When the little fish gradually, over time, eat the big fish

It’s rather obvious now that nonconventional (nonlinear, non-DVR) television will account for a large share of viewing even in markets in which it doesn’t already. South America is expected to grow to almost 16% VOD/OTT penetration by 2021 (apparently excluding DVR integrated into pay-TV systems), with the other lagging countries and regions, such as Japan and South Asia, exceeding 50% by that time. Some pedestrian thoughts on what this means.

• Broadband is VOD and OTT’s partner in a virtuous cycle: it both enables them and is made necessary by them.

• With technologies such as fixed 4GLTE and others in development, broadband could be deployed at infrastructure costs well short of the monumental expense of burying cable, especially under established cities. The same advance—inexpensive deployment, and also driven by a “killer application”, earlier enabled cellular telephony across much of the third world, out of all proportion to local economic strength, usually vaulting entirely over wireline telephony.

• DBS/DTH (unless integrated into a broadband or mobile offering) has little place in this model and is thus probably moribund or subject to massive contraction. The need for broadband eats into disposable income that also would fund DBS, and the need for it is diminished as content becomes available on cable or standalone VOD/OTT. As major sports components in the wealthiest countries fall like dominos to standalone VOD/OTT distribution (such as ESPN in the U.S.), the sole advantages of DBS providers might be the last few exclusives (typically major sports events) and customer service. That is unlikely to suffice for continued economic viability in ten or twenty years.

• Conversely, cable tied to broadband delivery, in which the extra cost of television service is modest, may prolong its life. It will feed the need for conventional TV use that many viewers still have (an aging cohort, to be sure, but quite young on average). The question for many viewers is major sports events, the extent of the VOD selection, and the extra money spent in addition to the broadband-only price.

• Television is headed towards a smaller but higher-value selection. This has two motivators:

1. One is subscribers’ interest in paying only for what they use rather than hundreds of channels they don’t want. This is served by either services like Netflix and its local workalikes with very broad selections for a very low price, or more expensive services like Dish Network’s Sling in the U.S. with a limited or subscriber-controllable selection of channels. In the first case, stuffing of low-local-value U.S.-targeted content into services in other countries, currently a large portion of multinationally offered programming in which all U.S. studios engage, is economically insignificant; in the second case, it’s not even there.
2. Then there is both OTT providers’ and pay-TV channels’ need to stand out, generate buzz, differentiate themselves from the competition. They have all gravitated to the the poor (anyway, resource-limited) man’s route to world domination, which can be fairly called the Motown Records approach: pick a few star properties and pump all your production and promotion money into them. That’s what we’ve been seeing from Netflix, Amazon, AMC, even the Travel Channel, and it has worked very well in the U.S., generating more interest in any non-premium-channel content than there’s been in many years.

• Many or most countries already have incumbent, local OTT services, for whom it is natural to defend from the onslaught of foreigners (Netflix, Amazon Prime Video) by using their strength in local content. The tactic is the same for the other side: criticised broadly for undertaking its international invasion on the strength of little non-English-language programming and insufficient rights to use what it had in its new countries, Netflix is planning to invest in locally targeted and produced content. Previously, Twentieth Century Fox as a feature film distributor has successfully become the first U.S. player to do so on a substantial scale, so the model can work. This would reinforce the potential for the medium to evolve from a steamroller of globalisation and boob tube into a culturally sensitive, appointment-viewing, dare one say, art form.

• As recently covered here, advertisers have tried to throw much of their money at targeted Web advertising and were largely unsatisfied, because of poor targeting, lack of independent auditing, and possibly other reasons. This means that there are advertising budgets in search of appropriate vehicles. At the same time, as also recently mentioned here, there are no guarantees of profitability for everyone as the supply side of the content market reconfigures, or even when it settles down, because the new model will be subject to different costs and revenues. Can standalone VOD/OTT providers attract advertising by targeting better on the basis of the usage patterns they see from specific user accounts? Will a market more accustomed to conventional demographics accept such indirect indication? Some OTT companies (Netflix) may be as unwilling as HBO to accept advertising, but for others whether, how much and in which format they play ads may depend on the money they stand to earn—and how much they are willing to risk user displeasure.