With over-the-top (OTT) content delivery pressing full steam ahead, both in terms of subscribers and the number of OTT
providers, common business sense would seem
to dictate that commodity pricing would soon
follow. Yet in mid-2017 that is not the case, nor
is it likely to be in the near term. Here’s why.
When I finished the survey analysis for a recent Level 3 and Unisphere Research report on
OTT video services, one surprising data point
was the optimism about OTT revenue growth in
2017: It said 55% of survey respondents projected double-digit revenue increases over 2016.
Based on that detail in the “OTT Video Services—Innovation, Opportunity, Maturation &
Technology Trends in OTT Delivery” report
(available for download at go2sm.com/ott2017),
my assumption was that the overall price of
consumer OTT subscriptions would drop in
due time, since revenues would grow based on
a burgeoning number of subscribers.
The latter is true—subscribers are growing, with Amazon Prime Video north of 66 million subscribers and Netflix ending 2016 with
93. 8 million subscribers worldwide, up from
17. 4 million in 2015—but subscription prices
are also trending upward.
To understand the dichotomy of commod-itization and premium pricing, it’s useful to do
as one of my M.B.A. profs once told me: Follow
the supply chain workflow.
If raw materials prices rise early in the supply chain, the cost is passed on to consumers of
the finished goods. That may be a part of what’s
happening here, as OTT providers increase demand for premium content to service a growing number of subscribers.
Yet I don’t think that tells the whole story.
After all, even when we’re discussing a limited amount of premium content in the market
that’s offered by a growing number of providers, the economies-of-scale rule should apply
to our fast-growing OTT market.
“With all the non-stop mentions of how pop-
ular OTT services are,” Dan Rayburn wrote in
2016 on his StreamingMedia.com blog (go2sm
.com/ottlicensing), “the one thing no one seems
to be talking about is how any of these OTT
providers are actually going to make money
and become profitable.”
Rayburn posits that the reason profitability
is out of reach, even as revenues rise, is the
cost of licensing or creating content.
“As we have seen with Netflix, scale doesn’t
get you to profitability,” wrote Rayburn, “when
the cost to license/create content is so high and
the price you can charge the consumer each
month is so low.”
I buy half of Rayburn’s argument (around
the cost of licensing), but I don’t subscribe, no
pun intended, to the idea of the cost of content
creation going up, nor do I agree that the cost
of monthly OTT subscriptions is too low.
When an OTT provider creates a piece of premium content and offers it exclusively on that
OTT service for a period of time, it’s not really
exclusive. What’s actually happening is that it’s
simultaneously being released in offline distri-
bution models (what we call “hybrid delivery”
in the recent OTT video services report).
Some of that distribution is through syndica-
tion licensing in non-OTT markets, and some of
it is being distributed through traditional cine-
ma, as we saw at this year’s Academy Awards
with Amazon and Netflix competing for Oscars.
One thing that may be happening, as was the
case in the 1980s when VHS home viewing hit
the market, is the ripple effect in driving more
premium content creation with a limited num-
ber of name actors. In other words, we could be
at a point where every OTT service that wants
premium content with a well-known actor or ac-
tress is competing against every other OTT ser-
vice that feels it needs the same small group of
thespians to drive continued subscriber interest.
If that were true, though, it would be a pity.
That would mean we’re allowing a scarcity model—or a potential cabal, to those inclined to conspiracy theories—to dictate the cost of content
in a classic king’s ransom. The pity is that we’re
in a golden age with OTT, where mid-premium
content can be licensed and, if properly promoted, be a win for both the up-and-coming stars
and the OTT providers themselves.
A King’s Ransom?
Tim Siglin is a streaming industry veteran and longtime
contributing editor to Streaming Media magazine.
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