Friend or foe: OTT and pay TV services

With Netflix forging multiple distribution deals in Europe, cable and IPTV pay TV operators are increasingly welcoming OTT services on board. Stuart Thomson explores some of the issues raised.

Is OTT a friend or foe to pay TV? Netflix, the leading OTT player internationally, has teamed up with multiple service providers that also package their own pay TV offerings, while multiple pay TV providers are looking to make fresh content available to advanced connected set-tops to stimulate take up and cut churn.

On the other hand, pay TV operators have also joined the rush to launch their own OTT services, such as Sky’s Now TV, to head off the competitive threat and – potentially – address a market segment that has hitherto proved resistant to the allure of ‘full-fat’ pay TV.

Potential partners

Everything ultimately depends on context. According to a recent survey carried out for technology provider Nagra by MTM, two thirds of operators see partnerships with OTT providers as “an important opportunity for their business” to keep audiences on the platform, differentiate their offerings and overcome a lack of in-house content assets and capabilities.

According to the study, 76% of respondents agreed with the concept that standalone premium OTT services are valuable potential partners, whether these are major international services such as Netflix or Amazon Prime Instant Video of the direct-to-consumer offerings of pay TV networks such as HBO.  Small cable and telecom operators are more likely to see the benefits of teaming up with large known OTT brands than large pay TV operators with significant portfolios of premium content rights. The latter are more typically looking to surf the OTT wave by launching their own paid-for OTT services, carefully tailored so as not to cannibalise their mainstream offerings.

From the other side of the equation, OTT providers see partnerships with pay TV providers as a way to extend the reach of their services to large, established pay TV subscriber bases. They also stand to benefit from established billing relationships and the marketing power of the larger operators.

It is noteworthy, however, that pay TV providers most keen to forge partnerships with OTT operators such as Netflix are those that make money from bundling TV with other services including broadband internet access, based on their own infrastructure – in other words telecom and cable operators. Satellite pay TV operators – even those that have branched out to offer broadband and other multi-play offerings – seem more reluctant. This was borne out by the MTM study, which found that the opportunity to bring third party services onto their platform was rated more highly by cable operators and telcos than by satellite pay TV service providers.

MTM’s survey respondents said they believe there will be a significant number of OTT service launches on a territory-by-territory basis over the next few years. Eight per cent of respondents stated a belief that pay TV operators will themselves increasingly use linear premium OTT services to offer higher-quality formats such as 4K TV to supplement their own efforts. Standalone OTT services from broadcasters are largely expected not to go head-to-head with pay TV broadcasters to secure premium sports rights and other premium pay TV offerings.

More the better

Despite the misgivings of large players, it seems that partnerships between pay TV operators and OTT providers are likely to become more common as operators seek to boost the appeal of the services to a broader audience with an appetite for non-linear internet TV services.

For Charles Dawes, senior director, international marketing at technology provider Rovi, increasing number of service providers “just see [OTT] as content that [subscribers] want to watch – the more content you have the better,” says Dawes.

Other technology providers closely involved in the integration of OTT with pay TV platforms agree.

“There are opportunities both to increase revenue incrementally and to increase the attractiveness of the overall bundle from pay TV operators. For OTT operators the key advantages are increased audience and device reach,” says Paul Mardling, vice-president of strategy at  OTT technology provider Piksel.[icitspot id=”410371″ template=”box-story”]

“Our feeling is that is that this will be key for many service providers. They will have to integrate these new platforms and other sources of content,” says Simon Trudelle, senior product marketing manager at Kudelski-owned technology provider Nagra. Such integrations enable operators to deliver OTT services via the same TV input and the same remote control as the pay TV service – a key advantage of the partnership model.

While such partnerships are growing in number, they are not without tensions. The question over who has ultimate control over the look and feel of services in this context is one of the thorniest.

For a player such as Netflix, the look and feel of its service is seen as one of the key selling points in its overall proposition, along with access to a long tail of content and high-profile originals such as House of Cards and Orange is the new Black.

At the heart of possible tension between the OTT provider and the pay TV operator is how pay TV services differentiate their offerings, not only from traditional competitors but from the coming wave of OTT services themselves.

The two main vehicles for differentiation are content rights – encompassing exclusive deals for premium sport and movies as well as the development of wholly owned channels and commissioned drama series – and the user experience – encompassing the look and feel of the service, the programme guide and search and navigation tools.

For the majority of pay TV operators – especially cable and telecom service providers – the acquisition of big rafts of premium content is not part of the core strategy. Exceptions include pay TV giants such as Sky, Canal+ and Telefónica. For small cable operators and telcos, such as strategy is beyond their resources and not part of their core expertise. Liberty Global and a few other large players stand somewhere in between, viewing ownership of content assets as important but not to the same extent or in the same way as the likes of Sky.

The MTM study found that over 90% of industry participants believe providing an integrated user experience across platforms and offering service through mobile and tablet devices will become increasingly important, with differentiation being achieved through the provision of easy integration, high-performance set-top boxes and the ability to offer supporting tools and services to partners.

Degree of control

Not all OTT providers are so determined to retain a high level of control on the Netflix model. An alternative approach has been adopted, for example, by ProSiebenSat.1-owned German OTT service Maxdome, which has adapted more readily to the requirements of cable operator and other partners.

“Our strategic goal as Maxdome is to reach our users on every platform. We have very attractive distribution partnerships in Germany. For example we fully integrated our SVoD offer into the offering of Unitymedia with availability for all TV and triple-play tariffs, which can be booked by more than seven million Unitymedia customers,” says Filmon Zerai, managing director and chief operating officer at Maxdome. “We expect that the relevance of paid content and the number of internet-enabled television sets will increase over the next few years, opening further revenue opportunities for ProSiebenSat.1. The use of internet video libraries will increase considerably. That’s why we also arranged agreements with many leading television manufacturer like Samsung, Philips, LG, Panasonic, Loewe, Toshiba, Humax or Technisat since 2010.”

The position the OTT provider adopts will depend on a rang of factors.

“Both options will exist and, dependent on the relative position of the players in a given market, the two could be used on the same platform,” says Trudelle. “You could have a native Netflix app alongside a marketplace-type platform where several OTT providers could sit in a ‘mall’ set-up with different content shops within the main interface.”

For Andy Hooper, VP, cloud solutions and services, EMEA at technology provider Arris, “pay TV operators have moved on from viewing services as a threat to seeing them as an important part of the content mix”, while OTT providers no longer necessarily see pay platforms as obstacles in the way of their goals. However, he points out that this doesn’t mean pay TV and OTT complement each other perfectly. Both OTT providers and pay TV operators want to control the user experience, with the OTT provider typically prevailing in cases where services are seen as adding value to the pay TV proposition.

Murali Nemani, chief marketing officer at ActiveVideo, the cloud technology provider recently acquired by Arris, points out that consumers have an interest in getting content via a single interface and input to the TV rather than have to deal with multiple devices and sources feeding content into the same screen via a confusing multiplicity of interfaces: “For consumers, it also means accessing more long-form content and things you might want to watch on a TV rather than a mobile device.”

Search and discovery

Not all industry participants share the view that pay TV operators want to add third-party OTT services to their offerings. For Matt Smith, chief evangelist at video technology provider Anvato, viewing the industry from a US perspective, the main preoccupation of pay TV operators is getting their own services on as many devices as possible and addressing the competitive threat presented by low-cost OTT offerings that could “cannibalise” their customer base. “A majority of pay TV brands we work with are looking to extend their services to devices such as Android and iOS smartphones and tablets, Roku and Apple TV,” he says. For Smith, most pay TV operators are focused on using OTT to extend the reach of their existing services rather than “shoehorning OTT onto a set-top box”, which is challenging because of the fragmented nature of set-top technology and the presence of large numbers of legacy devices that are supported by the operators.

While US pay TV providers have largely continued to view OTT as a threat, European cable and telecom players are more likely to see OTT as adding value to their platforms. Nevertheless, there are a number of commercial obstacles to deals being done. For example, how much space do operators want to give to other brands, particularly those, like Netflix, that identify their value around their unique user experience as much as on their catalogue of content rights? [icitspot id=”410401″ template=”box-story”]

Pressure to find a solution is coming from users themselves. Most want to have a single billing relationship, for example, rather than pay separately for an OTT service that they receive through their set-top box. Control of an established billing relationship is one of the key strengths of the pay TV operator. Trudelle suggests that the direction of travel is for pay TV operators to become more and more like large supermarkets, offering a wide variety of content packages from multiple brands.

Jean Moonen, VP of product management and business development at technology provider SeaChange International, points out that pay TV operators and OTT providers do have different objectives in relation to the user experience overall. “Operators want a uniform experience across different OTT providers with different services. If you are Netflix or Maxdome you want your experience to be common across different operators. You can’t fully satisfy both,” he says.

Search and recommendation are key here. Moonen says that attempts to provide unified search across OTT apps have not so far been very compelling. However, there is work underway to harmonise metadata across apps.

For Rovi’s Dawes, maintaining consistency in search and content discovery is a major challenge, as is the provision of unified billing. Both are key points of differentiation for pay TV operators and ways of presenting something of value to paying subscribers.

“In terms of the look and feel of services, predominantly it is the internet content provider that calls the shots, determining what branding and marketing is placed around the service, and taking charge of content origination and negotiation,” says Arris’s Hooper. “If a pay TV operator signs up to distribute an OTT service they get the content plus the app and have to sign up to how the OTT provider wants it to behave. That can be a challenge for set-top box-based pay TV operators.”

Hooper says that while operators seek to differentiate their offerings through search and recommendation and unified billing, they are running into problems when trying to do this across third-party OTT services as well as their own content. While OTT providers may be willing to open up their APIs because “the benefits of unified search are significant”, the challenges around billing are thornier, thanks in part to the contracts the OTT providers have with their own content suppliers.

Delivery of content to multiple screens – now an integral part of the pay TV offering and key to the value of OTT – is another potential source of tension in the relationship between pay TV operators and their OTT partners.  Multiscreen delivery of OTT services provides a potential flashpoint if the pay TV partner has launched its own TV everywhere service. For the most part, OTT providers want to team up with pay TV providers only to reach TV viewers via the set-top box, seeing delivery to tablets and smartphones as their own province. But pay TV oprators also want to deliver a uniform service across tablet and smartphone via their own TV everywhere services.  However, as Dawes puts it, consumers “don’t want to dive in and out of multiple apps and be disappointed – research we’ve done shows that 80% of people are going to turn off a device if they can’t find the content they’re looking for”.

User data

Perhaps the biggest source of tension between the OTT provider and the pay TV operator is over who gets access to user data. Data about the way consumers interact with and view video is seen as having a high value, feeding into their ability to sell advertising as well as make programming decisions.

“The increased data pool primarily enables advertisers to easily profile their target audiences. However, advertising is just one of the key advantages of data sharing. By analysing that mobile video viewers tend to favour shorter clips and that Personal Video Recorder users recording content typically find their set-top box storage capabilities limited, video service providers that aggregate subscriber data can offer tailored functionality. From this, operators can upsell services or offer add-ons to relevant subscribers, providing personalised services that deliver the utmost quality of experience for each individual consumer,” says Neale Foster, COO and VP global sales at multiscreen technology provider Access.

Given the advantages that control of data can confer, this is a key battleground between content providers and operators.

“OTT players like Netflix have kept control of their data and leveraged it smartly to improve their content buying and commissioning, and they have commissioned on basis of what they know about their viewers,” says Trudelle.

ActiveVideo’s Nemani says that views differ in particular over whether to share metadata for unified search, for example, with US OTT providers Hulu and Netflix taking different positions on this. While Netflix, with its large catalogue of long-tail content, sees search and recommendation as key to its appeal, Hulu, which is keen to heighten the discoverability of its recent content library, is more willing to share data with distribution partners.

Despite these problems there are strong motives for OTT and pay TV providers to team up. With regards to content, OTT platforms have not so far invested heavily in the key live rights that form the backbone of major pay TV offerings. Netflix is primarily a service with a large long-tail catalogue that could, in most cases, be seen as complementary to mainstream pay TV offerings.

The lines that separate different types of operator are in any case becoming blurred. While traditional operators for the most part are becoming multi-play providers – and are launching OTT packages of their own – other players including social networking sites and broadcasters are branching out into offering OTT video services. As content rights fragment and on-demand viewing grows, agreements such as those between Netflix and its multiple European distribution partners, or between Maxdome and its cable distribution partners, are likely to become commonplace. The variety and complexity of the commercial deals struck by the various parties, and the implications for the experience of consuming content on pay TV platforms, remains to be seen, but the pay TV proposition is likely to become much looser and more all-encompassing as time goes by.

Have your say: fill in our short survey of opinions on whether OTT and pay TV are partners or rivals and receive a copy of the resulting report.