OTT + Pay TV = Pay TV 2.0

The video market continues to move further away from a binary video ecosystem of pay TV. OTT and the introduction of complementary services like CBS SPORTS HQ, Fox Nation, and ESPN Plus further blur these lines. While a clean break between OTT and pay TV has not existed for some time, it is often pragmatic to segment customers into discrete buckets, particularly calling out those consumers who maintained a cable, IPTV/telco, DBS, or premium DTT service compared to cord cutters/nevers. The introduction of premium OTT services like Sling TV, PlayStation Vue, DirecTV Now, YouTube TV, etc. complicates this arrangement. The push to go direct to the consumer is helping fuel the OTT market, but the recent launches (or planned launches) of complementary services create a new dynamic within the video market.

The three services called out in the previous section are all expected to complement existing content and broadcasts. CBS SPORTS HQ, for instance, is a free service that will bring additional commentary and content to supplement CBS’s related sports coverage. Similarly, both ESPN Plus and Fox Nation (both premium subscriptions) are best viewed as premium services for the most ardent fans of ESPN and Fox News, respectively, with the intent not too dissimilar from services like YouTube Red that offer unique access to premium/additional content and other features (e.g., ad-free). These services are not substitutes for existing broadcasts and, therefore, do not necessarily contribute to the growing numbers of cord-cutters.

These “glue” services are important because they help bolster both the existing MVPD services and vMVPDs. They could also help push households that do not subscribe to either a MVDP or vMVPD service to consider upgrading to access a more complete package of content. Bridging the gap between OTT and traditional pay TV services is essential, particularly in mature markets like the United States where subscriber counts continue to decline (see key operator metrics below as example).

• AT&T (includes DirecTV, U-Verse, DirecTV Now): 25.532 million (2016) to 25.244 million (2017)
• Comcast: 21.488 million (2016) to 21.303 million (2017)
• Charter Communications: 16.836 million (2016) to 16.544 million (2017)
• Dish (includes Dish, Sling TV): 13.671 million (2016) to 13.242 million (2017)
• Verizon: 4.694 million (2016) to 4.619 million (2017)

AT&T and Dish include their respective premium OTT services, which helped bolster subscriber counts, while DirecTV has grown from 0.267 million in 2016 to 1.155 million in 2017 and Sling TV passed 2.212 million subscribers in 2017 (up from 1.501 million in 2016). Other operators like Verizon are also planning to launch premium OTT services, highlighting how the industry needs to seriously address pay TV.

As long as consumers pay for content (or it is associated with consistent ad revenue), it needs to be viewed as part of the pay TV continuum. The notion that pay TV must come to the residence via broadcast channels for consumption on TVs is antiquated. While this foresight centered on the U.S. market, other regions like APAC are already embracing new distribution channels (for live premium content) like mobile networks, some of which started as mobile video services. By viewing pay TV more broadly, new opportunities come to light.

Metadata and content recommendation will play a critical role coordinating or connecting a viewer’s collection of online video services. While attempts have been made in the past to create cohesive platforms, all have fallen short of creating one seamless user experience (e.g., search/results and recommendations across multiple services). This is one particular area where MVPDs/vMVPDs could hold an advantage, particularly as they open up their platforms to third-party services. Circling back to the new complementary services, if users do not know what is available on the other channels or platforms, then the content owners lose part of the available value to the consumer surplus. While the services could push or promote related content, it is possible that consumers might come to view these services more as a platform for additional premium content than as a service that can stand on its own merits. A platform or system that can identify which services a user has access to could serve those viewers that have access to both the linear/broadcast channels and a complementary service, while providing those who do not with a more isolated viewing experience.

The expanded definition of pay TV also means that OTT content needs to hold itself to a higher standard. This puts pressure on content distribution to be as reliable and timely as current broadcast services. In the world of instant updates and notifications, live content, in particular, is subject to spoilers. Low-latency streaming has quickly become a hot topic among video companies and it will become increasingly important as more content flows through these channels.

In the end, as long as consumers are willing to pay for content (or accept enough advertisements), then the video market will remain healthy and opportunities for growth will continue. Regional differences certainly exist, but activities that are occurring in APAC (e.g., mobile-first video services) could play a larger role in the video market in other regions, particularly as new services like 5G roll out. In addition, new technologies like mixed reality (MR) could change how and where consumers view their content. While people often think of XR as a pathway to 180°/360°content, strong interest exists in enabling 2D video on these platforms where any space could become a screen.

This creates new opportunities for social viewing and for content companies and services. For example, if a group of friends decided to watch a comedy show in a virtual living room, the platform could observe their emotional reactions (which are tracked to allow their avatars to reflect their reactions) and could recommend content based on how they responded to the content or elements of the show. This engenders new opportunities for targeted advertising and content recommendation; and again, this requires good connectivity between services and applications. Analytics, AI, search/recommendation, etc. will all play a critical role in the next generation of pay TV; even though it may look different, it is still premium content.