prospects for premium ott in western europe -...

MTM | 20-22 Shelton Street | London WC2H 9JJ | UK | +44(0)20 7395 7510 | [email protected]

Prospects for Premium OTT in

Western Europe

A research project

November 2014

Sponsored by:

1

MTM | 20-22 Shelton Street | London | WC2H 9JJ | +44(0)20 7385 7510 | [email protected]

Executive Summary

As Netflix launches across Europe, how will the market and competitive environment evolve? How do

industry participants believe the market will develop through to 2017?

What are the prospects for premium OTT offerings – subscription OTT VOD services – in advanced

Western European markets? Key market enablers, such as high levels of broadband penetration,

access to connected devices, a willingness and ability to pay for content online, and supportive

regulatory environments, are largely in place across most of the region. Technology costs for OTT

providers have fallen significantly, enabling a wide range of providers to enter the market, although

delivering services in a fragmented device environment can still be challenging.

For content providers, premium OTT is only one of various options and windows for monetising video

content – along with transactional services, ad-supported content and bundled offerings such as TV

Everywhere, provided as part of a wider subscription or membership package. The attractiveness of

these business models varies widely for different categories of video content – from premium film and

TV content through to niche or hard-to-find specialist content, such as performing arts or children’s.

However, Netflix’s entry into European markets has stimulated a wave of investment and service

launches by other international OTT providers, pay-TV operators and broadcasters – encouraging

interest in premium OTT as a business model. Industry participants are spending growing sums on

marketing and promotion, driving consumer awareness and understanding. Premium OTT appears

poised for rapid growth across the region.

However, our research indicates that many leading industry participants are cautious about the growth

prospects for premium OTT providers targeting the mass market with film and TV content. Barriers to

entry remain high – content licensing costs are increasing fast and subscriber acquisition requires

significant investment. As a result, scale is crucial and incumbency is powerful – only large, established

enterprises, able to support sustained investment, will be able to launch and grow successful large-

scale services. Leading industry participants expect no more than a handful of major mass-market

premium OTT services to gain significant scale in each market.

By contrast, opportunities for specialist or niche premium offerings are becoming far more accessible,

especially to providers with low-cost access to high-quality, unique or exclusive video content and a

clearly defined, addressable customer base. OTT providers and suppliers believe that specialist

premium service providers, with the right mix of content, technology and marketing, should be able to

attract a reasonable number of subscribers, especially if services can grow internationally. Many of the

most successful subscription offerings are likely to be targeted at well-defined fan bases or bundled

with existing membership or loyalty programmes.

Away from the subscription space, there will be scope for a wide range of transactional, ad-supported

and subsidised offerings, many with mixed business models and multiple revenue streams. Many

industry participants acknowledge that the availability of free content will be an important limit factor

to the growth of premium OTT services – and that some types of high-value, low-volume premium

content, will be better suited to transactional services, adopting either rental or retail models.

2


Going forwards, the prospects for premium OTT in key European markets will depend upon the

particular characteristics of each local market, notably including the size and wealth of the territory

and its ability to support strong domestic TV businesses capable of developing and delivering

competitive OTT offerings. European consumers have clearly demonstrated an appetite for premium

TV and film offerings, delivered on-demand to the device of their choice – and, in many markets,

European businesses are poised and well-positioned to respond.

MTM’s research programme – involving 30 leading OTT providers and suppliers in the UK, Dutch and

German markets – found that industry participants are strongly optimistic about the overall growth

prospects for the premium OTT market in key European territories. In the UK, providers expect the

market to be worth around £390m (€490m) in 2017, up from £110-130m (€150m) in 2013, while the Dutch

market is expected to grow even more strongly, from €15-20m in 2013 to €190m in 2017. In Germany,

however, industry participants anticipate slower growth, from€30-35m in 2013 to around €115m in 2017.

In all three markets, bundling and cross-subsidy models could grow penetration but reduce overall

levels of direct spending on premium OTT.

MTM‘s research study also found that:

Despite substantial investment, many OTT providers believe that broadband infrastructure remains a

substantial barrier, even in some developed countries. This is particularly the case in Germany,

where industry participants believe that poor broadband and a device ecosystem dominated by

Android will hold back take-up and monetisation during the next 3 years.

For the majority of premium OTT services, there is a widespread belief that technology will become

less of a barrier during the next few years, despite growing device fragmentation – however,

industry participants believe that the largest services will continue to invest heavily, attempting to

differentiate by offering customers more advanced product features and functionalities. This will

set high consumer expectations for user experience and quality of service, so niche providers will

need to find partners capable of keeping up with the pace of innovation.

OTT providers believe that the most important supply-side barrier is – and will remain – exclusive

access to high-quality, high-appeal video content. Exclusivity of content has become the primary

battleground for mass-market services, but rights costs will continue to inflate, as OTT businesses

such as Netflix and Amazon invest in long-term, exclusive licensing deals, as well as commissioning

their own productions. Aggregation will remain critical, with only a few individual studios able to

offer wide enough offerings to attract large numbers of subscribers. At the other end of the market,

supplies of high-value, high-volume specialist content are scarce, making it difficult to build

subscription businesses. Many content offerings are better suited to transactional or ad-supported

models.

Providers believe that consumer barriers to take up remain significant, even in advanced markets.

Awareness and understanding take a long time to build, and many consumers are satisfied with

substitute offerings such as free-to-air TV, PVRs, free VOD services (ad-supported and publically

funded) and pirated content.

Providers in every country believe that ‘buzz’ and word-of-mouth, driven by high levels of

marketing support from multiple providers, will have an important role to play in supporting growth.

Although premium OTT has become “a cultural phenomenon” in the UK, there is less ‘noise’ in the

3


German market and, consequently, consumers seem less interested at present. However, this is

widely expected to change in 2015, as competition intensifies.

Beyond 2017, industry participants believe that premium OTT provision across Europe could grow even

further and faster, if pay TV bundles being to unravel. Already today, incumbent pay-TV providers are

looking to secure the rights they need to deliver premium OTT services across Europe, expanding into

new territories. The supply of premium offerings will be further stimulated if commercial broadcasters

can carve out OTT windows for their content, without jeopardising existing pay-TV revenue streams, or if

pay-TV providers begin to cut back on channel provision, freeing up content for direct-to-consumer

OTT offerings, offered either alone or in partnership with other broadcasters.

4


Table of Contents

1 Introduction – exploring the prospects for premium OTT ................................................................................. 5

2 Prospects for premium OTT – a research framework ........................................................................................ 6

2.1 Market enablers ................................................................................................................................................. 7

2.2 Developing a premium OTT business – success factors .............................................................................. 9

2.3 Competitive dynamics ................................................................................................................................... 10

2.4 Demand-side barriers...................................................................................................................................... 11

3 Prospects for premium OTT – the framework in practice ............................................................................... 12

3.1 Common considerations ................................................................................................................................ 12

3.2 The UK ................................................................................................................................................................ 14

3.3 The Netherlands ............................................................................................................................................... 15

3.4 Germany ........................................................................................................................................................... 16

4 Conclusions – premium OTT in 2017 ................................................................................................................. 17

5


1 Introduction – exploring the prospects for premium OTT

In September 2014, Ooyala and Vindicia commissioned MTM to explore the prospects for premium OTT

services – subscription video services, delivering to connected devices – in three advanced European

markets: the UK, Germany and the Netherlands.

The research programme explored industry perspectives on:

The key market enablers underpinning the prospects for premium OTT, such as broadband

connectivity and device penetration

The major success factors underpinning OTT businesses, including access to quality content and

technology and product development skills

Competitive dynamics for mass-market services and specialist offerings

The major demand-side barriers, such as awareness and willingness to pay.

The research was structured around a form of the Delphi technique – a widely-used approach for

developing forecasts and predictions about the future by stimulating a consensus of opinion across a

group of experienced industry participants. The technique is intended to facilitate access to the

positive attributes of interacting groups – for example, by sharing knowledge from a variety of sources

and industry perspectives.

MTM’s project team synthesised a range of industry data about each market, to provide a basis for

discussion, and developed a simple framework to structure a discussion about the prospects for

premium OTT. The framework was explored and refined through a programme of qualitative depth

interviews with 4-5 leading industry participants in each market and was then used to structure a

discussion at specially-convened seminars in each country. Unless otherwise attributed, all quotations

in this document come from the interviews and seminars. Overall, 30 experienced industry participants

took part in the research programme, providing a broad sample of industry perspectives and a

perspective on the prospects for premium OTT in each market.

Inevitably, given limited resources and a wide brief, this paper provides only a partial view of a highly

complex industry and a challenging set of issues. The views expressed within this paper are solely those

of the authors and do not necessarily represent the views of the interviewees and contributors. All

interviews were completed under the Chatham House Rule. Any errors or mistakes are entirely the

responsibility of the project team.

MTM, Ooyala and Vindicia would like to thank the contributing companies for their input and insights:

6


2 Prospects for premium OTT – a research framework

MTM’s research was structured around a simple framework, designed to support analysis and

exploration of the various factors determining the prospects for premium OTT in a particular market.

Exhibit 1: Analytical framework

1

Market

enablers

Is the infrastructure in place for

delivering OTT services?

4

Demand-side

barriers

Does premium OTT appeal to

my target audience?

3

Competitive

dynamics

How many services can the

market support?

Developing an

OTT business

How high are the barriers to

entry in the market?

2

What is the level of broadband penetration of sufficient speed for

OTT streaming?

How well established are devices that enable OTT streaming – e.g.

tablets, Smart TVs and connected boxes?

Is there payment infrastructure in place

for online transactions – e.g. credit cards?

Do regulations or laws enable or hinder an OTT

service – e.g. net neutrality, copyright enforcement?

What is the level of upfront investment required to enter the

market?

How easy is it to acquire content rights to relevant content?

How difficult is it to build

or purchase the underlying technology platform and video

player – what features are required?

What level of spend or differentiation is required

to build a brand and be noticed by the market?

Which participants are likely to successfully run an OTT business – stand-

alone, pay TV, etc?

Which niche or specialist providers will be able to build an audience?

How many subscribers

does your service need to be sustainable?

How large is the target audience in the market?

How many entertainment and video subscriptions is

your target audience likely to have?

What is the level of awareness of premium OTT in the market?

What is the level of

penetration of substitute goods and services – e.g. PVRs, piracy, free

and pay TV?

How willing is the market to pay for entertainment content?

What level of digital sophistication has the

market attained?

7


2.1 Market enablers

Market enablers comprise the underlying infrastructure required to support a premium OTT service.

Exhibit 2: Market enablers

Key factors Secondary factors Uncertainties

Broadband Speed

Coverage

Superfast roll-out

4G and mobile

broadband

Ability of infrastructure to

support reliable delivery of

high-quality OTT video, as

demand grows

Devices Tablet penetration

Smart TVs

Connected TV devices,

(e.g. dongles,

consoles)

Smartphone penetration Improved access and

ease-of-use for OTT

services on TV platforms

and Smart TVs

Payment Credit card / debit

card take-up

Bill integration (e.g.

through pay platforms)

Prospects in-app

subscription services on

Google Play store and

Android ecosystem

Regulation Local content

regulation

Strength of anti-piracy

measures

Application and

enforcement of VOD and

EU AVMS Directive for

overseas OTT providers

Change of direction in net

neutrality regulation

Within each category, industry participants identify a range of specific considerations with important

implications for premium OTT – for example:

Roll-out plans for superfast broadband are in place across Western Europe, but are at varying

stages and, in most markets, do not yet support coverage to all TV households – for example, there

are uncertainties about the progress of high-speed broadband in the UK, with large areas of the UK

unable to receive super-fast broadband, as defined by Ofcom, although it is claimed that 95% of

UK households should be passed by next generation access networks by 20171

Levels of TV connectivity are increasing as TV replacement cycles (typically 6-8 years) work through

and USB dongles such as Chromecast become more widespread2

Although penetration of tablets and smartphones is growing rapidly, iOS users continue to spend

more heavily on premium content – markets with high levels of Android penetration may deliver

lower average returns for OTT providers3

Online payment does not appear to be a significant issue in the UK, Germany and the Netherlands,

where debit and credit card penetration is around 95%4, but is still believed to be a major barrier in

some Central and Eastern Europe markets.

1 Digital Business First, The UK’s Enduring Broadband Deficit (March 2014) 2 NPD DisplaySearch, Global TV Replacement Study (2012) 3 Forbes Magazine (May 2014) 4 Eurostat (2012)

8


Net neutrality regulation varies between European countries and remains an uncertainty that could

potentially lead to increased distribution costs for OTT services in the future, with industry

participants citing Netflix’s reported traffic deal with Comcast in the USA.

9


2.2 Developing a premium OTT business – success factors

At a high level, industry participants distinguish between – and envisage – three major categories of

premium OTT service operating in European markets:

1. Mass-market aggregators: International businesses such as Netflix and Amazon, and domestic

businesses such as Now TV (UK) and Maxdome (Germany), typically backed by domestic pay-TV

providers and broadcasters. Mass market aggregators typically license the majority of their

content from studios and other rights holders, but original content commissioning – driven by the

major international businesses – is stimulating greater investment.

2. Studio broadcasters: Broadcasting groups, often international, with significant volumes of existing TV

content, launching standalone premium OTT services to extend their reach and grow beyond pay-

TV.

3. Niche services: Smaller services with niche content and well-defined target audiences, in areas

such as sport, music, children’s and performing arts.

Success factors for these different categories of provider vary significantly.

Exhibit 3: Success factors for premium OTT

Generalist aggregators International studio broadcasters Niche providers

Investment

Very high initial investment

required to license content, build

technology platform and brand

Lower levels of investment required to build/acquire player and

infrastructure – costs can be reduced by using third-party providers

Content

Premium film and TV with exclusive

and/or local content. Increasingly

looking to commission as well as

licence in order to secure

differentiating content

Primarily using owned libraries and

productions – but risk of

cannibalising existing business with

pay-TV affiliates by going OTT

Requires access to cheap content

at reasonable volume and

regularly refreshed – if not then a

transactional or ad-funded model

may be more suitable

Technology

Usually custom built and available

on all platforms. The biggest

services will use quality as a

differentiator

Technology unlikely to be a

differentiating factor – but may

have complex payment

infrastructure to allow

authentication by pay-TV

subscribers

May need to minimise cost by only

supporting a small number of

platforms. Some content niches

may lend themselves to specific

functionality – e.g. offline viewing

for children’s

Brand and

marketing

Significant above-the-line

marketing required to build brand

and audience. Subscription model

relies on retaining customer after

high initial spend on acquisition

Linear business allows for cross-

promotion of OTT service.

However, the challenge is using

OTT to extend reach without

cannibalising existing audience

Needs to have existing fan base or

well-defined target audience,

reducing the cost of marketing. In

many cases the most successful

services will be bundled with other

offerings such as membership

schemes

10


2.3 Competitive dynamics

Given the success factors for different categories of offer, industry participants expect a distinctive

market structure to emerge by 2017.

Exhibit 4: Competitive dynamics

Generalist aggregators International studio broadcasters Niche providers

Investment requirements, benefits of

scale and limited consumer appetite for

subscribing to multiple generalist services

are likely to lead to a relatively

concentrated market, with only a small

number of mass-market aggregators

expected in any given territory.

Industry participants envisage three main

categories of competitor:

1. Major international OTT providers,

with scale and reach to invest

2. Pay-TV platforms extending into OTT

3. Major national broadcasters.

Other categories of industry participant –

telcos, device manufacturers, retailers –

are not expected to capture a large

share of the premium OTT market, but will

play an important role by supporting

bundling and co-marketing with leading

OTT providers.

Only a small number of major studio

broadcaster groups – mainly operating in

high-value premium content areas – are

expected to have the scale, content

and negotiating leverage to successfully

develop large-scale premium OTT

services in the UK, Netherlands and

Germany. Industry participants envisage

only 2-2 major groupings, at most.

Niche offerings may proliferate, but most

are likely to remain small-scale, gaining

only limited traction in each market:

“How many standalone packages are

consumers really going to subscribe to? I

don’t think it will be many. There’s a

benefit to bundling and aggregation.”

If content, technology and marketing

costs can be kept under control, various

specialist content niches could

potentially support SVOD businesses,

including:

Sports and pastimes

Performing arts

Specialist film and TV (e.g. Anime,

religious programming)

Music

Ex-pat services

Kids

Many services are expected to be

bundled with existing membership or

loyalty schemes, with video used as to

add value to a wider scheme.

11


2.4 Demand-side barriers

Industry participants identify four major demand-side barriers impacting levels of take-up.

Exhibit 5: Demand-side factors and indicators

Key questions Indicators

Awareness How aware are consumers of OTT services and

their distinctive benefits?

Brand awareness

Usage of existing VOD services

Substitutes Are consumers well-served by alternative

sources of content or by similar products and

services? Do these act as substitutes for

premium OTT services?

Pay-TV penetration

Satisfaction with free-to-air TV

Penetration of PVRs

Level of piracy

Interest in local content vs. US imports

Willingness to pay Are consumers happy to pay for

entertainment content – or are free or pirated

offerings preferred?

Entertainment spend per capita – pay-TV, DVDs,

cinema box office

Level of public subsidy of TV

Digital sophistication How comfortable are consumers with online

services and technology? Are they happy to

use commercial online services?

Online shopping spend per capita

Device penetration

12


3 Prospects for premium OTT – the framework in practice

The framework was used to explore the prospects for premium OTT, in three key markets – through a

programme of research and analysis, depth interviews with leading industry participants, and a

specially-convened group seminar in each territory, using a form of the Delphi technique to forecast

the value of the premium OTT market in 2017.

Industry participants in each market identified a range of common factors, but also referenced

country-specific factors in territory.

3.1 Common considerations

In general, industry participants are positive about the status of key enablers in the UK, Germany and

Netherlands:

Roll-out of broadband, especially next-generation access, will support OTT growth: “Broadband

infrastructure is still a bit of a problem in all markets, but should improve with next generation roll-

out”.

The majority of consumers are not able to access premium OTT services easily, through an intuitive

user interfaces, on their main household TV. USB dongles and smart TV roll-out which change

significantly over the next three years, and participants believe that consumer behaviour will

evolve as a result: “Connected TV will change people’s ways of watching. Once everyone has a

streaming device connected to their main TV then consumer behaviour will change”.

Intuitive connected TV interfaces will make OTT services more straightforward to access, and will

make payment more seamless: “The current user interface of Smart TVs is dreadful – it should be

simple and seamless to access the content that you want”.

Similarly, industry participants in each market have common views about the key factors underpinning

the success of premium OTT businesses:

Exclusive content will become more and more important, causing licensing costs for premium TV

and films to rise: “There are a number of players competing for the same content, and many of

them have very deep pockets – it will be good be a rights owner, but not a service provider”.

The product and technology costs of delivering a reliable and high quality service to a wide variety

of devices will fall: “the cost of a standard product will go down significantly – technology providers

will make their money on new features but the core platform will be cheap”.

However, generalist providers with deep pockets will continue to use product as a differentiator

where possible, with the most important and expensive areas being 4k and

personalisation/recommendation: “the major players are raising the barrier in functionality –

currently, the most important new feature is a good recommendation engine, and those are

incredibly expensive to build”.

Within each market, industry participants envisage broadly comparable competitive dynamics:

The number of generalist providers will reduce as competition intensifies and scale becomes vital in

securing desirable content: “There will only be two or three players left. For each market there will

be a big OTT player, and the pay TV guys will figure it out and respond, and there may be room for

one more”.

13


There will be opportunities for specialists with low cost access both to pipelines of desirable content

and also to captive audiences. However, to be sustainable, the majority of these services will need

to have international reach: “For niche services, the trick is to have international appeal – you will

be big enough if you are present in multiple regions. You can start a broadcasting company for

Portuguese church music – worldwide you will find enough subscribers”.

Specialists will also need to find niches that are far enough away from the mass market providers to

ensure that they can continue to differentiate on content, not just by being lower cost: “Lots of

niches may not be sustainable in the long-term. At some point the big guys will evolve into these

areas, for example Netflix and Amazon going aggressively after kids. As the big guys grow they will

look for more points of distinction. Once they have front-leading exclusive stuff, and libraries for

bulk, they may look at these niches for differentiation”.

Finally, industry participants have general expectations about the major demand-side barriers across

the three markets:

Willingness to pay for entertainment content will increase in line with awareness as OTT services

become more mainstream: “people are becoming used to the idea of paying for entertainment

content – as long as it is an attractive proposition and a good user experience people are

generally happy to pay for it – you just have to show them why they want it”.

14


3.2 The UK

The UK is distinctive in being a mature pay-TV market and also the most advanced market for premium

OTT in Europe, with Netflix estimated to be present in 16% of online homes and Amazon Prime in 7%.5

There is also a vibrant and growing ecosystem of specialist premium OTT business such as Chelsea TV

(football), Hopster (kids), be-at.tv (dance music) and Iroko TV (Nigerian cinema). Certain UK-specific

factors are therefore important in assessing the prospects for premium OTT:

There is also a vibrant and growing ecosystem of specialist premium OTT business such as Chelsea

TV (football), Hopster (kids), be-at.tv (dance music) and Iroko TV (Nigerian cinema). However, the

prospects for many specialist offerings remain highly uncertain: “The biggest challenge for smaller

providers is being unique and competitive, given all of the free content and existing pay-TV. The

economics only work if you scale internationally and are producing a good volume of content and

as a result I don’t think we’ll see lots of long-tail providers”.

Standalone generalist services have grown rapidly but continued growth may be dependent on a

higher degree of cord cutting and cord shaving. However, willingness to pay for entertainment

content in the UK is high: “UK consumers are hungry for entertainment and have really adopted OTT

– it’s been pushed heavily by big industry participants and has really been adopted by younger

consumers. It’s become a cultural phenomenon”.

Some participants believe that an important inflection point may be when OTT providers begin to

compete for sports rights, a key pillar of traditional pay-TV. However, it is clearly unclear whether this

will take place and what effect it would have on market structure: “The big driver will be the major

digital businesses investing in rights and live content that’s traditionally been TV. At the some point

the big digital businesses will start acquiring sports rights – but will it happen outside the USA?”

UK consumers show higher willingness to pay for entertainment content than their European

counterparts, and there is room for growth as awareness of premium OTT increases: “I think there’s

still quite a way for them to go in terms of growth”.

5 Decipher, Mediabug Wave 5

15


3.3 The Netherlands

Pay-TV is ubiquitous in the Netherlands, making the competitive dynamics quite different from the UK

and Germany. As a small and digitally sophisticated country, industry participants are extremely

positive about the growth prospects for premium OTT, with only a few reservations:

The small market size and language barriers make it unlikely that more than a few niche providers

will be able to sustain SVOD businesses. As a result, TVOD and advertising-funded business models

may be more successful: “It’s much harder for smaller markets, and there’s not much international

content that drives such passionate niche audiences… No more than a small handful of niche

players will accumulate a sustainable number of subscribers in the Dutch market – and those will

probably all be sport”.

The telecoms market is already highly converged and quad-play is becoming a more important

dynamic. The effect of this on OTT services is unpredictable: “More players entering this area from

an infrastructure point of view. All going towards a quad-play market”.

Industry participants believe that roll-out of 4G and rising data caps will be a driver of OTT growth

particularly in the Netherlands: “Mobile will get better and will change things if you can take

unlimited data bundles. It’s all about carefree usage – 4G could make a difference if it comes

down in price and if data usage is not capped”.

Pay-TV providers will consider OTT offshoots to leverage their investments in content rights and

extend their reach into homes that are not passed by their own network: “pay TV platform OTT

services will be big. Their current relationship with customers, existing rights deals, dominant position

in market at the moment – will all help them to establish their position in OTT”.

Participants expect to see the unbundling of pay-TV packages into specialist OTT services:

“Bundled services will have to get more unbundled over time, as people keep their broadband

and add OTT services on top. We will see the decline of second tier pay TV – people cancelling all

the extra channels that they get with their pay TV package, taking basic pay TV plus OTT”.

16


3.4 Germany

Premium OTT in Germany remains nascent and fragmented, with a larger number of generalist

providers than either the UK or the Netherlands. Participants agreed that it is the least digitally

sophisticated of the three countries and that willingness to pay for entertainment content is low,

meaning that the prospects for premium OTT are uncertain:

Broadband is weaker than either of the other two markets, both in terms of penetration and speed.

The rate at which it will improve is uncertain: “The absence of fast broadband coverage is a real

problem for German OTT providers – but we expect this to improve over the next few years”.

The device ecosystem is also less developed, with a higher proportion of Android devices and with

a population of smart TVs that are less likely to be connected: “Germany is a large market for TVs

and there are lots of smart TVs out there but in terms of usage and connection rates it is a very

immature market”.

Participants believe that the idea of content ownership is more embedded and as a result DTO

may be more attractive than SVOD to many German households: “Germans like to own physical

products – in the USA and UK, the days of owning large DVD collections are ending, but it’s not the

case in Germany. SVOD doesn’t substitute for DVD in Germany. 90% of transactional VOD is film

related, mostly new release titles. SVOD will never replace new release films, it’ll replace back-

catalogue”.

Local content will remain important, making it harder for international players to cut-through: “the

German market is very local and specific. In Netherlands everyone speaks English, you can just

deploy an English service and people will go to it”.

The market is currently fragmented, meaning that individual players do not have content offerings

that are broad enough to drive mainstream take-up. Consolidation is inevitable, but may be

painful in the short-term: “the German market will need to consolidate. The domestic incumbents

will do OK in the short to medium term but the challenge for them is when all their output deals

come up for renewal and the studios may look to break up those SVOD rights”.

Pay-TV penetration is low and the free-to-air TV offering is strong, reducing willingness to pay: “in

Germany the challenge is how you get people to pay for anything! They’ve been used to quality

content as a utility”.

Digital sophistication also remains lower than the other markets in question, and participants

expect that changing consumer behaviour will take time: “If it maybe takes two years in the UK,

you need to double the time and the investment in Germany”.

17


4 Conclusions – premium OTT in 2017

During the next three years, industry participants anticipate significant growth in premium OTT

revenues in all markets:

In the UK, premium OTT is already relatively well-established – however, providers believe

that there is significant headroom left for growth, both with existing pay-TV subscribers

looking for additional content, and with free-to-air households. The market is highly

competitive, with major US businesses competing with domestic TV businesses to drive

awareness and take-up. Many industry participants are also optimistic about the

prospects for niche services, in areas such as children’s and sport.

By contrast, industry participants in the Netherlands believe that the market is still very

early stage and that its attractiveness for premium OTT will lead to rapid growth in the

coming years. Most consumers speak English and have access to good broadband.

Netflix has recently launched and the major Dutch broadcasters and pay-TV businesses

are expanding into OTT, helping to drive growth. However, there appears to be limited

scope for domestic niche providers: “Our market just isn’t big enough to support many of

these offerings”.

In Germany, research participants believe that the market is significantly less mature –

and that growth will be much slower. Domestic businesses have successfully launched

premium OTT offerings, but progress has been relatively slow. Although the market is

expected to grow more quickly in the coming years, industry participants believe that

there are still significant barriers – mainly, the availability of free-to-air content and a

general reluctance to pay for content.

Exhibit 6: Market size forecasts for premium OTT in 2017

prospects for premium ott in western europe -...

Documents