How Netflix et al are killing off television as we know it

Content has long been king in the corporate jungle that is the entertainment and media (E&M) industry. Yet how it is delivered to consumers, and how it can be monetised, is becoming increasingly important, as providers look to revise their business models and digital media itself evolves. Old habits may die hard but they’re gradually dying nonetheless. Increasing use of mobile smart devices, coupled with greater consumer access to the internet globally, and the emergence of TV and film streaming services, has necessitated a rethink in corporate boardrooms.

In its Global Entertainment and Media Outlook 2013-2017 report, PwC suggests global E&M spending will rise from $1.7trn in 2012 to $2.1trn in 2017, with a 5.6 percent compound annual growth rate. Much of the impetus coming from China, Brazil, India, Russia, the Middle East and North Africa, Mexico, Indonesia, and Argentina.

These markets collectively will increase their share of total E&M revenues to 22 percent by 2017 (up from 12 percent in 2008) as a growing middle class and increased urbanisation have a major impact.

The report adds that in order to “harness this growth and compete effectively in the future, E&M companies of all types must evaluate their competitive advantages and seize their positions in the evolving ecosystem – which has the connected consumer at its core. To achieve this successfully, every industry participant will need to invest in constant innovation that encompasses its products and services, its operating and business models, and – most importantly – its customer experience, understanding and engagement”.

In the so-called mature markets of North America, the UK, Germany, Japan, France et al, growth has been encouraged by the widespread ownership of smart devices. Digital will constitute 44 percent of all E&M spending by 2017 – almost double the level in 2008 and up from 34 percent in 2012. The annual value of North America’s home video market – both pay-TV and over-the-top streaming services – is forecast to surpass box office value for the first time in 2017.

As Marcel Fenez, Global Leader of Entertainment and Media at PwC, puts it: “Universally, E&M companies need to invest in developing and distributing content in ways that compel customers to loyalty and take advantage of their tendency to engage in sharing content experiences. This will require enhanced digital media measurement tools and business models that respond to the changing patterns of consumer behaviour.” But right now, monetisation poses the biggest challenge for video on demand (VOD) providers.

Home box office title fight
Data from MPP Global Solutions shows demand for online video has soared in recent years. More than six billion hours of footage was watched every month via YouTube in 2013 – a 50 percent increase on 2012. Mobile devices make up around 40 percent of YouTube’s global watch time, while last Christmas, for the first time, more people accessed the BBC iPlayer on tablets than computers.

Paul Johnson, CEO of MPP says: “The success of Netflix has demonstrated that consumers are willing to pay for quality online video content, while YouTube’s ad revenues increased by 53 percent last year. It goes to show that media and entertainment companies can make huge profits if they offer three things: great services, great content and great offers.”

Yet in order to monetise product, content creators need to understand the kind of content customers will pay for. Typically, this is done by harvesting data from social media, adapting the way products are created and distributed, and embracing new business models – including partnerships. The central role of content in attracting, engaging and retaining consumers has been strengthened by the fragmentation of media choices.

With more than 44m users worldwide, Netflix is one of the emerging beasts on the digital media landscape. While that figure might look small in comparison to the 114m who subscribe to satellite and cable network HBO (133 million if you factor in the company’s Cinemax division), a growing minority of consumers are falling out of love with linear TV. They feel inconvenienced by programmes presented at specified times, on non-portable screens, with complicated controls and grid-based interfaces.

Netflix’s business model rests on the basic assumption that internet TV is set to grow at the expense of linear TV. Apps will replace channels as smartphone and tablet viewing increases, while remote controls will disappear. At the same time, leading linear TV networks, such as HBO, ESPN and the BBC, have been branching out into internet TV.

The ESPN app, for example, runs on many internet platforms and is designed to showcase sports, both in real-time and on catch-up. With fierce competition from the likes of Major League Baseball and others, ESPN will need to keep updating its offering if it is to stay ahead. HBO, meanwhile, continues to make its films and series more readily accessible online, while the soon-to-be-revamped BBC iPlayer will offer an improved on-demand interface for a wide range of the corporation’s programming.

While internet TV currently represents a small percentage of video viewing, it will continue to grow as the net itself becomes faster, more reliable and more widely available. And, unlike linear TV, internet TV allows advertisements to be personalised and made more relevant to the end-user. Increasingly fierce competition should ensure apps continue to improve.

While Netflix’s model is forcing other market participants to rethink their own strategies, the recent war of words between itself and HBO makes for intriguing reading. The two are not in obvious head-to-head competition: HBO’s streaming service is an add-on to cable TV packages, while Netflix is an online outlet that bills customers directly. Yet Netflix’s Chief Content Officer, Ted Sarandos, recently went on record saying Netflix’s strategy “is to become HBO faster than HBO can become us”.

HBO generated $1.8bn in operating profit in 2013, on a four percent increase in revenues to $4.9bn; Netflix’s revenues surged 21 percent to $4.37bn, but generated just $228m in operating income as content expenses weighed down profits.

And there’s the rub. Both companies recognise the importance of providing unique content, but Netflix, which produces shows such as House of Cards, Lilyhammer, Orange is the New Black and Arrested Development, operates from a position of weakness. It has to do most of its own marketing, while cable operators, which handle billing and customer services, can also provide marketing support for their channels (such as HBO).

However, that isn’t stopping Netflix’s plans to raise $400m to fund a major expansion into Europe. This will include investments, acquisitions and original content. It will face stiff competition from local offerings such as CanalPlay Infinity from France’s Vivendi, the recently launched Infinity from Italy’s Mediaset, and Snap from Germany’s Sky Deutschland.

Prime competitor
While HBO and Netflix conduct an increasingly bitter war of words, they may be missing the threat posed by Amazon Prime. Superficially, Amazon Prime looks like a clone of Netflix, with users paying a subscription fee for original and third-party streamed content. Where Amazon Prime has tweaked its business model is through customer feedback. The company’s content producer, Amazon Studios, recently posted a second season of TV pilot shows on its website. Viewers were invited to vote for their favourites and the most popular series will be commissioned for full series. The first three episodes of each series will likely be shown free of charge to everyone, after which a subscription will become necessary.

Amazon Prime’s customer database of approximately 160m users gives it a strong marketing advantage over its competitors – at least in terms of scale. The only major cloud on the horizon is the consumer resistance it will likely face if it carries out its threat to raise the annual subscription for its streaming service by $20 (from the current $79).

Catch up with consumers
The BBC recently abandoned plans for a standalone subscription-based version of its iPlayer after unfavourable market testing. Instead, the service will be incorporated into a revamped version of its website. The updated platform will include a new long-form video player, and a digital store where international consumers can buy, watch and keep programmes.

The move has been partly motivated by branding: the BBC’s digital content is currently heavily fragmented, with too many websites and digital propositions. By creating a centralised point of reference, the corporation hopes to double its global reach from 250m to 500m users a week over the next nine years.

The new iPlayer will include pop-up channels around specific events, online channels featuring other BBC content, and the ability for users to create their own evening schedules, with access to more content before it is on TV. Crucially, the broadcaster will be widening the window during which content can be accessed from seven days after broadcast to 30.

Scourge of the digital sea
A growing threat to E&M producers, irrespective of business models, is video piracy – principally through peer-to-peer file sharing. The movie industry has placed pressures on governments to force internet service providers to block illegal download sites, but these moves could be counterproductive. The users of such sites are necessarily tech-savvy and easily capable of circumventing such blocks. Moreover, the publicity generated by any government crackdown will attract additional users.

Another threat – though perfectly legal and available as an add-on for Chrome and Firefox– is Hola. This app allows users to conceal their online identity and thus allows access to sites that might otherwise be blocked in their region. For example, a user in the US can give the impression they are connecting to the internet from New Zealand. Users have been quick to exploit Hola’s capabilities on video-streaming sites, where content from providers such as Netflix will vary depending on regional licences.

Known commercial threats invariably foster a response. Given the rapidity with which the global E&M industry is changing, the long-term winners will be those quickest to adapt. As to who those winners will be, it’s simply too early to tell.