Direct-to-Consumer Changes the Narrative around Content

Disney+ launched on November 12, 2019 in the United States, Canada, and the Netherlands and expanded to Australia, New Zealand, and Puerto Rico the following week. In a previous ABI Insight, Disney (And Others) Looking to Shake up the OTT World (IN-5602), ABI Research called out Disney as a company looking to shake up the Over-the-Top (OTT) market and, based on early uptake figures, the company’s plan is progressing quite nicely—before the calendar changed to December, the Disney+ App was reportedly downloaded over 15 million times. While this tremendous growth is noteworthy, there are some caveats: namely Verizon offered their unlimited subscribers a free annual subscription to Disney+, including free trials that expire after one week. Regardless, the large number of users represents a profound step toward a future where more content goes Direct-to-Consumer (DTC); which is further accentuated by existing (e.g., CBS All Access, Showtime OTT) and upcoming services in 2020 (e.g., HBO Now, NBCU Peacock). Disney and its streaming services speak to more than the impact of DTC—they also showcase the value of aggregating services. For example, Disney+ reportedly increased support for Hulu and ESPN+, which were aggressively priced into a bundle for US$12.99, equaling the price of Netflix’s Standard monthly rate. 

Apple also launched Apple TV+ on November 1, 2019, and, while subscription details are less concrete, some estimates suggest the company could exceed its 2024 goal of 60-90 million subscribers within one year. This growth is misleading, however, since the company is giving new Apple hardware purchasers a free annual subscription to the service. The company has also stated it doesn’t expect the launch of Apple TV+ to have a material impact on its financial results—revenue from hardware sales will likely be used to offset the forgone service revenue. While some customers will cancel Apple TV+ once their trial period ends, a significant number could remain active subscribers provided the price of the service remains low (US$5/month) and the content library grows at a healthy rate.

However, not all streaming services are growing as the Virtual Multichannel Video Programming Distributors (vMVPDs) faced some challenges in 2019—AT&T TV Now (formerly DirecTV Now) lost 446,000 subscribers through 3Q 2019 since the close of 2018 and Sony announced it would shutter its PlayStation Vue streaming service in 2020, which by most estimates will see between 700,000 and 800,000 customers looking for a way to replace this content.

Since 2012 the U.S. pay TV market has seen a continual erosion of households and this current crop of OTT services will work to accelerate this transition. The struggles seen by some of the vMVPDs services, however, indicate this transition away from pay TV isn’t as basic as a fundamental shift in preferences for content distribution channels. It’s also too simplistic to say consumers have a penchant toward Video on Demand (VOD) versus live/linear content, as other linear services continue to do well and live content continues to see more streams every year. The focus is often on the technology of these services as the driver away from traditional media—for example, replacing the old Set-Top Box (STB) model for more current streaming to connected Consumer Electronics devices and mobile devices. While there is certainly some truth to this position, we would be remiss to ignore the content side.

Netflix’s streaming service has yet to see a drop-off in U.S. subscribers, despite the veritable flood of competition, which includes impending losses of content from content holders such as Disney and NBCU. Netflix is prepared to weather the storm because of its original programming and, while some subscriber losses could come in the future as consumers determine where they spend most of their viewing time, these declines won’t prove disastrous. DTC and spending on original programming bring the focus back to the content and shed light on why customers are flocking to new distribution channels.

As much as the entertainment industry is becoming an on-demand market, live/linear programming isn’t going away. What consumers are moving away from, however, is the forced packaging of channels into fixed bundles. As the content landscape becomes more fragmented and consumers are presented with a growing list of options, the ability to pick and choose which “channels” of content best fit their needs will only become increasingly important. This runs counter to the traditional pay TV model, which subsidizes less popular channels by bundling them in with the ones customers truly want and it is a model that needs to adapt.     

Content spending has always been a given in the entertainment industry, but the goalposts have moved. The days of limited competition and dictating how, when, and what viewers watched are off in the distant rearview mirror, which means incumbents and upstarts need to start establishing some framework for what the future of video will look like (it’s not going to be a simple collection of OTT services). Disney presented a glimpse of this future with its bundled package of services, but there are also some good indicators from the traditional pay TV market as well, such as Comcast and its Xfinity X1 platform, which works to homologize the traditional pay TV and OTT viewing experiences.

ABI Research has often highlighted the importance and opportunity of serving as an aggregation point and the launch of these new services helps drive this point home. Flexibility, however, will remain paramount. It is easy for customers to add and drop OTT services and customers will need to have the same freedom of choice when it comes to working within these points of aggregation. This flexibility needs to extend to the traditional types of pay TV services as well—some have called for “pay TV holidays,” but whatever one chooses to call this option, the customers need the flexibility to start and end/put on hold all of their content sources. Pay TV with their STB leases and installation fees/processes make churning more permanent and, coupled with increasingly less unique content (that consumers want to watch), makes it easier and easier to keep the cord cut. A better solution would allow customers to keep their boxes but put services on hold until the next season of their favorite show(s) and/or sports seasons start again. 

Expect to see more consolidation and partnerships to drive toward this aggregation, especially as costs of original programming rise. It is critically important, however, to maintain a high degree of choice when it comes to these aggregation points. In other words. it would not serve Disney or any company well to acquire a number of content sources and then package them into a fixed bundle like a pay TV service or vMVPD; rather, the components should be offered a la carte (as they are today) along with bundles/packages for those who want to invest in the entire package. Pay TV isn’t the only side that needs to evolve, as some of the traditional elements are filtering back into OTT. Disney’s The Mandalorian, for example, is eschewing the binging model by releasing episodes on a timed schedule, which helps spread new content and extends the value of the company’s investment. Ultimately, it’s not a matter of which side is winning or losing, but of how video is evolving and what it is moving toward, and it’s looking like a future where all will be able to play.