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A King’s Ransom: Why Do OTT Subscription Costs Keep Rising?

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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 percent 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, 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 commoditization 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 popular OTT services are,” Dan Rayburn wrote in 2016 on his StreamingMedia.com blog, “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 off line distribution models (what we call “hybrid delivery” in the recent OTT video services report).

Some of that distribution is through syndication licensing in non-OTT markets, and some of it is being distributed through traditional cinema, 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 number 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 actress is competing against every other OTT service 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.

[This article appears in the June 2017 issue of Streaming Media Magazine as "A King’s Ransom?"]

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