Is this the ‘Kodak moment’ for traditional TV players?
Over-the-top (OTT) TV is changing the TV landscape like never before, thanks to pioneers such as Netflix. In its short seven-year life this new form of internet TV has pushed traditional media players to significantly change their core business strategy and make-up.
Over 2015-2020 the perfect storm will form over Asia as mass market broadband TV viability reaches the tipping point in access to networks of sufficient speed, adoption of broadband services, and affordability of consumption devices like OTT set-top boxes, USBs and smart TVs.
While developed Asia-Pacific markets such as Australia, Singapore, South Korea and Japan already meet the thresholds and are coming to terms with OTT TV, in developing countries such as Thailand and Malaysia, and other emerging markets in Asia, the OTT TV storm front will hit progressively as domestic broadband speeds increase to serve HD and even Ultra-HD.
Technology is a key factor bringing faster than anticipated leaps in content compression and the "appification" of services. Next-generation compression means that within five years we will see HD content delivered over today’s equivalent SD-only broadband connection, and Ultra-HD delivered over today’s equivalent HD bandwidth.
Consumption devices are also no longer a barrier to the mass entry of OTT TV because in just a few years we have seen them evolve two generations, from traditional set-top box to USB plug-in and now even commercial services using applications embedded into smart TVs. With continued price reductions in access devices, OTT TV USBs now cost around US$35 (1,000 baht) and smart TVs essentially cost the same as a high end smartphone or tablet.
We see major OTT TV disruption to developing and emerging Asia markets occurring within three years.
First, defensive moves by domestic traditional TV players (both free and pay) will see them launching limited OTT services and pay-TV players will make pre-emptive entry package price cuts. Pay-TV players will very soon make this move to encourage acquisition of lower-tier households who to date have not taken up monthly subscriptions, but are now at risk of being lost forever to OTT TV. While this initial move will have little effect on their revenue, as the chain reaction begins it will snowball into a price war and the retention cycle which will chip away at premium monthly spenders.
This defensive cycle of traditional versus OTT TV has already been seen in Australia where Netflix launched its domestic service in March 2015:
* In the seven months before Netflix’s local launch, retail entry prices of local pay TV and OTT fell 50%;
* Netflix launched with OTT packages 50% cheaper than the lowest incumbent pay-TV entry subscription of $25/month (even after their 50% price drop earlier);
* Within two months of launch, 13% of incumbent pay-TV customers reportedly using Netflix, and 6% either switched to Netflix or local OTT competitor "Stan" (a free-TV operator JV), cutting their monthly PayTV spending from $98 to $11;
* ISPs are bundling Netflix into broadband offerings, with free periods of six months, to retain customers by leveraging multi-play churn reduction rates of up to 10 times;
* Incumbent pay-TV subscribers paying over $100 per month have fallen 11% in six months AND subscribers paying under $26 per month increased 71%, showing a structural spending shift.
This structural impact on the downstream TV players is not the end of the story. The OTT TV chain reaction will reverberate up the value chain to satellite providers who rent transponders to pay-TV operators, risking future broadcast transponder overcapacity and investment returns.
Beyond the standalone threat from network neutral OTT TV players, helped by loose regulatory barriers, there are already competitive movements in Asia from non-traditional TV players: Telecom operators are leveraging the OTT TV opportunity to enhance customer retention and push into media/content distribution, with examples including, SingTel (operator of MioTV) teaming up with Sony Pictures Television and Warner Bros Entertainment to establish their OTT joint venture, HOOQ (soon to be launched by AIS). This home-grown approach is on top of the threat from domestic telecom operators who are bundling big-name OTT TV like Netflix into broadband packages in a bid to retain customers.
Telecom operators in Asia will therefore be a key to aggressive penetration of OTT TV and will have the opportunity soon to play their role since Netflix is launching in Japan by the fourth quarter of 2015. It has announced it will finish expanding globally within two years, and says it may launch "limited services" in China and India soon. Further, it “may be considering” entering South Korea, Philippines, Indonesia and Thailand within this two-year timeframe.
Broadband, or OTT TV is about to fracture traditional media, which in Thailand is already struggling with high licence fees and broadcast transmission costs.
To many observers, this resembles disintermediation of the film processing industry from the 1990s to 2000s, when digital technology brought about the demise of household-name giants in image processing and consumer devices such as Kodak, and replaced them with brand new players riding the wave of technology change and consumer-driven consumption shifts.
We already see conditions ripe for the OTT TV shift ready to play out across Southeast Asia with a perfect storm on the horizon for Thailand. So the question beckons: Is the next few years emerging as the "Kodak moment" for traditional media value chain players?
Dominic Arena is managing director of AEC Advisory.
AEC Advisory MD
Dominic Arena is managing director of AEC Advisory.