Future of video

Changing video consumption patterns

By Vikram Dhaliwal, Steven Pattheeuws and Jurjen van der Werf

TV broadcasters were always very skilled at determining which content to produce or source and when to air it, in order to maximise cost versus viewer numbers. Yet, this business model is changing rapidly, as more and more viewers (binge) watch content on-demand on their own device in the train, bedroom or gym. The arrival of mobile devices connected to fast broadband drives this change in viewing behaviour, and has spurred innovative OTT players like Netflix, Hulu and HBO to deliver their content straight to the consumer. With a growing number of viewers watching on-demand content across TV and online channels/libraries, loyalty to specific TV channels or platforms is declining. We also see social media increasingly driving large numbers of viewers to specific online videos.

More and more video content

Content production continues to grow. In the US, we see more series being produced and more money being invested in each episode. Moreover, major content providers are investing more than ever in new series, as demonstrated by Netflix and HBO. Netflix’s tremendous spend on new content amounts to 12-13 billion US dollars this year, which is 3-4 billion more than last year.1) In fact, Netflix’s production of 80 feature films exceeds that of any other Hollywood studio. The other major content producer, HBO, spent an astronomical 15 million US dollars on production costs for each episode of its Game of Thrones series. Another driver of content is that existing content is more widely distributed across geographical markets.

In the first half of 2018, Netflix and Amazon Prime overtook pay TV subscriptions in the UK, with Netflix, Amazon Prime and Now TV having 15.4 million subscribers in the first quarter of 2018 versus 15.1 million subscribers to Sky Virgin Media and BT. According to research by TV regulator Ofcom, the most important reason for switching to streaming services is the original and exclusive content created by Netflix and similar parties. For example, The Crown, which is only accessible through Netflix, is an immensely popular show. This highlights how challenging it is for traditional broadcasters to succeed online. The shift towards online and non-linear viewing is bad news for linear TV players. Magma reported that as of last year, advertising spend in alternative video formats (e.g. online video via OTT, social, VOD) has surpassed spend in linear TV. In 2017, we witnessed a major fall in linear advertising spending in the Netherlands.

1) telecom.com

Linear TV is on the decline … is there a new equilibrium?

Linear TV is on the decline. In the US, TV viewing minutes declined by another 2% this year. The share of cord-cutters and cord-nevers in the viewer base grew from 17% to 30%. US sports live audiences declined by 10% this year. In the UK, TV viewing minutes dropped by 10% in the 18-24 age segment and by 5% in the 25-40 age segment, with a clear shift to VOD and delay TV. The Netherlands is also experiencing a clear decline in time spent in front of the TV screen in the under-35 segment, although at a slower rate than initially expected. Some content lends itself very well to linear TV: sports event, major live happenings and certain live shows like The Voice. There is still a future for linear TV and it still represents an important opportunity for advertisers because it is one of the last remaining types of media that can reach large numbers of consumers at the same time. Big mass marketing brands like Coca Cola or Heineken therefore continue to regard linear TV as an important channel for reaching mass audiences without overlap.

Yet, while major live sports events remain a big primetime attraction for linear TV, their viewership is on the decline. The opening ceremony of the PyeongChang Winter Olympics attracted 28.3 million viewers according to Nielsen, down 11% on the 2014 Sochi opening ceremony. NBC’s prime-time Olympics programmes saw an overall double-digit decline, with a record drop on Monday 19 February 2018 of 31% compared to a similar night four years before. Similarly, other major sports events are experiencing declining viewership. Last year’s NFL showed a 17% drop in viewership per game compared to 2015, while NBC’s national broadcast of NHL matches fell by 20%.

Another factor is that OTT players are starting to go after live sport. They have begun to invest selectively in sports rights and make enriched F1 video content available directly to fans via subscription. Pay TV broadcasters are exploring options for OTT packages to reach the younger segments. Google has launched YouTube TV, and Amazon is investing selectively in American football rights, although not exclusively yet.

These trends undermine the natural ‘value proposition’ of linear TV to advertisers: providing access to large mass audiences around live sports and live major events. Broadcasters will need to consider how to complement their linear channel with other OTT linear live channels (online, mobile app, etc.) and seek ways to attract viewers to them and to linear channels (e.g. using social platforms), particularly in the under-35 segment. Sport and, by extension, major live shows may become the next big battleground.

So what ?

These trends are both a threat and an opportunity for all players in the value chain. For some, the opportunities are clear and right in front of them. For others, it will be a challenge to reinvent their business model.

We see five potential ways to be successful in the market:

Strategy

Content

Business model(s)

Examples

HBO model
  • Premium quality
  • Exclusive, channel independent
  • Content owner
  • Subscription
  • In-show advertising
  • HBO
Pure platform
  • Aggregate content from different channels
  • Subscription
  • In-show advertising
  • Hulu

Netflix/Amazon

  • Premium quality
  • Owned content
  • Subscription
  • Netflix
  • Amazon

Social media platforms

  • User-generated
  • Live videos
  • Social videos: shared across social network
  • Advertisements
  • User-engaged advertising
  • (Subscription add-free model TBC)
  • Facebook
  • YouTube

Niche channels

  • Niche content (Boxing, Opera, Golf, etc.)
  • Subscription
  • Targeted advertisements
  • Discovery Channel

Taking these different strategies into account, media companies need to redefine their portfolios and business models to stay competitive in this disrupting video landscape.

Broadcast media groups

Broadcasters feel the pain of stagnating, or even shrinking, advertising income. With linear TV on the decline, they need to figure out their online strategy as well as how to ‘shrink to greatness’ in the remaining linear TV arena. They will find that the impact of international blockbusters will decline as their viewers shift to other video formats. Moreover, the pull from blockbusters to cheaper programmes will not work anymore in the online world. For example, CSI used to be a blockbuster for broadcasters, earning them a high profit thanks to a relatively low sourcing cost. They would reinvest these profits in producing local content that attracted relatively smaller audiences. To survive in the linear TV arena now, however, broadcasters will have to scale down their existing cost structures and content acquisition model to fit the new reality.

We see two potential strategies for broadcasters, each requiring a different set of capabilities that will define their success. The first is to compete in the online arena by building the right online library while shrinking to greatness in linear TV with niche programmes and major live events. To succeed at this, broadcasters will have to build a different set of capabilities. Traditionally, the strength of broadcasters lay in programming time slots; they knew what kind of programme to air during which time slots to pull as many viewers as possible. With online video, however, time slots have ceased to matter, so broadcasters need to build the right content library to attract customers.

Building the right content library is essential to winning in the online arena, but it is also one of the most difficult and expensive capabilities to develop. According to the UK TV regulator Ofcom, the most-cited reason for switching from linear TV to online streaming is the latter’s original and exclusive content. It took Netflix and Amazon multiple years to build a library that allowed them to amass the subscriber base that they have now. Moreover, each year they invest tens of billions in producing and acquiring new content for their library.

At the same time, broadcasters that still want a presence in linear TV will have to shrink to greatness by focusing on high-engagement live programmes, which do especially well with specific audiences, and major live events that meet group viewing needs.

Some markets may also offer a local content opportunity. French viewers, for example, are still keen on watching Frenchspoken locally produced content. Another example is RTL 7 in the Netherlands, a channel that brands itself as ‘only for men’. Shrinking to greatness also means scaling down cost structures in order to remain competitive in the lower equilibrium of linear TV. OTT players are also investing more and more in producing local content, a strategic move that also anticipates potential regulatory changes, which may set a certain local content quota for online libraries. The EU, for example, is looking at legislation that will require internet streaming services to have at least 30% of their library consisting of European content.2)

2) Variety

Social media platforms

Social media platforms are expanding their activities into online video. Because they already own and operate an online platform with millions of users, their main issue is how to monetise that platform with video. There is no one single solution and the only way to find the optimal monetisation model is by experimentation, ranging from pure ad-based to user-paid – with either a subscription model or pay-per-view or premium model.

Key for social media platforms is integrating the social aspect into watching video. Players like Facebook and Instagram are already doing this by letting people post user-generated videos on timelines. Moreover, Instagram and Facebook now allow viewers to post live videos, which is nothing more than live streaming your current party or excursion and letting all your friends see you. In addition, Facebook’s Watch Party is experimenting with providing a ‘shared viewing experience’ on non-user-generated videos3). This feature enables group watching of recorded videos at the same time.

The big challenge for social media platforms is to find the right monetisation model. Ads inserted in between videos spoil the user experience. As a result, the platforms are considering an ad-free model, but that would mean users have to pay. According to Facebook COO Sheryl Sandberg, their targeted advertising model came in for a lot of criticism and they are now considering a subscription-based ad-free model.4)

3) Techcrunch
4) CNBC

Live broadcasting of major events may be a way for social media platforms to steal mass advertising revenues from linear TV. A few examples have already demonstrated that there is great potential here. One of the most famous live broadcasting events, which broke the live viewing record, was Felix Baumgartner’s skydive from the edge of space. More than eight million people flocked to their live-stream device, making it the largest number of concurrent live streams in the website’s history at the time.5) Since then, live events have broken record after record and more platforms are live-streaming major events. For example, Twitter’s live-stream record was Trump’s inauguration, with 6.8 million unique viewers tuning in as Trump took the oath of office.6) Nike this year achieved 13.1 million live views on Twitter, Facebook and YouTube for their Breaking2 live-stream coverage of the attempt to break the two-hour marathon record.

To find a success formula for attracting mass viewership with live broadcasting, social media platforms need to understand how the market will respond to certain events. Cracking this code will put social media platforms in head-to-head competition with linear TV on the very feature that is keeping it alive: mass viewing without overlap.

What remains uncertain is how social media platforms are going to compete with OTT payers. Although they have a huge advantage in that they already have a tremendous audience using their platform for social media purposes, their content is mostly user-generated and centred around live events. However, the major social media platforms have deep enough pockets to invest heavily in building the right content library able to compete with Netflix and the like. In fact, this could be a very smart move for them as it makes them less dependent on using user data to generate revenues and, therefore, less prone to criticism or new privacy scandals.

5) The Guardian
6) Forbes

OTT players

It is proving hard to find the right success formula for breaking into the OTT market as number three after Netflix and Amazon. These two businesses currently dominate the OTT market, with 69% of OTT subscription revenues between them in the US market. Although their duopoly gives them a luxury position, it will be a major challenge to sustain their growth trajectory by conquering new markets and optimising their position in existing markets, where they are already big. Yet another attempt to launch a competing broad video streaming service is newly launched NewTV, a one billion US dollar investment supported by Disney, Alibaba and NBCUniversal.

In our view, players that want to win in the OTT market will increasingly have to localise part of the content on offer because the ability to address local market characteristics is becoming an important success factor. For example, the market leader in India, with between 75 and 100 million active users per month, is local hero Hotstar, owned by Star India and controlled by Twenty-First Century Fox. Netflix and Amazon are producing local content to break into this market; Netflix, for example, has launched Lust Stories, a series of short films by prominent Indian directors, while Amazon is planning to air Comicstaan, a new series featuring famous Indian comedians.7)

7) CNBC

Right holders

Right holders are usually those who own the rights to major sports events, for example in football and Formula 1 racing. Their key decisions differ from content owners somewhat in that they do not have to decide what content to produce. Their issues revolve around income versus reach and the question whether or not they might be better off going to the consumer directly.

Right holders representing major sports have a vested interest in keeping the interest in sport alive across all their audiences. For example, NBC, which owns the rights to NFL football games, could cut a multibillion dollar licensing deal with Amazon Prime, which is willing to pay huge amounts to acquire content. However, they would then run the risk of not attaining the reach they want when compared to the more traditional linear TV channels, which have a much larger audience base but much less money to spend on content acquisition.

Another related question for right holders is whether they should go to the viewer directly. For example, Formula 1 has launched a beta version of an OTT TV service for the Spanish Grand Prix this year. If this succeeds, they are planning to broadcast to their fans directly through a premium F1 option, featuring all twenty driver cameras live and a side-by-side race viewing option. The non-premium version will provide regular TV access and radio broadcasts.8) At first glance, this looks like a smart move that allows F1 to maximise its revenues by bypassing broadcasters. 

Even so, the strategy of going to fans directly might not be the best move for all major live sports events, especially World Cups. That is because the popularity of a live event is very much country dependent. If the Netherlands is out of the World Cup, then the reach there will be extremely low compared to when the national team makes it to the semi-finals. Moreover, right owners who go to viewers directly rely heavily on the big countries being in the tournament finals (because the big countries give them the most viewers). The most recent World Cup had three relatively small countries in the quarter-finals, i.e. Belgium, Uruguay and Croatia. Right holders can hedge this risk by licensing rights to broadcasters for a fixed fee.

8) Digital TV Europe

Advertisers

The emergence of online video has created an opportunity for targeted advertising, but undermines the opportunity for mass advertising. Targeted advertising is an efficient way to increase the effectiveness of advertisements by tailoring and then pushing them to specific audiences. Success, however, depends on knowing which audience to target and then where to find them. Traditionally, advertisers would spend a large sum on one linear TV channel and focus on negotiating the right commercial blocks around the right programming. In targeted advertising, however, the key is knowing on which online video platforms to find consumers. 

Moreover, as we mentioned, targeted advertising is not the Holy Grail for all advertisers. Big brands like Coca Cola and Heineken still benefit from mass advertising because they can reach a huge audience without any overlap, whereas overlap is very likely and expensive when attempting to reach mass audiences on multiple platforms and channels. As noted, they have so far remained loyal to linear TV, but there are two other opportunities for them to consider.

The first is in-show advertising. Popular shows that used to be the blockbusters of linear TV but are now scattered across online channels still reach mass viewers without overlap. The trick here is to make sure that the product is placed or used in the show. Second, as mentioned before, advertisers may be able to find their new mass audience on social media platforms. For live broadcasting of major events, this means seeking collaboration with players like Twitter, Facebook and YouTube and helping them build the capability to attract mass audiences.

Video production, distribution and consumption patterns are changing rapidly and are disrupting the TV business. Nobody has a crystal ball to see where things are going. The only thing we know for sure is that the traditional linear TV business is going to phase out and make way for multiple different video business models. Each player in the arena will have to figure out what their strategy is going to be and then define and build key capabilities around that.

Contact us

Vikram Dhaliwal

Senior Associate Strategy&, PwC Netherlands

Tel: +31 887922874

Steven Pattheeuws

Partner Strategy&, PwC Netherlands

Tel: +31 (0)88 792 29 36

Jurjen van der Werf

Associate Strategy&, PwC Netherlands

Tel: +31 (0) 88 792 26 98

Follow us