Demography is Why OTT Video Wins, in the End

http://www.parksassociates.com/blog/article/pr-mar2014-ott-webcast

The way younger users consume entertainment video tells you most of what you need to know about the inevitability of over the top, streamed video that competes directly with linear video subscriptions, even if, in an interim period, it might well turn out that linear video subscription providers emerge as key purveyors of such services.

In what linear video service providers might consider an ideal scenario, consumers would be able to stream only the shows and programs they want to watch, on demand, if they also purchase a linear video service that accompanies the over the top access, even if they do not want to watch linear video, or possibly even do not own televisions.

That is the direction major linear video suppliers already are headed, at least for the major television networks, essentially adding “on the go” access to some of the channels and content subscribers already pay for as part of their linear video subscriptions.

How successful such approaches might be in a future market is not so clear, but, in principle, many consumers might accept new packages supporting both on demand streamed access as well as linear TV access, if the retail pricing questions can be addressed.

In other words, many users will refuse to pay $100 or more for linear access, only to get streamed access as part of the package. Whether they might be willing to pay lower amounts, for smaller channel packages, plus streamed access, is not yet clear.

Of course, it never is easy to convince consumers they have to pay one product they don’t want, to get access to another product they do want. Requirements to buy fixed voice service in order to get high speed access provide one recent example of that sort of retail packaging.

Likewise, video service providers typically require consumers to buy basic cable first, in order to buy a premium channel such as HBO.  

Movie services already are well down the path of mass adoption, by way of contrast, as consumers have grown accustomed first to renting videocassette tapes, then DVDs, and now streaming Netflix, Amazon Prime and other content.

Perhaps 45 percent to 50 percent of U.S. broadband households now use paid over-the-top (OTT) video services, either subscription or transactional, according to Parks Associates. That is up slightly over about a year’s time.

Including “free” sources such as YouTube, perhaps 70 percent of Internet users watch at least some over the top video.

Parks Associates also notes that 37 percent of consumers 18 to 24 view online video is their most important video source.

More than 40 percent of U.S. broadband households selected online video as one of the top three important sources of video, topping rental DVDs at 25 percent and 13 percent who said owned Blu-ray discs were among the top three sources.

The key observation is the huge difference in video entertainment preferences between the oldest and the youngest age cohorts, with roughly linear correlations in demand across all age cohorts, namely that the older the user, the less reliance is placed on over the top, streamed sources.

The younger the user, the more reliance is placed on streamed video entertainment. For users 34 or younger, online sources are at least as important as linear video, and among those younger than 24, the most-used delivery mode.

Should those behaviors persist as younger consumers grow older, linear video demand will drop, and content now delivered using linear retail formats will have to shift.

But there is one important observation about the timing of such a change. Though one might argue the transition will be about as linear as the consumption graph indicates, this almost certainly will not be the case.

When the disruption happens, and linear content is made available on a streamed basis, behavior will shift rapidly, in quantum fashion, not linearly. The reason for the prediction is simple: all other popular mass market services have shown a quantum, not linear adoption pattern.

Demography is destiny, one often hears, as a quip. But it is a quip with solid rooting. As Liberty Media CEO John Malone once quipped, in response to an analyst’s question about take rates for cable TV, specifically the fact that some consumers had high resistance to buying the product, Malone quipped that this was true, but “those people are dying.”

For it is a simple fact that generations of people eventually die, and are replaced by successive generations of people. So when researchers see significant generational demand for some products, the habits of the younger age cohorts are strategic, as they represent the future consumption patterns of virtually all age cohorts.

Ad-Supported Communications Takes Scale

Entrepreneurs have been trying to create advertising-supported communication services for decades, with no success. Recently, mobile service providers have been trying to do so in the United Kingdom.

Samba Mobile is one such effort.

Blyk was another U.K.-based effort. But Blyk shifted course to become an advertising services provider.

OVIVO, another mobile virtual network operator using the advertising model has shut down. The crowdsourced firm had raised £440,000 from crowdsourcing site Crowdcube.

The OVIVO “Freedom0” plan gave subscribers 300 minutes of voice calls, 300 text messages and 500 MB of data each month.

Blyk and OVIVO might illustrate one of the strategic issues for ad-supported communications, namely the need for scale. Blyk, for example, could not create enough reach to interest big brands.

In the past, other would-be providers tried supporting fixed network voice services using advertising.

But even some service providers that wanted to create big ad-supported services have had to retrench. In the United States, RingPlus offers zero-cost mobile service offering 300 “no incremental cost” calling minutes or 50 free text messages per month, but using a freemium model, not the ad-supported model it originally favored.

RingPlus users can add credit to their accounts with a credit or debit card. And there is a $49 a month plan for people who want unlimited usage.

But efforts persist. Denver International Airport offers free domestic and global phone calling with a new advertisement-based service offered by RMT Free Phone, available at more than 200 landline phones throughout the airport.

The program is the result of a new partnership between the airport, RMES Communications and DIA's advertising agent Clear Channel Airports.

International calls are free for the first 10 minutes, with a charge of 25 cents for each additional minute, plus a 15 percent tax.

The phone service is supported through ad revenue. Each phone has a 17-inch LCD screen that will run 15-second advertisements and offer digital coupons.

Likewise, icall, supporting low-cost calling on mobile devices, originally pitched as an ad-supported service, now has switched to a Skype-style VoIP service.

Ad-supported content works for broadcasters because they have scale. Ad-supported software works for Google because Google has scale. Until an ad-supported communication service provider can attain similar scale, it seems doubtful it can succeed.ad-

What is More Important: Mobile or High Speed Access?

One way of gauging the importance of various products is to ask users how hard it would be to give up a particular product, or asking users to rank various products in terms of utility, usefulness or value.

Most people would guess that a mobile phone is the communications product most people would have trouble giving up.

Some surveys suggest that was the case. But not all.

Actually, according to some studies, Internet access is the most important or valued product.

U.K. consumers would rather keep broadband than mobile, one study found.

In that regard, a recent survey by the Pew Internet and American Life Project suggests linear video services face a yawning chasm with people 18 to 29. Just 12 percent of those ages 18 and 29 say television would be very hard to give up.

In other words, “television” is not a product younger people care about, in objective terms, or in relative terms, compared to Internet access or mobile phones, for example.

One survey found 53 percent of Internet users say it would be “very hard to give up.”

Another found that 46 percent of people would find it "very hard" to give up Internet access, compared to about 44 percent who thought it would be "very hard" to give up their mobile phone service.

Some 87 percent of U.S. adults now use the Internet, with near-saturation usage among those living in households earning $75,000 or more (99 percent), young adults ages 18 to 29 (97 percent), and those with college degrees (97 percent), according to a new study by the Pew Internet and American Life Project.

About 49 percent of mobile phone owners say their mobile phone would be “very hard to give up.” Some 36 percent said the same about email. Just 28 percent said their landline phones would be very hard to give up.

Some 11 percent of internet users say social media would be very hard to give up.

Fully 68 percent of adults connect to the Internet with mobile devices like smartphones or tablet computers.

So though mobile devices clearly are very important to consumers, it might be a close call whether high speed access is even more important than mobile.

Can Mobile Operators Really Compete with WhatsApp?

Can mobile service providers really compete with over the top messaging apps? To be sure, some mobile service providers believe they must try. Many believe they will do best to partner with OTT app providers in various ways.

This sort of problem has happened before. How to cope with falling per-minute prices and profit margins in international voice was a precursor. How to deal with Skype and VoIP were other earlier challenges.

Broadly, the choices are “do nothing, and harvest revenues,” “partner with the attackers,” or “launch a branded competitor.”

The service provider response to voice pricing was simply to grudgingly match lower-price offers when necessary, while doing everything possible to slow the rate of revenue decline. That essentially was a “harvest” strategy.

In the case of VoIP and Skype, many service providers also have decided not to compete, preferring instead to take steps to shore up the legacy product as well as possible, without matching VoIP prices. A few launched branded OTT voice apps of their own.

At least so far, service providers have tried some of all of the earlier tactics in responding to over the top messaging. Text messaging prices have dropped, or value has increased, to some extent. U.S. mobile service providers now are moving to add no incremental cost international texting in an effort to add value, while maintaining prices.

In other cases, service providers have tried to work with OTT providers. Jajah and Deutsche Telekom took that route.

In a few cases, service providers have tried to compete with branded offers of their own. Telefonica has done that.

The dominant response arguably has been the “harvest” approach, in part because many believe telcos really cannot effectively compete with their own branded apps and services.

McKinsey analysts believe telcos can slow the incursion of OTT apps, but only at the cost of lower retail prices..

Booz and Company analysts have argued telcos really cannot compete directly with OTT applications.

A few telcos have tried to launch their own OTT apps. Generally speaking, the argument for effective telco competition with OTT apps is to add value. Whether enough value can be added to change the value-price relationship is the question.

OTT apps continue to add functionality and value as well, the most recent example being WhatsApp has added free voice calling and video calling for WhatsApp users, and now also has added calling to any phone number, for a fee.

But many will argue the best course is to harvest voice and text messaging revenues, as has been done in the past in the communications business when a legacy revenue source faces decline.

The reason is simply that service providers arguably still have more to lose than to gain were they to meet OTT prices head on.

High Speed Access and Video Entertainment are "Legacy" Services, But with Vastly Different Growth Profiles

Though both high speed access and linear video subscription services might be deemed “legacy” services, there is a big difference. In the U.S market, for example, the high speed access market is growing, in terms of subscribers, while the video entertainment market is shrinking.

Consider that, in 2013, the video services market shrank by at least 105,000 customers, while high speed access grew by at least 2.6 million accounts.

The 17 largest cable and telephone providers in the United States,  representing about 93 percent share of the market, acquired over 2.6 million net additional high-speed Internet subscribers in 2013, according to the Leichtman Research Group.

The high speed access market still is smaller, in terms of subscribers, than the video entertainment market. There are at least 84.3 million high speed access subscribers. In all, there are 94.6 million linear video subscribers served by the largest fixed network service providers.

In the past, one might have argued that “always” would be the case, since not every household owns computers, and not all computer owners use the Internet. The situation is changing, as was predictable.

These days, even if “using a computer” is not the reason for buying a broadband connection, watching TV, listening to music, playing a videogame, offloading mobile data usage or buying merchandise might well be the driver.

If so, high speed access adoption should eventually exceed the number of linear video subscriptions, implying there is upside for high speed access accounts of perhaps 10 million more households.

Cable companies have 49.3 million broadband subscribers, representing 58 percent market share, while telephone companies have 35 million subscribers, representing 42 percent market share.

But the net additions are heavily dominated by cable companies, which garnered 82 percent of the net broadband additions in 2013.

The top cable companies added nearly 2.2 million broadband subscribers in 2013, while the top telephone providers added 480,000 net high speed access subscribers in 2013.

In part, those telco results are driven by deactivations of digital subscriber line connections by fiber to home or fiber-reinforced access connections.

AT&T and Verizon added 3.3 million fiber subscribers (U-verse and FiOS) in 2013 but also saw a net loss of 3.05 million DSL subscribers.

U-verse and FiOS broadband subscribers now account for 47 percent  of telco broadband subscribers.

Still, the fact that cable now gets more than 80 percent of netw new additions is significant. Even if one grants that telcos primarily are interested in upgrading customers from DSL to fiber connections, the net new subscriber figures suggest cable connections have emerged as the preferred high speed access product.

So far, there is no similar pattern in the linear video subscription business. The latest data from Leichtman Research Group suggests only a grinding and slow shift of share from cable to telco providers.

The total linear video market, which includes cable, satellite and telco providers, lost about 105,000 net video subscribers in 2013, so the market contracted slightly.

The largest U.S. cable operators lost a net 1.7 million video customers in 2013, according to LRG, while satellite providers lost 170,000 subscribers. Telcos gained 1.5 million video customers.

Basically, the market share shift amounted to an annual cable provider loss of about 1.8 percent and a gain by telcos of about 1.6 percent.

In the market as a whole, there were 94.6 million subscribers at the end of 2013. The top cable operators had 49.6 million video subscribers, satellite TV companies had 34.3 million subscribers and the top telephone companies had 10.7 million subscribers.

Cable had 52 percent market share, satellite providers 36 percent share and telcos (AT&T and Verizon) about 11 percent share, according to Leichtman Research.

Can Mobile Operators Really Do Much, In the Near Term, About Price Wars?

Price wars can be quite destabilizing in the short term. 



In France, nine percent of the annual revenue of the more established mobile operators was lost in one year, argues Itamar Altalef, vice president at marketing services firm Pontis.



In Israel, average revenue per user declined 36 percent, with an 87 percent increase in the number of subscribers churning to new providers, he says.



What mobile service providers can do about such price wars in the short term, perhaps is limited, other than to match offers in ways that protect existing market share. 



In the long term, perhaps perversely, the strongest firms in any market will tend to benefit from such price wars, as they bleed financially-weaker competitors, especially those with high fixed costs, high debt or inability to match the market-leading offers. 



Mobile service providers get lots of advice about what to do, naturally, from suppliers of services intended to aid service providers in gaining or retaining customers. Such advice might help, long term. In the near term, almost nothing other than marching competitor offers is feasible, really.



Creation of separate "value" brands is a staple, but those sorts of moves are long term in nature, not generally effective in the near term when a price war breaks out. 

Is Usage-Based Internet Access Inevitable, or Only an Option?

Consumers tend to prefer “unlimited usage” plans for Internet access, in preference to “metered” usage. The implication might be that people actually want to use lots of bandwidth. In 98 percent of cases, that tends not to be the case.

Though “typical” consumption tends to grow over time, the typical user actually does not consume all that much data.

Why they have that preference is the issue. One might argue that, in many cases, people buy bigger usage plans than they need, because they are buying “cost certainty,” not necessarily “better prices” or “more data.”

To be sure, ISPs have their reasons for wanting to shift retail packaging and rating to somewhat “metered” mechanisms. But most of the reasons have to do with a demand environment they expect in the future, not necessarily a present need.

And, so far, ISPs that have tried to shift users to metered plans, from unlimited, have found mixed success.

Metered mobile Internet access plans have been more successful, perhaps because mobile ISPs have been able to make those changes at the same time they have added other attractive plan features.

It hasn’t been so easy in the fixed network business.

Speaking at the Deutsche Bank Media, Internet and Telecom Conference recently, Time Warner Cable Chairman and CEO Rob Marcus said very few broadband subscribers have opted for its access  plan that caps data use at 30 gigabytes per month.

In fact, the number of subscribers taking the usage-based service tier is running only "in the thousands" out of 11 million U.S. high speed access customers.

According to Marcus, the vast majority of customers prefer to avoid broadband caps, even when they are unlikely to go over the data threshold.

Marcus said a typical user might use  "high twenties" Gbytes in a month.

It isn’t yet clear how a shift to usage-based high speed Internet access billing will affect end user behavior or service provider preferences, though it seems fairly clear most consumers dislike the practice.

A 2011 survey by Cisco found more than 70 percent of U.S. and Canadian consumers found usage-based billing of Internet access “unfair,” in both fixed and mobile settings.

Roughly similar perceptions were held by consumers in Western Europe as well. In Canada, a market considered by some a test of consumer reaction to new usage-based rating policies, Cisco found that about 30 percent of survey respondents watched consumption and curtailed usage to avoid paying overage charges.

About 58 percent of surveyed consumers reported they never think about overages, or watch their consumption levels. About 10 percent reported paying overage fees.

Those findings might suggest there is some revenue upside from heavier users, but also significant potential risk of reduced application use.

The harder question is whether “value” was enhanced, unaffected or reduced, by the institution of usage-based billing.

Why do many ISPs meter usage, if consumers prefer unlimited access or at least predictable recurring rates for access?

Some would argue ISPs gain in several potential ways from usage-based pricing. For starters, some consumers--in particular the heaviest users--might reduce consumption. That could have advantages in alleviating some peak hour congestion.

Some users who also buy video entertainment services might rely more on such services, in comparison to watching the same content online. That would protect video service revenues.

Some users might upgrade to more-expensive packages to get a bigger consumption bucket or unlimited usage plans.

But most of those advantages will be realized only in the future, when most people stream video that otherwise would be watched on a linear TV service.

Still, there are other issues at work. Consumer expectations about products profoundly shape the terrain upon suppliers offer their products to buyers.

And, possibly for historical reasons, consumers have vastly-different expectations about “metered usage” of Internet access services and other recurring services, in some markets.

Nobody questions whether electricity, water, natural gas or heating oil “should” be priced according to volume purchased. Nor, for that matter, is retail charging generally unrelated to volume.

But consumer expectations for some services are volume insensitive. Nobody thinks there should be a price differential, based on the actual amount of either “free over the air TV” or “paid linear video subscription video” one watches.

In some markets, there also is an expectation of flat rate unlimited use of some other products as well. Local calling, text messaging, in-country calling and calling circle usage are some products that are expected to incur no incremental cost for usage, in some markets.

Unlimited usage remains an expectation for some Internet access services as well, both mobile and fixed, in some markets. Public Wi-Fi and at home Wi-Fi provide other examples of use cases where unlimited usage for no incremental cost is expected.

All of that could help explain why there is consumer resistance to metered pricing. The simplest explanation is the easiest, though. People prefer certainty about the cost of a recurring service. Metered pricing introduces uncertainty.

That might be why acceptance of "buckets of usage" is relatively high in some markets. Given enough experience, people have relatively good levels of certainty about the size of their monthly bills.

The value of "unlimited usage plans," in other words, is more about "pricing certainty" than usage.