that produces content or acquires rights. Netflix’s content strategy is based on a large catalog of rather old content, mainly based on movies produced in the US and a limited amount of very exclusive content (around 300 hours) with international and local series. Netflix also mainly includes a powerful recommendation engine and is distributed both directly and indirectly with tiered pricing.
  21. 21. How to ride the OTT wave 21 Netflix’s global expansion Breakdown of Netflix subscribers per country end of 2014, Western Europe 200 countries by 2017 Subscribers paid, in millions % of Households Launch Norway 0.90 39% 2012 Denmark 0.79 30% 2012 Finland 0.54 21% 2012 Sweden 1.10 26% 2012 United Kingdom 3.30 12% 2012 Netherlands 0.94 12% 2013 Ireland 0.18 11% 2012 Luxembourg 0.011) 5% 2014 Switzerland 0.14 4% 2014 France 0.51 2% 2014 Germany 0.47 1% 2014 Austria 0.05 1% 2014 Belgium 0.031) 1% 2014 Figure 18: Netflix: geographic breakdown of subscribers in Western Europe Source: Arthur D. Little/Exane BNP Paribas, New York Times, Digital TV research, note: 1) as of September 2014 Original and licensed contentPure OTT Tiered SVoD pricing  Netflix is a pure OTT player that partners with ISPs on a technological level to efficiently deliver content, thus managing QoS  Netflix provides three classes of a monthly subscription-based video-on-demand offer  SD € 7.99.-  HD € 8.99.-  UHD € 11.99.-  Netflix provides video-on-demand services of original and licensed content  Netflix approaches the question of creating successful content by systematically micro- tagging available content and analyzing big data on user behavior Position at technological edge Recommendation engine Distribution  Netflix acknowledges its recommendations engine as a central competitive advantage  User behavior and taste are derived from an algorithm that combines offline machine learning experimentation with online AB testing  Netflix is distributed either directly over its Internet platform  or via a reselling partnership with local telecom and cable providers, which make it accessible via their set-top boxes, ie:  Netflix is producing its original content (so far House of Cards, Marco Polo) in ultra-HD (4K), trying to position a differentiation factor against the traditional pay-TV offers  Its positioning at the technological forefront of the matter enables Netflix to use the image of a pioneer      ISP Virgin Media, UK Com Hem, SE Waoo!, DK Proximus, BE ….. 1 2 4 # of devices that can use Netflix’s offer simultaneously Figure 19: Netflix business model Source: Arthur D. Little / Exane BNP Paribas, New York Times, Digital TV research Strong worldwide growth Since 2011, Netflix has managed to both grow its customer base, with a 35% CAGR, and to progressively increase its share of paying subscribers – users enjoy a free trial period in the beginning.This growth was driven by Netflix’s penetration increase in US households, as well as by its geographical expansion, as Netflix has expanded in Canada, Latin America, Australia and Europe.
  22. 22. How to ride the OTT wave 22 Figure 20 illustrates Netflix’s latest published figures for 2014 with a customer base exceeding 57 million households worldwide, of which 95% are paid customers and 32% are located outside the US. Forecasts Subscribers paid/free 2011–2020e, worldwide Subscribers US/international 2011–2020e, worldwide Total number, millions Total number, millions 146,2 143,8 2,4 2019e 129,4 127,0 2,4 2018e 113,0 110,6 2,4 2017e 96,7 94,3 2,4 2016e 80,4 78,0 2,4 2015e 72,4 69,4 2,9 2014 57,4 54,5 2,9 2013 44,4 2020e 41,4 2,9 2012 33,3 30,4 2,9 2011 23,5 21,6 1,9 PaidFree 61,8 2017e 96,7 48,6 48,1 2016e 80,4 45,4 35,0 2015e 72,4 43,9 28,4 2014 57,4 39,1 18,3 2013 44,4 33,4 10,9 2012 33,3 27,1 6,1 2011 23,5 21,7 1,9 51,2 2020e 146,2 55,0 91,2 2019e 129,4 53,3 76,1 2018e 113,0 USAInternational Figure 20: Netflix subscriber base evolution Source: Netflix, Arthur D. Little/Exane BNP Paribas Forecasts Likewise, Netflix has continuously grown its revenue, as can be seen in Figure 21. Nevertheless, operating income was very low in 2012 and negative in 2013 due to a significant increase in marketing and technical distribution related to its penetration of new markets. ForecastsForecasts Streaming revenues 2012–2020e, worldwide Operating income 2011–2020e, Streaming + DVD, worldwide In USD millions 712 2020e 15,717 5,603 10,114 2019e 13,679 5,430 8,249 2018e 11,744 5,214 6,530 2017e 9,843 4,895 4,949 2016e 8,010 4,515 3,494 2015e 6,237 4,021 2,216 2014 4,739 3,431 1,308 2013 3,464 2,751 2012 2,472 2,185 288 USAInternational 744 542 403 -63 50 376 2013 3,849 2019e 2020e 2,840 2018e 2,017 2017e 1,370 2016e2015e201420122011 In USD millions Figure 21: Netflix revenues and operating income Source: Arthur D. Little/Exane BNP Paribas
  23. 23. How to ride the OTT wave 23 Massive investment in content In parallel, Netflix also significantly increased its investment in content, as detailed in Figure 22. This enabled Netflix to make the content available in multiple markets and add original content to its catalog.The amounts spent by the group are amortized on a global scale and therefore not directly comparable with the amounts spent by national broadcasters, but these figures give an idea of relative sizes and power. Spend on content 2010–2014, worldwide 1.6 2.0 2012 3.0 2013 20142011 0.9 2010 0.3 USD billions (estimates) Figure 22: Netflix cost of content Source: Investor relations, Leichtmann Research Group, Inc., Arthur D. Little analysis Case study – YouTube: looking beyond free Google’sYouTube distributes content with an advertisement model.YouTube is also looking at options to introduce a paid revenue stream. Revenue generated through advertisement is shared with the content creator according to the following model: Gross ad revenues 2011–2020e, worldwide In USD billions CAGR Ad revenue split model Shares on gross ad revenues Threshold according to YouTube rate card (ranging from 4,000 to 120,000 euros, depending on category) 55% 100% Content creator Figure 23: YouTube model 20.0 5.6 3.7 2.0 2020e1)201320122011 +29% Source: YouTube, Variety, Forbes, WSJ, Morgan Stanley, Time; note: 1) Estimates by Forbes and Morgan Stanley
  24. 24. How to ride the OTT wave 24 YouTube revenues come almost entirely from advertising, andYouTube accounted for almost 20% of the US online video advertising market in 2013. Revenues from paid content have not reached a significant level yet. For this paid content, the channel owners set the financial conditions: either a subscription monthly/yearly (from $0.99.-to $5.99.-/month) or a pay-as-you-go model. Paid content owners have the option to enable advertising on their channels as an additional revenue stream. YouTube shares the revenues generated by advertising with the content owner: 45%YouTube/55% content creator – up to a threshold. Above that threshold 100% of ad revenues go to the content creator.The actual ad price (CPM) is negotiated between YouTube and the advertiser based on a number of contextual factors relating to the video.The content owner has no influence on this.YouTube’s CPM is usually in the range from $18 to $24. Google recently announced its launch of a MVNO in the US, and could potentially bundle the mobile service with access to specific YouTube paid content at preferred rates. Case study – Apple ambitions The content strategy of Apple is based around the iTunes platform, which delivers video and audio content via a transaction-based model.The content is then limited to use on Apple devices as a means of enriching the value of the equipment sold by the company. Apple is looking to enter the audio-streaming market following the acquisition of Beats in 2014.The group has also announced plans to enter the pay-TV space in the US in autumn 2015, with aTV bouquet on its AppleTV platform. (So far, the limited success of the AppleTV has been attributed to its lack of attractive content). Apple acquired Beats Electronics, including Beats Music for USD 3 billion. Beats Music is a subscription-based online music- streaming service that gives users access to more than 20 million titles. Apple has announced plans to integrate Beats Music into iTunes or merge the two brands, giving Beats a permanent place on its 800-million-sold devices’ home screens.The monthly subscription is currently at USD 9.99.-/month for up to three devices, but this is expected to be cut. Evolution of Apple’s revenues total and share by product In USD millions  Central store and media library for content purchased from Apple  Focus on multi-device accessibility within the Apple ecosystem 7% 4% 18% 20% 19% 4% 100% Acces- sories iTunes, software and services iPod Mac iPad iPhone 2013 170,910 3% 9% 3% 13% 53% 2012 156,508 3% 8% 15% 50% 2011 108,249 9% 20% 42% App Store Music 62.0% 24.0% 14.0% Videos, books, other In terms of revenue, content might still be a side business for Apple – but the announced integration of the newly acquired music subscription offer “Beats” into the next version of iOS signals the strategic value of music content for the company Movies TV shows on demand  85,000 movies1)  300,000 TV shows1) Music on demand  Audio titles (43m songs1))  Music videos  iTunes Radio Source: Arthur D. Little analysis, Apple investor relations, Financial Times note: 1) total amount worldwide, not available in all countries Figure 24: Apple iTunes model
  25. 25. How to ride the OTT wave 25 Case study – beIN Sports innovates in pay-TV beIN Sports is a pay-TV bouquet available in France that focuses on sports. Although the business model, with a subscription-based offering providing a set of linear channels, is not significantly new, the positioning purely on sports is new. It has aggressive pricing, is relatively innovative compared to traditional pay-TV offers and provides a wide range of content at a higher price.The company has significantly invested into acquiring content, with reasonable success. However, the long-term sustainability of the model is questioned, with projected cumulative losses estimated at EUR1.8bn in 2020 (Source: BFM Business) and the recent loss of the RugbyTop14 rights against Canal+.  In Europe, beIN Sports is available in France only, where it is included in TV bouquets of French television operators or accessible via beIN Sports Connect – an OTT application  beIN Sports offers 10 channels with premium sports content, live and with a rewind function (go back for max. of two hours), accessible via PC/Mac, smartphone tablet and gaming consoles  Monthly subscription beIN Sports Connect: – without engagement: € 12.00.-/month – with engagement: € 11.00.-/month1) Subscribers and content 2012-2014, France Access and pricing Subscribers, millions  Sports content: 2.5 2.0 0.0 1.5 1.0 0.5 June 2014 2.5 February 2014 1.8 June 2013 1.4 October 2012 1.0 June 2012 0.0 Football World Championships Brazil 2014 Figure 25: beIN Sports model Source: Arthur D. Little analysis, Kantar Media, note: 1) 12-month engagement, € 5.50.-/first two months OTT non-exhaustive Included in TV bouquets of
  26. 26. How to ride the OTT wave 26 3. Is content still king? The evolutions of the ecosystem in the past few years have led to content producers capturing a growing share of the value chain. Will this trend continue with the rise of pure OTT players in the coming years? Of course, not all content is alike: we show the huge range of value attached to different types of video content, the real king remaining the global sporting events or national football championships. However, the premium sports and live news, exclusive series have an increasingly important role.This format is perfectly suited for OTT S-VoD providers, so we expect more along these lines in the coming years. Our analysis shows that unless one assumes Netflix’s customer bases in European countries will rapidly triple – reaching penetration of c.50% – which seems unlikely – even the leader in the OTT space will not have the scale to compete with the pay-TV leaders (such as BSkyB) for the whole range of their content line-up. Still, our industry experts anticipate that overall content costs will continue rising in the coming years. From a qualitative point of view, we expect the keywords to be “exclusivity”, “series” and “attractive”. Finally, international content should continue to grow, even though the global-versus-local content battle remains undecided in Europe, with preferences varying by country. Figure 26: Evolution of value captured by different players of the ecosystem Flow of funds in the media industry total in France, Germany, Italy, Spain, UK, 2013 Source: Arthur D. Little analysis, note: all figures in EUR, all percentages are CAGR 2007–2013 PUBLIC FUNDING 77.6bn (-2.1%) 8.7bn (-3.4%) 8.7bn (+0.7%) 9.8bn (+29.2%) 20.7bn (+12%) 20.8bn (-3.6%) 24.4bn (-6.7%) 4.4bn (+4.2%) 35.7bn (-1.3%) 9.5bn (+2.6%) 10.2bn (-3.7%) 8.4bn (+24.5%) Retained: 39.5bn (-5.0%) Retained: 22.1bn (+13.7%) Retained: 63.7bn (+0.6%) Total spend: 22.6bn (+2.1%) ADVERTISING SPEND CONSUMER SPEND Total spend: 87.4bn (-0.5%) Total spend: 53.8bn (-1.3%) Retained: 38.6bn (-1.7%) Offline spend Online spend TRADITIONAL AGGREGATORS ONLINE PLAYERS CONTENT PRODUCERS / RIGHTS HOLDERS TRADITIONAL RETAILERS
  27. 27. How to ride the OTT wave 27 Until now, content owners have played the game very well The 2014 Arthur D. Little study “Flows of Funds” in the media industry illustrates the dynamics “of the funds flowing through the industry between 2007 and 2013”. It shows that changes in user behavior from offline to online have strongly benefited the online players, to the detriment of traditional players (See Figure 26 above). Interestingly, content owners have been benefiting from this move with an increase in their revenue since 2007. It is, however, uncertain how long this trend can last, since a number of players competing for content are increasingly cash constrained. The different types of video content ƒƒ The cost of the content relates either to the content acquisition cost when rights owners are not media studios, or to content production costs otherwise; ƒƒ The local/global aspect describes the geographical relevance of the distribution. News and talk shows are particularly local, whereas movies and series usually have global reach; ƒƒ The live aspect is key to identifying content whose relevance decreases significantly when put in a VoD catalog. Figure 27 describes six content segments and 14 subsegments.The peak in terms of content acquisition costs is reached for global sporting events and national football championships, with an average cost of EUR6m per game. Production costs also give a sense of the content value, but have to be put into perspective with the different monetization possibilities used by rights owners. For example, in the case of a movie, those would also include movie theater revenue, DVD and multiple sales to differentTV channels (including pay-TV) as well as VoD services. Premium content is a key differentiator for pay-TV – live sports and premium movies, but also increasingly premium series, and these are mostly fixed costs Pay-TV providers are leading a fierce competition to build an attractive content catalog. Premium content is highly valued by those players.There has also been a growing interest in series over the last few years. Content segment Sub-segment Examples Non-exhaustive Price range (in EUR millions) Transmission Local/ GlobalProduction costs National license acquisition costs Sports Premium sports International competitions (Olympic games 2012) (Football World Cup 2014) (Football Champions League) National football championships (Premier League England 2014) (Ligue 1 France) Motorsports (Formula 1) Other sports, event-based, e.g. (Rugby World Cup) (Tennis Wimbledon) 0.08/game Up to 3.3/event or day (45–65; 3.3/day) (130–180; 2–3/game) (1–3/game) Up to 6/game (6/game) (2/game) Up to 3/race 2-3/race Up to 1/event (0.85–0.95/game) (0.43/game) Live Global Global Local Local Local Global Local Local Other sports 2nd League football, Handball, Basketball, Ice hockey, Skiing, etc. Live All Local Entertainment Reality TV Voting related Job search, dating, etc. Up to 0.9/episode 0.08-0.38/episode Live Pre-recorded Local Local Global Events Society (Oscar awards) (Royal wedding Monaco) Concerts (New Year’s concert) Adventure (Red Bull Stratos) 15 (0.4/event) Live Global Local Global Global Kids’ shows Pre-recorded Local Global Talk Shows Pre-recorded Local Movies Hollywood studio movie 23–320 Pre-recorded Global Independent movie (no “Big-6” studio) Up to 75 Pre-recorded Local Global Premium TV movies (TV only) Up to 11 (11/movie) Pre-recorded Local TV Series Premium TV series 1.5–6.8/episode Pre-recorded Global Other TV series (Independent crime series) 1.4/episode Pre-recorded Local Global Local Animation 0.45–0.53/episode Pre-recorded Local Global Documentaries (Science topic) up to 19/episode 0.65/episode Pre-recorded Local Global Newscast Pre-recorded Local Source: Arthur D. Little/Exane BNP Paribas Figure 27: Video content segmentation and cost in large European countries
  28. 28. How to ride the OTT wave 28 Content drivers of Pay-TV subscriptions “Please indicate how important the following genres of content are to your TV-viewing habits.” Numbers reflect the occurrence of a genre in the top-two boxes of a seven-point scale, in percent 19 23 24 50 51 58 46 17 16 17 26 40 Late-night comedy Paid-subscription shows Live events Live sports Prime-time shows News Free-to-air usersPay-TV subscribers  Pay-TV subscribers rank any genre higher than free-to-air users respectively – they generally attribute a higher level of importance to the TV content they consume.  Live sports events are significantly more important to pay-TV subscribers than to free-to-air users. Thus, they become the most important differentiation factor between the two kinds of linear TV. Figure 28: Pay-TV subscription drivers Source: comScore on US TV users In order to attract customers, pay-TV providers heavily rely on live broadcasts – more specifically, news, sports and shows. Figure 28 highlights that premium sports represents the main reason for which users subscribe to pay-TV. (Live Sports is the category with the largest difference between pay-TV subscribers and free-to-air users. News is the most important category for pay-TV subscribers, but also for free-to-air users). Volumes of VoD by genre 2007-2013, France In percent Revenues from VoD by genre 2007–2013, France 2013 68.0% 32.0% 2012 65.8% 34.2% 2011 60.1% 39.9% 2010 61.2% 38.8% 2009 35.8% 64.2% 2008 27.9% 72.1% Series and moviesOther In percent 2008 2009 2012 38.5% 201320112010 39.7% 46.7%46.6% 63.7% 68.9% 53.4% 36.3% 31.1% 53.3% 60.3% 61.5% Figure 29: Series increasingly gain audience on VoD Source: GfK Consumer Choices
  29. 29. How to ride the OTT wave 29 Among the different types of content proposed by VoD providers, movies and series represent an increasing share of media consumption. Figure 29 illustrates that, in France, this phenomenon has particularly grown since 2010 – when it exceeded the 60% threshold in viewing time and the 50% threshold in revenues. Series have several advantages for the distributors: they create stickiness, as the user will come back to see all the episodes.They also cost less than movies, with a large number of episodes being produced as part of the same production. Finally, the series can be renewed season after season. Media editors and aggregators rely on their catalogs to enroll customers VoD service providers rely on both breadth and exclusivity of content to attract viewers. Figure 30 illustrates the positioning of the different players: ƒƒ Global pure OTT players such as Netflix and Amazon manage to attract viewers with their large and mainly international catalogs, using advertising-based business models for the largest ones and subscription-based models for premium content. ƒƒ Free-to-airTV channels such asTF1 and ITV benefit from large viewership as they reach allTV households in a country.Their catch-up services leverage the same content, mostly free to access but with pay-per-view models for premium content or after a given time period. ƒƒ Local OTT services, most of them recently launched, charge EUR4 to EUR15 per month and have lower penetration rates/ audiences than the two previous types of players.They differentiate from catch-upTV services with premium content. ƒƒ Finally, at the high end of the market are premiumTV channels such as Sky and Canal+, with high ARPU and a large availability of premium content. For the moment, there are limited offers in the EUR7–10 per month range with a sizable success – with the exception of Netflix. Notes: 1) FTA channels assumed to provide 4,380 titles/year [12*365; avg. duration: 1 hr/title, 50% repetition per day] 2) TV take-up per country represents FTA viewers 3) Catch-up channels assumed to provide 2,920 titles/year [12*365*2/3] 4) Yearly subscription to Amazon Prime by month = EUR 4.08.- Free 45 105 55 40 20 15 10 5 0 1,000 221211109 35 25 876540 Germany BritainFrance Italy Spain Filmin Nubeox sd Sky Online Maxdome Voddler Viewership(millions)[monthlysubscribersoruniquevisitors/month] Size of bubble indicates amount of available content Yellow bubble indicates premium content Monthly subscription (EUR/month) 4) FTA catch-up channels3) Global OTT Local OTT Pay-TV FTA channels1,2) Source: Arthur D. Little/Exane BNP Paribas Figure 30: VoD service per price, audience and size of catalogue
  30. 30. How to ride the OTT wave 30 How will the current shifts affect the content rights market? Based on our interviews, on average in Europe, the market evolution is expected to push content towards premium and global production, as illustrated in Figure 31. The chart shows that: ƒƒ Executives in all countries typically expect to see evolution towards premium and more expensive content (except for France); ƒƒ Regarding the balance between local and global content, opinions vary more by market. France, Italy and the Nordic countries are more sensitive to local content, while Spain, Belgium, Central Europe and the Netherlands expect the current balance to remain unchanged, and Germany and the UK foresee evolution towards more global content. Looking now at how the different types of players see this question: ƒƒ The average European view is strongly championed by telcos; ƒƒ Media players expect a strong shift towards premium content, but a slight shift towards local content; ƒƒ On the other hand, OTTs expect content cost to decrease, with no major change in the local/global balance. We expect the rights acquisition costs to increase. Around two-thirds of our interviewees saw an increase in content cost. Half saw the increase more specifically affecting premium content, while the other half forecasted an overall increase. 33% Overall increase Stable 13% Only premium will increase 47% Decrease 7% Figure 31: Interview feedback – What will be the key evolutions for content production and cost? -80 -60 -40 -20 0 20 40 60 80 -100 -50 0 50 100 EUROPE Netherlands Nordics Central Europe Spain Germany Italy UK Belgium France -80 -60 -40 -20 0 20 40 60 80 -100 -50 0 50 100 EUROPE Others Telcos Regulators Media OTT Mass content/ user generated (cheap) Premium (expensive) Local Global Local Global Source: Arthur D. Little/Exane BNP Paribas
  31. 31. How to ride the OTT wave 31 Towards pan-European rights? It is important to note that we are in the early days regarding content purchasing at the European level. The model has historically been constrained by the sellers, but this may change. Netflix has initiated the purchase at global level. For example, Netflix acquired from Warner Bros. the exclusive subscription on-demand rights for the series “Gotham” in all the countries in which it operates. Such a trend could minimize the risk for content owners that obtain in one transaction a European reach for their content. It also reduces the potential gain if the content were to be broken down into national rights and sold in each of the European countries. Will online video players compete against traditional providers for content? Pure OTT players are gaining traction in the media industry. For example, as detailed in section 2, Netflix reached 57.4 million subscribers by the end of 2014, 95% of which were paid subscribers.This important subscriber base generated over USD4.7bn in revenue and USD776m gross profit (net of direct costs and marketing) in 2014. With such firepower, it is logical to wonder whether pure OTT players will increasingly compete with local pay-TV channels for exclusivity on content such as premium sports, premium movies and local content. The analysis described in Figure 32 shows that in order for a pure OTT player like Netflix UK to propose a content catalog that could compete with BSkyB while amortizing its cost, it would require an additional 9.4m subscribers – i.e. it would need to have a subscriber base of c.13m and hence penetrate 50% of UK households. We do not see this as a reasonable assumption in the short to medium term, given the strong market position of traditional pay-TV players. This theoretical analysis is based on a pure OTT player like Netflix investing GBP250m annually in Premier League rights (which corresponds to a fraction of the sports contents acquired by BT for 2016e – see Figure 55. In addition Netflix has been explicit about not investing in sport), as well as an additional GBP300m in premium series and movies and original local content (which represents 25% of what BSkyB invests in those segments). 647 150 Football Premier League rights 250 TotalMarketing, technology development, GA 97 Long tail 0 Original content, locally produced 150 Licensed premium movies series Annual rights costs and theoretical Netflix’s customer base growth to fund premium content acquisition In GBP millions Additional customers required at GBP 6.99.-/month 3.6 m 2.2 m 2.2 m 0 m 1.4 m 9.4 m Equivalent to BT’s level of investment Equivalent to 25% of BSkyB’s investment Already included in Netflix’s catalogue 15% of revenue from OTT benchmark Graph changed Figure 32: Assessment of Netflix’s ability to purchase premium rights in the UK Source: Arthur D. Little/Exane BNP Paribas
  32. 32. How to ride the OTT wave 32 Even considering a scenario in which Netflix only competes in the premium movies and series and original content segments, this would represent over GBP350m (including 15% for marketing, technology, development and GA). It would therefore require over 5m additional subscribers. We do not expect Netflix to achieve such scale in the short to medium term, either. Yes, good content will still be king We expect the shift of the ecosystem toward an increasing number of media distributors to increase the competitive intensity for content rights acquisition.This means that content prices are likely to continue to increase. We expect content rights owners to continue capturing an increasing share of the value in the ecosystem. We also anticipate changes regarding video content quality over the coming years, along four axes: ƒƒ More exclusive content ƒƒ More series ƒƒ More international content ƒƒ More attractive content Exclusive content being a key differentiator for VoD services, we expect VoD providers to invest into producing their own content and leverage on it to build their brand image. This evolution would go along with an ongoing shift towards series that engage customers in the longer term and represent an investment better suited to the capabilities of VoD companies.They can extend/stop after the trailer and the season, and series offer a better production cost/video time ratio than movies. Then, the S-VoD model fosters the production of a limited number of global blockbuster contents, which will be amortized among a wide customer base. We also expect that the shift towards VoD will favor attractive content, to the detriment of less attractive content, by making it available at any time. So far, the increase in content rights has been financed by the uptake in video services driven by broadband penetration increase. In the future, we believe that the amount of content will need to be reduced in order to finance a limited, but more expensive set of content.
  33. 33. How to ride the OTT wave 33 The rise of pure OTT players is a challenge for traditionalTV players, both pay-TV and free-to-air – but not all are equally placed to face these challengers. We believe that the largest and most innovative pay-TV groups will be able to adjust, but with rising costs, and that leading free-to-airTV channels will also keep high advertising revenues.The most challenged players are smallTV channels and low-end pay-TV. Traditional pay-TV is facing competition from pure OTT players in multiple content segments, but mainly on price. As such, we believe that the long tail of large pay-TV bouquets will be under growing pressure. Pure OTT players also compete with premium series production – hence, pay-TV players will be able to maintain their leadership in content, but they will face pressure on both prices and costs. Industry experts believe that there is a serious risk that pure OTT services may cannibalize traditionalTV in the long-term – i.e. that pure online video players have the scale and potential to move up the ladder and become the new pay-TV. However, pure OTT players will face a number of challenges themselves if they are to succeed in such a revolution. Leading pay-TV groups will be able to adapt, fending off OTT competition by launching their own OTT services and leveraging their key assets, such as brand, relationships with content providers, technical skills and, last but not least, intimate and long-established relationships with their customer bases. However, this will require more costs (in content as well as new services) and probably some price adjustments. Finally, on the advertising revenue side, the move to online consumption is a threat to broadcasters’ advertising revenues. We believe fee-to-air leaders should remain attractive to advertisers, and that innovative players will be able to capitalize on digital innovations, which can also enrich the advertising market. However, the new world will be a challenging one for smallerTV channels, which will not be able to amortize the growing cost of exclusive and attractive content on a sufficiently large viewer base. Traditional pay-TV is facing competition in multiple content segments as-well-as on price The long tail of large pay-TV bouquets is under pressure By providing any user with access to quality thematic content, free VoD services such as catch-up services from free-to-air channels or free video platforms such asYouTube and Dailymotion put pressure on the long tail of channels offered by pay-TV bouquets. Putting together free-to-air catch-up services andYouTube channels, customers can get a choice of content similar to the long-tail of premium pay-TV bouquets – as shown in Figure 33 in the case of Sky Deutschland. Pure OTT players also begin to compete with premium series production As seen before, Pure OTT players are increasingly investing in their own original content, and more specifically, in premium series. Well-known examples include House of Cards, Alpha House, Marseille and Vorstadtweiber. (This effort still brings the number of hours of exclusive programs on Netflix to 320h for 2015, versus more than 1,000 per month for a typical large free-to-air channel.) This effort is key for pure OTT players to differentiate with exclusive content, as well as to have a number of content rights at their disposal that can be monetized on a global scale, allowing rapid expansion and delivery into a global footprint. 4. Serious threats to traditional media
  34. 34. How to ride the OTT wave 34 Identified genre of channel Quantity of channels offered on Pay-TV1) Comparable content available on YouTube? Comparable content available for free on FTA catch-up services? Pay-TV channels covered on YouTube or FTA catch-up Animation 6 Animation movies 1 Crime 3 Erotic 1 Folk 2 History 2 Lifestyle 2 Movies 13 Music 2 Nature 3 Premium movies 1 Premium series 1 Premium sports 8 Reality 1 Science fiction 1 Series 3 Soaps 2 Sports 3 Sports news 1 Coverage of Sky Germany’s offer in YouTube and FTA catch-up channels 2015, Germany                                          Figure 33: Coverage of pay TV long tail channels in YouTube and FTA-catchup services Source: Sky Germany company landing page, Arthur D. Little, Note: 1) Non-repetitive: meaning HD, +1h, +24h versions of channels not included 9 8 6 1 1 1 1 3 20142013 2015 ITV, UK Amazon Netflix HBO, USA Showtime, USA CBS, USA AMC, USA Fox, USA FTAOTT Pay-TV Nominations per type of player Golden Globe awards 2013–2015  Pay-TV:  OTT:  FTA: Examples for nominations per type of player 2013-2015, non exhaustive Figure 34: Golden globe award for series by origin between 2013 and 2015 Source: Arthur D. Little/Exane BNP Paribas
  35. 35. How to ride the OTT wave 35 The Figure 34 shows the increasing share of series distributed by OTTs among the Golden Globe Award winners. Every year, 10 series get awards, corresponding to five in each category: drama and musical/comedy. In 2015, the OTTs got three nominations, versus zero in 2013. Even if the Golden Globe Awards are run by a panel of traditional production houses, their distributors and are more likely to be aligned with an established production paradigm and value-chain actors, it gives a good indication of the value of such content and the importance given to it by OTT players. Pay TV players maintain their leadership in content but face strong price competition Figure 35, based on a 4,000+ customer survey across 11 markets globally, shows that consumers currently consider pay-TV providers to offer better content, customer service and video quality than pure OTT services. However, it also shows that OTTs are perceived as having clear price leadership. Pay-TV vs. OTT providers: key advantages “What are the key advantages of Pay-TV vs. OTT providers respectively?” 11% 11% 18% 49% 50% 51% 70% 51% Video quality 82% Customer service 89% Content 89% Price 30% Recommendations of relevant content 49% Availability on multiple devices 50% User interface OTT providerPay-TV provider Figure 35: User view on Pay TV vs. OTT provider’s strengths Source: Linx-IE Market Research Corporation worldwide survey (including FR, DE and the UK from Europe) Pure OTT services may cannibalize traditional TV in the long term Growing online consumption versus broadcasters’ advertising revenues We expect traditional linearTV to stay alive for at least for one generation. However, with the audience shifting towards online content, advertisers are finding traditional distribution platforms less attractive relative to online platforms, and this threatens today’s revenue streams of legacyTV channels. Figure 36 shows 1) the continuous decline inTV and video advertising revenue over recent years and 2) the continuous growth of the proportion of online video net advertising revenue in EU5 countries, increasing to 5% of overall video net advertising revenue in 2013. Net advertising revenue differs from an advertiser’s gross expenditure as it does not include production cost. The online platforms provide access to detailed consumption metrics. In addition, the ability of online advertising agencies to process the data and provide targeted ads attracts advertisers better.
  36. 36. How to ride the OTT wave 36 95.0% 2011 17 96.3% 5.0% 2012 18 17 97.4% 2.6% 2013 3.7% 2010 18 98.1% 1.9% 2009 17 98.6% 1.4% 2008 19 99.4% 0.6% 2007 21 99.7% 0.3% TV and online video net advertising revenue 2007–2013, EU5 Online TV Source: Arthur D. Little/Exane BNP Paribas Figure 36: TV and online video net advertising revenue between 2007 and 2013 42% 31% 27% Online players will get a growing part of the advertisement revenues at the cost of traditional players Traditional players will attempt to move their business online to offset this advertisement change No shift occurred in the revenues yet Is a shift happening in the revenue stream for traditional actors (Pay-TV, FTA...) with the emergence of online video players? Figure 37: Interview feedback – What implications will there be on revenue streams? Source: Arthur D. Little/Exane BNP Paribas This shift to online provides an opportunity for pure OTTs to capture advertising revenues from traditional players. As can be seen in Figure 37, close to half of our interviewees expect the advertising revenue shift fromTV to online video players to continue. At the same time, over one-quarter of interviewees also expect traditional media players to evolve towards online distribution and therefore capture a share of the online revenue stream. Pure online video players have the scale and potential to move up the ladder and become the new pay-TV Even though we have seen in section 3 that even a leading OTT such as Netflix should not have the financial means to acquire premium content to the same extent as a pay-TV group, over half of our interviewees predicted that pure OTT players would grow to a size at which they would replace traditional audiovisual players in the medium term. (See Figure 38) One-third of our panel did not believe in nonlinear players replacing traditionalTV broadcasting. OTT will replace a current actor in the mid term Will OTTs be able to challenge other players in the market and become tier 1 or tier 2? 45% 6% 16% Not clear 33% They are already tier 1/2 Figure 38: Interview feedback – Can online video players be more than second-/third-tier offerings complementing premium pay-TV, or can they actually move up the ladder? People will stay more interested in traditional broadcast What could be the relationship between OTTs and Pay-TV in the future? Place both charts on Figure 37 67% 33% Pay-TV doesn’t have to see OTTs as a threat Pay-TV will suffer from OTTs Source: Arthur D. Little/Exane BNP Paribas
  37. 37. How to ride the OTT wave 37 Which challenges do pure OTT players need to overcome before they can displace pay-TV? A first challenge for OTT players consists of providing a seamless customer experience. Users paying for premium content also expect perfect quality of service.This aspect is particularly challenging when a large number of users watch the same content at the same time. By definition, OTTs are not mastering the QoS and need to develop technical solutions in partnership with ISPs or rely on external suppliers. We have seen IPTV providers encouraging their customers to plug their set-top boxes into their DTT antennas in order to ensure premium QoS. Another obvious competitive challenge comes from pay-TV players themselves, first because they launch their own OTT services (see section 4), but also because of new players entering the pay-TV market – e.g. beIN Sports in France, though its future profitability is being challenged. Last, pure OTT players with international footprints need to address local market needs. Users expect to find local content on their VoD services.This is why a player such as Netflix invests in a French series such as Marseille. Netflix’s investment in this series is expected to reach EUR6–8m for the first season of eight episodes. Algorithms threaten the editor and aggregator roles Along with our interviewees, we believe that the current shifts are putting pressure on the edition and aggregation functions of traditional players. Indeed, the aim of the “edition” functions is traditionally to define an editorial line for a stream of content, and to produce or acquire content along this editorial line. Internet players are using the capabilities offered by the delivery of content over telecoms networks associated with their Big Data capabilities to virtualize the editor and aggregator functions and re-linearize the content. In other words, editing can be increasingly done by algorithms rather than by people. Internet players are employing significant efforts to digitize these functions by collecting user preferences to influence the content, as well as proposing smart recommendation engines, claiming to adapt to each individual tastes, in order to provide a compelling experience.This role is becoming important given the chaos of content abundance. Two examples of such recommendation engines are Netflix’s and Amazon’s: ƒƒ Netflix –– Netflix has invested significant RD efforts into the setup of its recommendation engine.The company even launched an open public contest to improve the algorithm, called the “Netflix Prize”. It ran from 2006 to 2009, with USD1m awarded in 2009 even though the winning algorithm was not fully implemented due to engineering costs. –– In 2012, Netflix stated that 75% of Netflix viewing was based on recommendations, and that the team was investigating how to include context in the recommendation engine.That would translate into the same user not having the same recommendations depending on his location, the device he is currently using and the time of day. ƒƒ Amazon –– In 2010, online retailer Amazon launched its own production company, Amazon Studios, with a collaborative and consumer- centric approach in mind for selecting the content. –– Amazon started to invite creatives from all over the world to submit ideas for consideration. Several pilots have been produced, and users can watch the pilots and vote for the ones they would like to see produced for full series. The future of TV channels We can imagine a future in which the video stream edition is fully virtualized and handled by a recommendation engine or the user himself.The editor (orTV channel) would be producing/acquiring rights for different types of content with a wide range of choices, and then proposing personal streams to their users based on their preferences.
  38. 38. How to ride the OTT wave 38 As illustrated in Figure 39, the stream can be produced along a specific editorial line and adapted by users, who can tailor them with specific on-demand programs.This does not mean the end of premium or mass-market content or of traditional players, but a more customized user experience in which players need to demonstrate why it is better to viewTV content through them and not directly through the content owner’s OTT service or theTV channel’s on-demand service. User 1 User 2 User 3 20:00 21:00 22:00 23:0019:0018:0017:00 Major sport event Major sport event Reality show C Series A Major sport event Reality show C 8pm news 8pm news Music show Blockbuster movie on demand Series B Major life event gathering audience at a specific time Near-live events watched at different times On-demand programs Figure 39: Potential viewer experience of future TV based on dynamically customized linear content Source: Arthur D. Little These changes will: ƒƒ Provide Internet players with the opportunity to further enter the ecosystem, with differentiated offers in terms of user experience and business models; ƒƒ Force traditional media players to adapt and engage in digital transition with impact on their value propositions and cost structures; ƒƒ Filter the content landscape to provide only the most attractive content, as there will be less gaps to fill with low-cost content at remote times or on less-viewed channels.The number of long-tail channels in large pay-TV bouquets will significantly decrease. Who will capture advertising revenues? A key element of the business model is that the owner of the editing function is the party able to incorporate advertising into the video stream, and thereby the one controlling the advertising revenue.This is why the integrity of the signal is essential for traditional players. Many traditional players fear that the growing role of Google’s operating system, Android, in the ecosystem (in set-top boxes, for example) would enable the company to insert advertising into, before or around the video streams and therefore capture a growing part of the advertising revenue. So far, regulatory decisions have guaranteed signal integrity for channels. TV manufacturers also have the capacity to enter this market. As an example, users in Australia have reported seeing advertising inserted into their personal video streams by their Samsung SmartTV sets. Even if this event was reported as an issue by Samsung and promptly resolved, it shows that equipment manufacturers and operating system developers can propose to directly deliver advertising to the consumers, bypassing the content editor or aggregator.
  39. 39. How to ride the OTT wave 39 The answer of traditional TV players To address the OTT threat, traditionalTV players have relied on their differentiating assets in the media ecosystem to renew their service offerings. Key assets of traditional TV players TraditionalTV players have a number of key assets they can leverage: ƒƒ First, they usually benefit from established market presence and strong, well-recognized brands. ƒƒ They have built their positions over the years by developing specific editorial lines and strong relationships with content rights owners. ƒƒ They also master sets of key skills in terms of programming and technical control over the quality of services delivered – even over third-party networks. ƒƒ They have contracted user bases with regular relationships in terms of billing, etc. ƒƒ As a consequence, traditionalTV players also have strong emotional relationships with their audiences and have gained their trust when it comes to the quality of content broadcasted. ƒƒ Additionally,TV players have deep knowledge of their customer bases and significant behavior data that they can leverage at their disposal. Some traditional TV players have launched their own OTT services As we see consolidation happening on a pan-European scale, with a number of large cable operators and pay-TV providers driving mergers and acquisitions to achieve scale – Liberty Global and BSkyB being the two main examples – some traditional pay-TV players actively enter the OTT world by launching their own VoD services. Broadcasters also increasingly distribute their content online in OTT mode, providing access to their linear content live and in catch-up mode. Sky Germany 2014 +11.6% 3,529 2013 3,908 2012 3,212 2011 2,857 2010 2,521 In thousands 2013 Sky Pay-TV subscribers 2010–2014, Germany In millions Sky Go sessions 2010–2014, Germany Q1 2014/15Q1 2012/13 26.0 1.7 Q1 2011/12 18.1 0.0 8.2 Q1 2010/11 Q1 2013/14 2006 2011  SVoD  Included in Sky Online or from € 3.99.-/month individually  “Tier-2” movies, series and documentaries  PVR Push-VoD service  Access to 400 premium titles  Record, pause and rewind live TV 2014  SVoD  Premium movies and series  From € 9.99.- to € 19.99.-/ month  1-day access to all sports channels for € 19.99.- 1)  Free linear OTT service that allows Sky’s Pay-TV subscribers to stream content on PC/Mac, smartphones and tablets, and via game consoles CAGR Source: Company landing page, Arthur D. Little analysis, note: 1) Now TV is Sky Online’s equivalent in the UK Figure 40: Sky evolution towards OTT services
  40. 40. How to ride the OTT wave 40 For instance, Sky Germany has progressively developed its OTT strategy. First, Sky launched Sky Go in 2011.This service enables Sky’s traditional pay-TV customers to watch the linear channels online and gives them access to a catch-upTV service. As can be seen in Figure 40, Sky managed to continuously grow its customer base over this period and Sky Go rapidly took off. In 2013 and 2014, Sky then launched two OTT services.The first one, called SNAP, gives access to a VoD library of movies, series and kids’ programs with very aggressive pricing at EUR3.99/month.The second one was launched in 2014 with premium positioning and includes linear content as well as VoD. In France, Canal+ has adopted a similar strategy and proposes multiple OTT services in addition to its pay-TV offer. MyCanal provides pay-TV users with OTT access to all channels and a catch-up service. Canal Play started as a pay-per-view video service but, since 2011, it also proposes a subscription VoD service with a recommendation engine. Figure 41 shows that despite those innovations, Canal+ has had difficulty maintaining its subscriber base over the last few years. Canal+ France’s offer 2013 Canal+ subscriptions1) 2009–2014, Mainland France CanalPlay subscribers 2012–2014, France 599 335 156 201420132012 2005 2011  Free linear OTT service for Canal+ and CanalSat subscribers  Catch-up function of the last eight hours of programming; stop and rewind functions  SVoD with a library size of about 7,300 available  Recommendation engine  From EUR 15.90.- 3) to 29.90.-4) (for Pay-TV subscription)  TVoD  Download to rent download to own  8,500-title library  From EUR 1.99.- to 5.99.- for rent and to 13.99.- to buy a title  SVoD  10,700-title library  (40% French programs)  500 new programs each month  EUR 7.99.- to 9.99.- 2) 9,000 9,500 10,000 0 2011 9,563 9,199 9,569 9,720 20132010 2012 8,864 2009 2014 -1.5% 9,760 CAGR In thousands In thousands Source: Company landing page, note: 1) incl. Canal+ and CanalSat, 2) incl./excl. available. on TV, 3) € 24.90.- after 6 months, 4) € 79.80.-/month after 6 months Figure 41: Canal+ evolution towards OTT services Finally, in the US, HBO has entered OTT distribution in a similar progressive way. HBO is a premium cable content provider, and so far had been distributed as an add-on to pay-TV packages with a revenue share model between HBO and the cable company, which was also in charge of the customer relationship. In 2010, HBO launched HBO Go to provide multi-device OTT access to its existing customer base. More recently, HBO announced the launch of a stand-alone Internet service. Content is exclusively available on Apple devices at launch, but rapidly available on other platforms as well.This illustrates HBO’s strategy of being distributed on all platforms: direct broadcast, via distributors (cable or telecom operators) and directly in OTT, although revenue share with OTTs is rumored to be around 10–15%, – significantly less than with cable channels (~50%).
  41. 41. How to ride the OTT wave 41 HBO’s offer USA and Nordics In millions April 2015 HBO Cinemax2) subscriptions 2010–2014, USA 2010 Dec 2012  Free linear OTT service for HBO subscribers that allows them to access video content from their pay-TV subscriptions via various platforms and devices Announced:  Stand-alone SVoD  Available via Apple’s iTunes store  Billed by Apple  USD 14.99.-/month 0 40 44 48 42 46 39 2014 46 2013 43 +4.1% 41 2011 40 2010 2012 CAGR  Linear TV channel SVoD  New HBO content available within hours after first appearance in the USA  EUR 9.95.- to 14.95.-/month1)  JV with Parsifal International (TV broadcaster) HBO Nordic users 2014, Nordics HBO Go usage 2014, USA 9 30 Number of subscribers to linear HBO Pay-TV and HBO Go users in 2014 in millions  A study from May 2014 reports that:  120,000 people have access to HBO Nordic and  17,000 people use it daily  Compared to Netflix, which has 1.3 million people with access and 410,000 daily users Source: Company landing page, mms.se, note: 1) one-year engagement, 2) disclosed together as subsidiaries of Time Warner Inc. Figure 42: HBO evolution towards OTT services Free-to-air leaders should remain attractive to advertisers Major free-to-air television channels should remain attractive to advertisers in the medium term. Free-to-air is the only mass-market platform for advertisers (especially consumer goods), and large channels should be able to continue attracting high advertising prices. However, niche channels will be attacked by on-demand players.The trend of smaller channels shutting down (see section 1) is therefore likely to be a long-lasting one. Digitization brings innovations in the advertising market In the UK, Sky has introduced the AdSmart service. Instead of broadcasting the same advertisements to all users, different ones can be shown to different households watching the same program. The set-top box inserts targeted advertisements into the linear content on Sky channels, depending on a household’s profile. Households are individually targeted based on segmentation derived from a combination of Sky’s own customer data and information from consumer profiler experts.The effect is increased relevance of advertisements due to household-specific attributes, which allows Sky to extract a higher CPM from advertisers on its platform. On the other hand, some small advertisers can use the service to target only small numbers of people. Geographic targeting based on postcode areas has opened up a new revenue stream for Sky by making it accessible for the first time to niche brands, small medium-sized enterprises (SMEs) and location-specific advertisers. As a result, 77% of the advertisers that have used Sky AdSmart so far had not previously advertised onTV or with Sky.
  42. 42. How to ride the OTT wave 42 Pay-TV operators’ dilemma Pay-TV players face increasing competitive pressure from pure OTTs, but it is their aggregator role that is being attacked. Cautious about the cannibalization risk inherent to their launch of pure OTT S-VoD services, they have entered the OTT ecosystem progressively, leveraging their established customer relationships. Doing so, they have managed to maintain their ability to charge monthly for premium content. However, in order to protect the traditional revenue stream and progressively grow the OTT revenue stream, pay-TV players need to continuously propose premium content with the right balance of catalog availability on the different distribution channels. They also need to permanently stay on top of innovation by regularly introducing new features such as UHD content or second screen, especially on OTT services where direct competition is very aggressive. While doing so, pay-TV players should nevertheless capitalize on their ability to editorialize content, especially for the passive viewer and to control quality of service. As a consequence, we expect costs to increase for traditional pay-TV players while revenues are put under pressure – and we anticipate that margins will drop.These players may be forced to specialize in narrower content types to optimize resource allocation, and thereby strengthen their brand power and ability to differentiate. Online video is an innovative and cost-effective distribution platform for traditional pay-TV operators as well, and they should develop on this front as high-speed Internet development is fostering online usage.
  43. 43. How to ride the OTT wave 43 The evolution of theTV market will, in our view, depend on two main factors: ƒƒ First, the level of virtualization in the editor and aggregator functions, versus the traditional programming function based on the manual analysis of the audience; ƒƒ Second, the share of the editor and aggregator market that Internet players will capture.This will depend on the speed of change in behavior, Internet players’ ability to capture premium content and the brand power and adaptability of traditional players. A strong parameter influencing the market’s evolution will be the strength of the local content in terms of its availability and the appetency of users for it in each country. We therefore see three scenarios for the evolution of the competitive landscape. In scenario 1, local and premium content continues to “win”, enabling a leading pay-TV operator to keep its leadership versus OTTs, and limiting Internet players to a long tail of content with relatively low value. In scenario 2, a few global OTTs manage to reach the scale necessary to compete with pay-TV on premium content. Finally, in scenario 3, global OTTs take over not only pay-TV but the wholeTV market, attracting massive audience and advertising revenues. Scenario 1: Local and premium content remains the differentiator for traditional audiovisual players In this scenario, traditional national premium audiovisual players (e.g. large free-to-air channels; pay-TV channels and bouquets) broadly maintain their leading market position.They manage to secure premium and local content by maintaining high content purchase prices, and monetize this content through relatively high ARPU (in the EUR30–40/month range) or generating large advertising revenue.This would be feasible in the countries where local content is highly valued – i.e. in markets that do not rely exclusively on international productions. In such a scenario, traditional players would succeed in transforming their models around the editor/aggregator function – i.e. they would evolve towards the digital model described previously by fully integrating the premium and/or live content in dynamically customized video streams with on-demand/recommended nonlinear programs. Besides these players, Internet players would develop a market to provide additional on-demand programs based on 1) a long tail of programs for an attractive price and on 2) specific premium content in a limited manner (attractive series or blockbuster movies, but no live sports, talk shows, reality shows, etc.) and with more affordable prices (e.g. c.EUR10/month). The consequence of this scenario on the market structure would be a pay-TV market with only one remaining player. Indeed, this is the only solution to amortize expensive content on a sufficiently large subscriber base with retail prices slightly below the current levels (i.e. generating ARPU at around EUR30–40/month). A reduction in the resources for free-to-air channels and pay-TV bouquets associated with a potential increase in the cost of premium content should ultimately lead to a reduction in the number of free-to-air channels or long-tail channels in the pay-TV bouquets. Finally, two or three Internet-based players would consolidate the most serious offers/catalogs at around EUR10/month. Scenario 2: Global pure OTT players reach the scale to acquire sufficient premium content to compete with traditional pay-TV bouquets and large free-to-air channels In this scenario, the Internet challengers would manage to acquire and/or produce sufficient premium content to build an offer that directly competes and cannibalizes the offers of the traditional Pay-TV bouquets and leading free-to-air channels. 5. Three possible market scenarios

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