Consumer & Entertainment Services
By Simon Dyson 24 Feb 2020
China music industry update, February 2019.
Across a handful of mature markets, there are now more subscriptions to services delivered solely over the top (OTT) of the internet, such as Netflix, Amazon, and Hulu, than there are pay-TV subscriptions. In the US, the number of subscriptions to OTT video surpassed those to pay TV in 2016; Australia and Scandinavia followed in 2017. This is likely to be one of the dominant trends in the coming years, hitting the UK in 2019 and other markets at various points this side of 2025. In the 2020s, this will become the new norm everywhere.
The good news for pay-TV operators is that there is a significant degree of overlap between OTT video and pay TV. Despite early anxiety about cord-cutting, services such as Netflix have, over time, proven to be rather more complementary to pay TV as existing TV subscribers have added SVOD services on top of their TV packages. In addition, OTT video subscribers have tended to subscribe to more than one OTT service as more have become available. Through many mature markets, a large proportion of Netflix subscribers tend to take up secondary SVOD services to complement Netflix's content offering, as well as start to pay for TVOD content. Over time, these "Netflix+1 households" are likely to also add a third subscription – and in some cases even a fourth or a fifth subscription –typically from a pool of smaller genre-specific or specialist streaming services, such as DisneyLife, Crunchyroll, or CuriosityStream. Once a household subscribes to Netflix (or a rival generalist service), the barrier to additional spending is lowered. To take the example of the US, this year Netflix will have just under 60 million subscribers at year-end, which would suggest a penetration of nearly half (46%) of all US households. If we include all 173 million OTT video subscribers in the US this year, the average US household will subscribe to 2.4 OTT video subscription services.
Figure 1: US: OTT video subscriptions (in millions), with the average number of subscriptions per household
A household that subscribes to Netflix and Amazon as well as a third specialist SVOD is likely to spend a minimum of $20 on online video subscriptions per month. If the same household added another SVOD, the monthly spend would come in at just under $30, or the cost of a basic pay-TV package. It is at this point where the consensus on how much consumers are willing to spend on online video starts to fall apart. Lots of people have argued that as soon as the total price of taking several OTT services reaches that of pay TV, the pay TV bundle will look more attractive. But what if that's not true? What if people are happy to spend more on OTT video services, simply because they prefer them to pay TV? These are considerations of the utmost importance for TV companies today, especially those that operate or plan to launch OTT offering so-called "skinny bundles" of selected linear pay-TV channels and content.
In the US, Netflix and Amazon have a head start of nearly 60 million and 46 million customers, respectively, but subscription-based linear OTT (SLIN) services from US pay-TV operators as a category is already the fastest growing sector of the TV and video market in the US. The total number of SLIN subscribers (including linear services from broadcasters, sports associations, and other providers, as well as skinny bundles) in the US will jump from 33 million in 2017 to 46 million this year, and at current projections the total market for SLIN services will within a few years exceed each of the two OTT giants. At current projections, the total number of subscribers in the US will grow to more than 260 million by 2023, largely due to the increase in SLIN subscriptions rather than new Netflix or Amazon subscribers. In 2023, the average number of subscriptions per US household will have increased to 3.4, up from 2.4 in 2018.
Having appropriate pricing strategy for an SLIN service today is incredibly important as it will contribute to consumer expectations around pricing for linear or channel-based premium streaming services for years to come. A premium pay-TV experience delivered online shouldn't mirror the price of an SVOD on the Netflix model (>$10/month) as it's simply not sustainable for a premium channel-based offering; a price that is too low may also increase the potential of cannibalization. The aim of an SLIN should not be to try to beat Netflix or Amazon but to allow consumers to maintain their sub-$10-per-month Netflix/Amazon subscriptions while capturing the additional ~$20-per-month spending that OTT households appear to be prepared to spend on other supplementary services. Operators should pitch their packages in the same space; the game is the ~$30 monthly subscription market. If we accept that OTT video subscribers are also prepared to be high spenders (like pay-TV subscribers), perhaps the potential of OTT is a much larger and more demographically diverse market than that of the traditional pay-TV market.
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