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Straight Talk Consumer and Entertainment Services

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2018 brings with it hopes of a brighter future for many in entertainment distribution – and hopes of any kind of future for others. Threats that established players have pored over in trepidation for years are no longer approaching; they’re already here: Ungrateful younger audiences are watching lots, but in stubbornly unpredictable and hard-to-monetize ways; increasingly value-conscious existing audiences are examining service provider propositions with greater scrutiny and less loyalty than ever before; and threats are arising from platforms whose rules of engagement and content economics are scary enough to prompt the preeminent titan of modern media, Rupert Murdoch, to fold rather than stick with traditional entertainment distribution.

The great rush to build direct-to-consumer platforms is one aspect of the reorientation exercise now underway. And we’ve yet to establish if any of this is really helping. This week sees a couple of Sony channels joining Amazon’s Channels initiative in Germany, and Turner rolling out classic movie SVOD service Filmstruck globally. Nothing has changed regarding the brutal reality of subscription-based OTT for the majority of companies looking to claim a stake: Market share is dominated by Netflix, Amazon, and a handful of regionally oriented platforms; and audiences are disloyal, value-conscious, and swayed by aggressive marketing promotions. Churn is high across the board, precipitously so for some, and the big firms are Borg-like in their ability to assimilate huge swaths of audience activity.

Working with a powerful aggregator such as Amazon might mitigate some of these challenges for broadcaster D2C services: Amazon brings a huge subscriber base – complete with payment details – about whom has intimate knowledge, including unrivaled insight into their online shopping habits. It also has a willingness to help third-party direct-to-consumer platforms build an audience. But there are reasons to remain skeptical of Amazon’s ability to build a service that could go head-to-head with a traditional pay TV service in the short term in the US and Germany, and this is reflected in our forecasting. This is primarily down to the strength of FTA TV in both markets, the absence of key channels, and the speed with which the price rises to stratospheric levels when you ladle more than a few channels into the checkout basket. Fundamental questions remain for Amazon Channels, most notably: “What market need is this proposition targeting?” and “Is it a sufficiently significant addressable market?” – and the answers are somewhat oblique.

However, to focus on the details of Amazon’s current efforts is to risk missing some valuable points: The fact that Amazon – a firm that was less than a decade ago best known for turning Harry Potter books into loss leaders – is now marching boldly into TV is impressive in and of itself. Amazon’s video business is already significant in a number of markets, and the Channels initiative is delivering a huge volume of intelligence regarding how to entertain an online TV audience with a pure-play aggregated online “channel” bouquet that is (or should be) the envy of competitors. But this is a work in progress. As an aggregator, Amazon should observe what is missing in the content proposition offered by itself and its partners and work out how best to fill the gaps. Its current interest in sports rights may be an example of this process.

Amazon has understood, leveraged, and successfully executed on the device side of the equation, in aggressively backing the Fire TV range. Its content investments are yielding artistic recognition, and there is a huge story yet to be told if Amazon can bring its expertise to bear on the advertising carried by channel partners. Addressability is coming to TV, and Sky’s Adsmart is a case study in solving this problem from the starting point of a premium pay-TV service provider. Amazon’s starting point, as a native, scaled, global digital platform, will give many in the TV industry looking at the same problem much to think about.

Straight Talk is a weekly briefing from the desk of the Chief Research Officer. To receive this newsletter by email, please contact us.

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