Television is going through a major market disruption. Its distribution model is evolving from broadcast (over air or cable) to an anytime, anywhere online distribution model termed over-the-top (OTT). This disruption is creating a potentially large market opportunity that is spreading worldwide as television connects to the Internet and becomes smart TV.
As this disruption propagates, an evolving landscape of content providers and aggregators, service providers, and device manufacturers is emerging. This landscape is seeing a proliferation of business models to exploit the opportunity.
Let's begin this examination of smart TV by sampling a market researcher's projections for the opportunity. Multimedia Research Group expects the worldwide OTT subscription video-on-demand (SVOD) market to reach nearly $8 billion with more than 120 million subscribers by 2017.
A more telling observation about what subscribers will use to view content comes from the IHS Screen Digest. "In 2015, 49 percent -- or nearly half of all devices obtaining television services from 43 of the largest global pay-TV operators that have commenced deployment of multiscreen services -- will be PCs, smartphones, tablets and other so-called multiscreen devices, up from just 18 percent in 2011," the research firm said in a press release. The walled garden that content providers have used to control their intellectual property and extract value from its distribution has been breached, and the content is flowing out over the top and on to the web. Here the market disruption is a competitive struggle of old guard versus new.
Keith Nissen, an analyst at Multimedia Research Group Inc., wrote in a company blog post, "Netflix has matched HBO market penetration at 40% (US Internet users)." More importantly, original OTT content is starting to compete with content from the mainstream suppliers.
Writing in a Poynter.org blog post, Andrew Beaujon cites a New York Times survey of more than 4,000 online video users. Among the survey participants, "news sites were more popular than sports for online-video watchers, but they were far less popular than video hosting sites like YouTube."
A new landscape for the connected TV (summarized in the table reproduced below) is emerging.
Connected TV landscape.
Each competitor in the landscape is vying for the attention of consumers, who are increasingly using smart devices to access content. Thus, old-school television and cable networks are struggling to monetize their content outside their walled gardens.
The most visible example is Hulu, which was formed by 21st Century Fox, Walt Disney Co. and NBCUniversal (part of Comcast Corp.). Hulu reported $1 billion in revenue for 2013 from 5 million paying subscribers. Netflix, YouTube, and ManiaTV, and other new-school content providers -- some of that content taken from the walled gardens and some of it original programming -- have the advantage of lower costs or even no cost (as in the case of YouTube). The rating service comScore Inc. reported that 189.2 million Americans watched 47.1 billion online videos in November, and that Google sites captured the vast majority of these viewers.
Telecommunications vendors such as Verizon and AT&T are competing against entrenched cable and satellite providers like Comcast, Time Warner, Cox, and DirecTV to deliver content to homes and wireless devices. Comcast's purchase of NBCUniversal illustrates the effort to achieve competitive advantage by integrating distribution and content creation. Not to be left out, Verizon partnered with Outerwall (formerly known as Coinstar) to offer Redbox Instant. Access to this large content library helps keep Verizon competitive with cable companies while maintaining a competitive foothold as a media aggregator against Netflix, Amazon, and others.
While the turf battles rage between cable and telco service providers, both are in continuous negotiations with content owners over revenue sharing.
Battle over monthly subscription
How much of a household's monthly subscription do service providers have to share with content providers? The cable and telco service providers are not only providing walled-garden content. They are also providing the Internet connection that gives OTT content providers access to the same households.
Comcast, Cox, Time Warner, and others assess broadband connect fees to access OTT content. Content aggregators provide content for a monthly subscription fee (Netflix, Hulu, Amazon, etc.) or for free (YouTube, Yahoo Video, etc.) and make their fees from advertising. This is a model not unlike RF broadcast TV.
If the millennials in Beaujon's post represent the future, the business model that might prevail is cable and telco suppliers providing bandwidth and content suppliers offering video on demand directly or through an aggregator like Hulu or Netflix. The days of bundled cable packages with hundreds of seldom-viewed channels would appear numbered.
Furthermore, the OTT trend is being bolstered by the growing amount of bandwidth to the home. Christophe Louvion, CTO for M-Go, said at the Streaming Media West conference in November that the average household had 7.5 Mbit/s of bandwidth, and others had 30 Mbit/s to 60 Mbit/s of bandwidth.