The over-the-top (OTT) media battle is about acquiring and maintaining subscribers by offering increasing amounts of third-party and original content while providing the hardware to play it. The recent Amazon Fire HD streaming player box release is the latest offensive by a major OTT player to attract viewers with hardware that eases access. Those at risk from this competitive gambit are pay TV suppliers.
A story in Variety puts the conflict into perspective. Comcast has 30 million subscribers, while OTT leader Netflix has 35 million. However, the former generated $5.18 billion in the first quarter of this year, while the latter managed only $1.27 billion.
Comcast sells access to content as pricey prix fixe meals using its own leased hardware while the latter provides content as an all-you-can-eat budget buffet via streaming media players that viewers own outright. In a world where the Internet has brought low-cost bandwidth to the masses, the momentum is with Netflix, which continues to attract new subscribers while Comcast is losing its own.
“Netflix’s offering is longer tail programs, often 20 days or more after video-on-demand pay per rental release of the content,” Mike Inouye, senior analyst at ABI Research of Scottsdale, Arizona, declares. Viewers tend to have both pay TV and over-the-top, with some cord-cutters opting out of pay TV going exclusively OTT. “With Netflix, Amazon, and Microsoft doing their own content there is a potential alternative distribution of quality content,” Inouye explains. “But the viewing pattern is binge watching -- a whole season of Damages or House of Cards at one sitting. That means the viewer goes away until the next binge. With (pay TV) cable and broadcast, the touch point is much more frequent and predictable.”
With Netflix's hit series House of Cards attracting subscribers, competitors Amazon and game console supplier Microsoft were incited to begin producing original content while also distributing third-party content. With the announcement of Amazon Fire HD, the online retailer is making its content -- including original series -- available over its own device, explains Inouye. The content is also streamed via Smart TV or a competitive streaming media player, such as Roku.
This is where the Amazon and Microsoft models depart from Netflix. In 2007, Netflix made the decision not to build its own streaming media player and to spin out the Netflix group building the box into Roku. At its head was Anthony Wood, the Netflix project lead whose team designed and built the player hardware and software. The rationale was that Netflix wanted to be available on all the streaming devices going into the home, especially Apple TV.
Now the major dispute between old pay TV distribution -- broadcast and cable -- and new streaming media distribution is over broadband bandwidth. The former controls not only the content but in the case of Comcast also the broadband distribution network. It wants to extract revenue for sites that consume large amounts of that bandwidth.
Netflix accounted for just over 25% of total Internet traffic according to Sandvine Network Analytics on July 10, 2013. By contrast, YouTube accounted for 12%. Netflix acknowledge this reality when it grudgingly signed deals recently with Comcast and Verizon to provide assured bandwidth for its streaming content. It is likely Netflix will be making similar deals with other Internet service providers going forward.
What is the role of streaming media player suppliers in this high-stakes battle between old and new world content distribution? Small though their customer base is -- Apple claims 20 million and Roku claims 8 million -- the streaming media players have the momentum while the conventional set-top box growth is slowing. Counting Microsoft’s game console as a streaming media player, its 48 million Xbox Live subscribers on more than 72 million Xbox consoles, raises the total considerably. (This total grows considerably when Smart TV is included.)
Technavio's new report “Global Smart STB and Dongle Market 2014-2018” projects a 25-percent compound annual growth rate for streaming media players for the period 2013 through 2018. Why the popularity of these devices? The Elmhurst, Illinois market research firm says “OTT can deliver video and audio data using the Internet, without a service provider.” This “cutting the cord” is happening among Millennials, that desired 28 and younger demographic that advertisers crave and the streaming media player is enabling a small percent of viewers to kick the pay TV habit.
While the OTT box provides freedom, it comes at a cost of having to find the desired content amid a large, expanding selection. Roku, for example, claims “1500 channels and growing at two to three new channels every day,” says Lloyd Klarke, director of product management at Roku.
“The differentiation Roku provides in its player is user interface and search functionality. Roku has a simple user interface along with a powerful search capability that locates desired content with a minimal number of key strokes, accomplished using the up-down, left-right screen-keyboard-typed letter at a time from the remote control,” Klarke explains.
Using a Roku mobile app, a user can type in a search term via the Android or IoS smart phone or tablet keyboard. Amazon is turning to verbal commands to initiate searches, though not without its problems as noted in a New York Times review. Apple brings its user interface technology to Apple TV (along with licensing deals with a number of major content providers including ABC TV, Bloomberg, among others).
The other major trend that muddles the water for the streaming media player is Smart TV, which faces the same hurdles that confronted the OTT set-top box at its beginning: the user interface and content. Each major TV manufacturer is attacking the problem with its own solution. For example LG has adopted HP’s WebOS, while Vizio and Samsung have employed Yahoo’s connected TV. In the summer of last year Samsung acquired Boxee presumably with the aim of developing a distinctive user interface for its Smart TV offering.
"At the Consumer Electronics Show in January Roku introduced Roku TV to be integrated in Hisense and TCL TVs this fall,” Klarke says. TCL and Hisense are the third and fifth largest TV makers worldwide, accounting for five percent and four percent, respectively, of the total TV market. The move could vastly increase the installed base of the Roku platform while putting pressure on competitive OTT set-top box makers.
Won’t the proliferation on Smart TV spell the end of demand for stand-alone streaming media boxes? Inouye doesn’t think so. “The Smart TV sits in a living room for several years before it’s replaced. The technology in the streaming media players moves quickly, with newer models obsoleting older ones. Stand-alone streaming media players provide a quick way to get new functionality much sooner and cheaper than replacing the Smart TV every 12 to 18 months.”
The battle boils down to pay TV providers protecting access to their content and Internet-based, over-the-top content suppliers trying to establish an alternative business model using the same content, while developing their own. The viewing public will ultimately make its choice. In the choosing viewers will determine what percentage of the billions of dollars at stake will go to the various players: content creators, pay TV suppliers, and OTT content distributors and hardware suppliers. If the music and publishing industry are any indication, the camp leveraging the Internet has the long-term advantage.