Over the Top

This article originally appeared in the MIPCOM 2014 issue of TV Europe.

OTT and on-demand platforms are reshaping the media landscape across Europe.

Perhaps the most highly awaited television launch in Europe this year was not that of a traditional channel at all but that of an OTT service—the kick-off of Netflix in Germany in September. The OTT market in Germany is already crowded. The lineup of existing SVOD services offering Holly­wood fare includes Amazon with its Prime Instant Video offer, Sky Deutschland’s Snap and Vivendi-owned Watchever. The German free-TV broadcasters, meanwhile, have their own online platforms.

The emergence of OTT is possibly the most important innovation to hit the television business since digital channels began to proliferate on cable and satellite platforms. For the first time in many years, there are big new players in the market and new stand-alone channels on a new technological platform. Industry veterans see the advent of OTT opening a new stage of competition, as the emergence of pay TV did.

The big difference with this innovation is that OTT goes straight into the consumer’s home without an intermediating cable or satellite package. This new approach has had an immediate impact on the business of TV production and distribution, probably faster than anything that has happened before. OTT video services can be linear or on-demand. From the perspective of incumbent pay-TV providers, OTT is potentially a threat. For content owners, it’s certainly an opportunity. Eye-catching OTT deals seem to be happening every day. For the Netherlands, for example, Netflix has made deals with Walt Disney Studios for feature films and with NBCUniversal for films and series. In the U.K., Amazon Prime Instant Video is the exclusive window of CBS Studios International’s sci-fi thriller series Extant, which started its online run in July on the day after its premiere on CBS in the U.S. The platform also has a deal with Tandem for Crossing Lines.

SOARING SPENDING
Global spending on OTT video will rise to $4.7 billion (€3.53 billion) by 2018, according to Strategy Analytics. Even more bullish, PwC predicts that OTT streaming revenues will increase to $10.1 billion (€7.8 billion) in 2018.

While forecasts show incumbent pay-TV operators grabbing much of the growing pie, it is pure-play services such as Netflix and Amazon’s streaming offerings that are generating the buzz.

According to Clemens Schwaiger, the global head of digital media strategies at the Telecommunication, Information, Media & Electronics (TIME) practice at the Arthur D. Little management consultancy, the excitement around the newcomers is still a bit greater than the market reality at this point.

“OTT is not having a big impact on the TV market as yet,” he says. “The buzz is bigger than the reality. About 99 percent of the value of video and more than 80 percent of the consumption of video still come from television. But nobody would say that OTT does not represent a major change.”

“OTT is a fundamental change,” says Jakob Mejlhede, the senior VP of acquisitions and programming at one of Europe’s biggest TV players, Modern Times Group (MTG), and chief content officer of its digital division, MTGx. “There has been a surge of competition in SVOD services. It has really been quite dramatic.”

To put what’s happening in perspective, he says the current climate is “like pay-TV competition” in the early days of that sector.

“OTT is absolutely growing in volume, and the new services are growing as businesses,” says Gina Brogi, executive VP of worldwide pay TV and SVOD at Twentieth Century Fox Television Distrubution. “I think they will live and continue to evolve. There is room for all of these platforms.”

OPENING WINDOWS
The traditional program-distribution business has actually accommodated OTT without too much trouble so far. “SVOD has almost always been a part of the business of subscription television,” Brogi says. “It has evolved into an OTT business, and this has caused our business to evolve.”

The windowing structure continues to work for movies—theatrical, then premium pay TV. Many traditional linear services have their own on-demand services. So in the case of Sky, for example, a film could be on Sky Movies and on-demand and on Sky’s OTT service, NOW TV (which was launched to compete with new OTT providers). “Whether they buy separately or together with the linear services depends on the market,” Brogi says.

Television series usually start on advertiser-supported free-TV channels. They could be on SVOD after that. Frequently, SVOD is a way to offer previous seasons of series that are still on linear channels. In the case of 24, for example, when the limited series 24: Live Another Day aired on FOX, the previous eight seasons were available on Amazon Prime in the U.S. Internationally, the studio has used different iterations of the same tactic.

SVOD can also offer an alternative for shows with more niche audiences. “It can breathe life into series that might not have a place in the market otherwise,” Brogi says.

This has been the case for MTG, which has used SVOD to get more value out of shows that might struggle on linear free TV.

“We have seen a decline in linear ratings,” says Mejlhede. “Part of the reason is that many U.S. series are more narrow in appeal than they used to be. They struggle to find a broad linear television audience, but they can work well on SVOD. Take a personal favorite of mine like Dexter [from CBS Studios International]. It had dismal television ratings but it is a strong SVOD program. Thanks to Viaplay [MTG’s online streaming platform], suddenly the show became viable for us.”

BEING TERRITORIAL
From the content owners’ viewpoint, the OTT market may be pretty smooth sailing, but for stand-alone OTT services like Netflix, the rights market is tricky.

“The video market is riddled with national territory rights,” says Arthur D. Little’s Schwaiger. “You still need to buy rights nationally. That’s why it’s taking Netflix so long to conquer Europe. There are specific OTT rights, subscription video rights, but these are traditionally the last window.”

Netflix also expanded into Austria, Switzerland, France, Belgium and Luxembourg this year, having launched in the U.K. and Ireland, Denmark, Finland, Norway and Sweden in 2012 and in the Netherlands in 2013. Since its birth in 2007, the streaming service has grown to more than 50 million subscribers in 40-plus countries with close to 28 percent of them outside the U.S. at the end of the second quarter of 2014. A report from Digital TV Research issued prior to the European expansion ranked the U.K. as Netflix’s second-biggest market outside the U.S. with 4.5 million subs, followed by Canada and Sweden.

Netflix has an interesting situation in Austria, where the company launched last month. House of Cards, one of its signature original series, repped by Sony Pictures Television, has been licensed to public broadcaster ORF, so it does not have the show for its own OTT service.

“The value from television for rights’ owners is much greater, and it is going to remain that way for a very long time,” Schwaiger continues. “The rights business is all about negotiation. Pay-TV companies and rights’ owners want to protect their businesses. Deals are negotiated very carefully.”

Viasat is one company buying exclusive OTT rights. “If I am going to make a big output commitment I want to have everything,” says Mejlhede. “I’m not interested in having free-TV rights to a show that’s on Netflix for SVOD. Over the last year or so, we have been seeing how we can convert the rights in our output deals to a mixture of free-TV and SVOD. Output deals are under pressure in many places. But you can provide a good solution for the rights’ owners if you have all platforms, as we do.”

ALL-ACCESS PASS
For Ioris Francini, the president of IMG Events & Media, “technology is further enabling rights’ owners to segment their offering and enabling consumers to access specific content. OTT will not be a revolution. It will improve access.”

In the long run, Schwaiger says, OTT will not kill off traditional pay-TV companies like BSkyB because of the importance of premium sports, which have their established subscriber bases and whose rights cost more than OTT players can afford.

“OTT won’t demolish the infrastructure of pay TV,” Francini says flatly. “That’s not going to happen. OTT is about the long tail of choice.”

High-profile Netflix might not be the biggest OTT challenger to the status quo. The company is a heavyweight in the OTT-only space, but compared to its main adversary, online retailer Amazon, it’s actually a lightweight in the bigger economic scheme of things.

Amazon’s launch in the video-subscription business in 2011 opened the door to a new kind of bundling well beyond the old tiering model of cable and pay TV.

Amazon Prime members can access thousands of movie and TV titles on their Amazon Instant Video service, at no additional charge beyond the annual fee they pay for expedited delivery of their Amazon orders. It’s probably not a coincidence that the fast-delivery fee has risen to $99 in the U.S. since the inclusion of video.

“By bundling its SVOD service with Amazon Prime, Amazon is using content to drive e-commerce,” says Bernd Riefler, chief marketing officer at Munich-based research company veed analytics. “This is scary for broadcasters.”

And it presents a real challenge to Netflix.

INTO THE AMAZON
“The stand-alone model faces an uphill battle,” Riefler says. “Netflix has a superior product, but it does not have the cross-selling potential of the competition. Perhaps its new [marketing alliance] with Deutsche Telekom will improve the prospects.”

Analysis from veed also says that Amazon Prime offers the largest catalogue of current movies and TV shows in Germany, and the biggest selection of recent movies and TV shows, with a very low price point. “Netflix has a superior product in terms of technology and user-friendliness, but ultimately the user decides based on price and content.”

“Amazon is in a strong position because the video offer fits so well into the existing e-commerce business,” says Arthur D. Little’s Schwaiger. “It already has customers and is earning revenue from other sources. It has massive cash flow and pricing power and can bundle video with other offers. Netflix, on the other hand, is investing cash flow and debt-financing and making investment rounds. The picture would change immediately if Netflix were to be acquired by a big player like Google.”

Schwaiger sees Apple, which dominates online music, as a big disappointment in the OTT space. “They don’t seem to have a new strategy. The music model is a transaction model, and that will be hard to move into the video space. Video will be a subscription business. Competition will focus on the size of catalogues. Having a big catalogue is important.”

That’s because video content is “not easily substitutable,” he says. His explanation goes like this: “If you look at music, there are a few big labels. Let’s say three. You could have deals with two of the three, but if the consumer wants Madonna and she belongs to the one you don’t have, that consumer will not want you. The same is increasingly true of TV. For the platform it’s hard to have everything. It’s not affordable.”

That’s where the strong push by OTT players into original content comes in. “Original content offers differentiation and exclusivity,” Schwaiger says.

DRIVING SUBSCRIPTIONS
Strategy Analytics sees stand-alone OTT as a proposition “addressing the holdouts—who will not be swayed by traditional premium-TV offerings—by promising high-quality content including, crucially, live sports, shorter commitment periods, a lower cost of entry and much simpler installation and hardware requirements than traditional pay-TV services.”

IMG’s Francini cites the example of TennisTV, which offers live ATP World Tour and WTA events for a subscription of $129.95 (€100) a year. “If you’re a tennis fan and you just want to watch tennis and don’t care about anything else, then OTT in this case is a replacement for Sky in a more effective way. It’s much cheaper than any Sky package. Maybe you want to get Netflix too for £5.99 (€7.50) a month. You’re a happy boy.”

Pay-TV operators have moved to counter the stand-alone OTT challenge. They have the advantage of being able to add a Netflix-type OTT service on top of their TV offer. Comcast has done this in the U.S. BSkyB has Sky Go for higher-tier bundles.

In Germany, Sky Deutschland cut the subscription price for its OTT service, Snap, to €3.99 ($5), down from €9.99 ($13), ahead of Netflix’s launch in the territory.

MTG’s Mejlhede sees SVOD as an extension of pay TV that can reach new audiences. “Cable and satellite pay TV is largely a family product,” he says. “We are finding success with a new group of consumers, young males for instance, who want premium sports but would not subscribe to traditional pay TV.”

Viasat is offering live sports via OTT in a premium package costing about €25 ($32) per month compared with the usual €10 ($12) for the lower-tier offer. That has helped its Viaplay keep pace with regional OTT rivals.

OTT is by no means only an opportunity for pay-TV companies. Ad-supported linear channels can benefit too, as Viacom International Media Networks (VIMN) has found as both a channel provider and a source of programs.

“OTT is another distribution opportunity for the content from Viacom’s iconic global entertainment brands, including Comedy Central, MTV and Nickelodeon,” says Arran Tindall, senior VP of commercial and content distribution at VIMN. “We already make multiple rights windows for our content available. At the moment most of VIMN’s OTT activity is for third-party SVOD services. There are some linear OTT players, and we are engaging with these operators too for distribution of our linear services. In some markets we have done deals with OTT operators for the rights to individual titles owned by Viacom or packages of content. Both SVOD and linear OTT offer opportunities for a return on the content investments that we continue to make. Viacom’s annual content spend of $3 billion (€2.2 billion) is still geared towards our own branded networks and digital properties in the first instance. Viacom controls the IP to the vast majority of its content. Where we do buy content from third parties, the OTT rights would be taken into consideration as part of the acquisition. We are open to the idea of partnering with OTT providers on content initiatives.”

FAMILIAR FACES
“The same players who are big in TV will be the big players in OTT,” predicts Leonard Fertig, the CEO of Motive Television, which develops software for delivering on-demand TV across any network. “Major broadcasters have deep relationships with the advertising business and with content providers, and they have a brand relationship with consumers. They know how to create programming and curate channels. And they have their own distribution assets.”

Motive Television is developing the ability to deliver programming that normally requires broadband infrastructure, such as OTT channels, over the air. “Terrestrial distribution is cheaper,” he says. “The networks are already in place. With fairly cheap software they can do the same things as broadband.” In other words, in the future OTT might not be confined to the Internet.

Fertig says he sees consolidation coming in OTT. “Even Netflix is doing deals and forming joint ventures with broadcasters in order to emulate assets they don’t have. The old players will be the new players.”

THE HEART OF THE MATTER
And content will remain king. “A lot of tendencies favor rights’ owners and content producers,” says Schwaiger. “We have analyzed the trends in revenue from consumer and advertising spending, and we see that there has been significant growth in what rights’ owners and producers pull out of the market. At the same time there has been an increase in the volume of production.”

He says that if he were a content producer looking at OTT, he would focus on two things. “First, I would make tacit attempts to cut out the middleman and go direct to the consumer. HBO is doing this in the Nordics. Second, I would try to create and preserve healthy competition, between pay TV and OTT and between OTT players. You don’t want consolidation under Amazon and Netflix. You don’t want a repeat of the music scenario where iTunes became all-powerful as the only competitor. The rights’ owner has plenty of leverage and plenty of opportunity to play buyers off against each other. The business is all about negotiation.”

That negotiation might mean a growing value for OTT-only rights. “You can differentiate rights for OTT,” says Riefler. “It is becoming more complicated, but at the end of the day there could be more money in the market and programmers will probably benefit.”