Industry jargon such as “digital ecosystem,” “platform,” and “digital media” is overused, but these terms best describe the key factors driving the competitive dynamics in the connected home.
Today’s consumers know they are not just purchasing a service or a piece of hardware but an experience, and companies in the connected home space are the gatekeepers of this user experience (for good and bad). Key components include content, apps, and the interface, which combine to enhance (or detract) from the user’s experience. Pay-TV providers and platform vendors in particular are going through immense challenges in finding the right service and feature combinations to capture and retain their core consumers.
Cord-Cutting and Fears of Lost Subscribers
For pay-TV providers in particular, the ultimate goal is to retain access to the viewer, and spurred by cord-cutting fears, many of them rapidly designed and deployed TV Everywhere services over the past several years. Parks Associates defines “cord-cutting” as the act of discontinuing a pay-TV service in favor of using online video options or other methods to view broadcast TV and movies. This phenomenon was an ongoing preoccupation for television networks and providers because it generated fears of a consumer exodus to OTT services and a dramatic shift in content revenues. This fear was particularly acute as younger consumers (the “next generation” of TV viewers) are the most likely to turn to online video for their entertainment services.
These fears, while not wholly groundless, have yet to manifest in a way that would cause a restructure of the video services industry in the short term. Among broadband households in the United States, where pay-TV is most prominent, less than 5% have cut the cord, the majority of which did so due to economic considerations. Even among the Millennials group, pay-TV penetration remains high, while non-subscribers among broadband heads of households ages 18-24 sits around 15%, with no substantial increase over time.
Considerations in Cord Cutting – To Cut or Not to Cut
Reasons for Cutting the Cord
- Pay-TV Subscription is too expensive
- Unhappy with pay-TV service
- Not consuming as much video
- Able to watch desired video content online
- Staying current with content is not important
- Can get desired content on broadcast TV
Reasons for Retaining Pay-TV Service
- Current content is not always available online
- Convenient aggregation of content
- The online video experience is fragmented
- More content available on TV
- Most TV apps require authentication
- Familiar interface and user experience
Those who did cord-cut found that self-aggregating though broadcast and OTT services produces a fragmented experience. Streaming media devices like Roku attempt to consolidate the OTT viewing experience, but different services usually require different apps to access content, while some content, notably from premium networks like HBO, Starz, and Showtime, is completely unavailable.
While it does not appear pay-TV subscription volume is shifting substantially, the online video market is gaining traction, and the shift of consumer eyeballs to OTT video merits careful attention. Younger viewers are increasingly turning to online content as their primary means of video consumption, and Millennials in particular prefer online sources of video content. TV Everywhere (i.e., linear and on-demand video services provided by pay-TV operators to IP-connected devices) has emerged as a key tool for pay-TV providers in retaining customers and staying competitive in the video marketplace.
TV Everywhere users have several characteristics that set them apart from, and make them more valuable than, average pay-TV subscribers:
Younger age (on average, seven years younger)
More likely to have children at home
A higher rate of connected device ownership
Higher monthly ARPU
Higher spending on all types of video
Pay-TV providers are going to put a premium on retaining these viewers, who are emerging as highly valuable customers.
In general, TV Everywhere services still lag other OTT offerings in terms of features. Some operators and solution providers are now focusing on feature improvements to differentiate TV Everywhere services, a notable shift from their early motivations. At the outset of the TV Everywhere market, providers were focused primarily on getting content to connected screens in order to stave off perceived OTT threats.
As the television industry began to better understand the realities of a video world that included OTT delivery, their focus shifted to quality of delivery and support for mobile devices. In the New Era, entered at the beginning 2014, few question the necessity to offer content on any screen; however, operator attitudes and priorities related to TV Everywhere are undergoing a subtle but fundamental change as they better understand the new market dynamics.
In many cases, OTT customers are simply supplementing their pay-TV service with an OTT option, making OTT services a threat to premium pay-TV options rather than to the core service itself. In the U.S. market, 90% of OTT service subscribers also subscribe to a pay-TV service, but they have to move outside of their provider’s service interface to access OTT content. Pay-TV providers ultimately need to retain access to the viewer, but operator set-top boxes have long been closed to anyone other than the pay-TV provider. Instead of trying to achieve parity with OTT services, many providers are considering ways to facilitate the OTT experience without losing connection to the consumer.
Instead, the perceived threat in today’s market has shifted to direct competitors, that is, other pay-TV providers, both foreign and domestic, as well as networks, studios, and content creators, which have recently forged direct interaction with viewers through apps and online portals. For example, World Wrestling Entertainment (WWE) has launched a 24/7 streaming network on its website, a similar approach to Major League Baseball’s MLB.TV streaming network.
While many of these threats remain minimal or conceptual, pay-TV providers are gearing up their TV Everywhere 2.0 features in order to be able to compete through differentiation and an enhanced user experience:
Improved content discovery through personalization
Metadata enhancements and social features to enhance the viewing experience
An integrated solution that seamlessly moves from one connected device to another and from one network to another
Each of these solutions offers its own unique challenges. Industry players throughout the ecosystem are trying to discern the true value of the new distribution outlets so that they can balance risk and build additional distribution rights into licensing agreements as pay-TV providers seek new ways to position and differentiate themselves:
Verizon offers Redbox Instant, a subscription VOD service similar to Netflix.
DISH Network offers its Sling-enabled Hopper service, which allows users to watch live and recorded programming on mobile devices.
DirecTV offers the NFL Sunday Ticket, a Sunday afternoon NFL game package that allows viewers access to local broadcasts of out-of-market games.
In these cases, providers are looking to enhance the user experience with valued content and services, which will ultimately keep the viewer within the company’s network.
The Platform Wars
While pay-TV providers are striving to retain their loyal subscribers, OTT players are looking to establish that same lock on their customers: providing an enhanced user experience through their respective content/service platform. When considering whether to buy an iPhone, an Android, or a Windows phone, consumers compare not just phone specs but also app availability, ability to transfer playlists, etc. Today’s consumers know they are not just buying a piece of hardware but an experience, not a brand but a trusted relationship that promises fresh content and ease of use.
As with pay-TV providers and TV Everywhere, the approach of platform vendors has changed in recent years. A decade ago, the technology world and business community debated wholeheartedly about open standards versus closed systems. Today, these topics are overshadowed by the industry’s pursuit of a perfect lock-in—where consumers love their experience so much that they want to stay with their vendors for as long as possible.
Past business failures reinforce the notion that without an ecosystem and an experience-driven approach, even marquee brands, from Palm to Blackberry, HP to Motorola, can retire into oblivion. The voids these companies left are now being filled by a new generation of platform providers.
Major Platform Vendors: Apple, Google, Amazon, and Microsoft
Upcoming Vendors (still building their respective platforms): Facebook, Samsung, Sony, and China’s Tencent
Each of these platform providers has a large user base to tap.
Apple has almost 600 million iTunes accounts; Amazon boasts over 200 million shoppers/customers.
Google’s Android user base tops one billion, and the company has another division, serving over two billion customers, called search.
Microsoft’s desktop software users number in the billions, but its mobile user base is paltry. Between these two extremes is its gaming platform user base—50 million strong, thanks to its Xbox franchise.
Facebook has one billion users, Tencent has 800 million QQ account holders, and there are 400 million WeChat users along with a growing user base of Samsung’s products and Sony’s services.
Companies are waging platform wars on a variety of fronts: digital media and apps, social networking and messaging, commerce and advertising, payment and artificial intelligence. Battles are also fought across multiple devices—TV, PC, smartphone, tablet, game console, and streaming media box—and soon they will extend to wearables. Technology races range from chipset designs to sensors to cloud infrastructure. Each player is fighting hard because it knows each new product and feature, each device iteration and software upgrade, along with related content and service updates, is critical to the end user’s experience. The richer the experience, the higher the value a company can earn from its loyalists.
In the case of Amazon, the company is enhancing the user experience in particular for its Amazon Prime members and Kindle product users, which are the most valued customers among its more than 200 million shoppers. Prime subscribers are significantly more active shoppers on Amazon.com, and Kindle users consume a disproportional amount of digital content in paid forms. The 22.5 million strong Amazon Prime members (based on Parks Associates estimates) spend three times more than an average Amazon shopper. The over 50 million Kindle device owners may not be as heavy shoppers as Prime members are, but there is a significant overlap between the two groups, and Kindle users who are also Prime members are known to spend more on digital media than average Prime members.
Microsoft’s Xbox users are the software giant’s saviors in the digital media battle. Out of the over 50 million Xbox Live account holders, about one-half pay $60 per year for a Gold membership, which gives them access to some premium features. These users spend more on games and other media content than all other account holders, and these Gold members will become the primary targets for Microsoft to converge the Xbox experience with its mobile initiatives.
Apple’s and Google’s core users are harder to identify because the companies have broader device/OS footprints and each platform’s monetization strategies are different. Apple benefits from a more loyal user base—with higher spending power—than the average consumer, whereas Google’s advertising revenues support many services that are low cost or free to Android users. Each company has been vigorously expanding into new media and device categories to drive user growth and average user spending; each also entered into the other’s respective turf for monetization—Apple has been trying to revitalize its iAd business, whereas Google is heavily promoting its Play Store contents.
Retaining Consumers – Bend but Don’t Break
Connected CE and OTT services have a symbiotic relationship. Each enhances the value of the other, and together they can attract and retain the most valuable consumers. Roughly 90% of those with an active, connected CE device have pay-TV service, and the penetration rate is higher (97%) among those using multiple types of connected CE devices. In many cases, the game console is the “gateway device” to OTT services, meaning it is the device generally used by first-time, connected CE users—it is important for companies offering online video to have their content accessible from these devices.
Apps and APIs make it possible for both service providers and platform vendors to extend the value of their solutions, and both players need to be flexible so as not to break their connection to the consumer. Consumer response to the cord-cutting option highlights this need—consumers do not want a fragmented experience and will pay to avoid it. By forcing a choice, companies can lose access to valuable users.
Platform vendors are already locked in a media race to provide the best user experience to their key consumers, and pay-TV providers are locked into aligning the new dynamics of today’s market. Both need to focus on ways to manage their viewers’ OTT experience. Success will depend on how well companies manage the experience of their core, and most valuable, consumers.
The company's expertise includes new media, digital entertainment and gaming, home networks, Internet and television services, digital health, mobile applications and services, consumer electronics, energy management, and home control systems and security.
Each year, Parks Associates hosts industry webcasts, the CONNECTIONS™ Conference Series, and Smart Energy Summit: Engaging the Consumer.