Pay TV Fighting Decline With OTT Offerings: PwC Report
The U.S. remains the largest single OTT market, generating $29 billion across transactional and SVOD last year, with double-digit growth in 2021 alone. Throughout the pandemic, many consumers who previously eschewed paid video entirely were finally convinced to take the plunge, and there's new data to prove it.
PwC's new Global Entertainment & Media Outlook explores these recent growth metrics in detail, and pinpoints how connected TV is shaping up to be an AVOD battleground.
On OTT Growth
Per the report: In absolute terms, the U.S. added $6.4 billion of OTT video revenue in 2020, and $4.8 billion in 2021, driven by a combination of new subscribers and subscription package price increases.
Over the next five years, PwC expects the market will increase at an average 6.8% CAGR.
"While this represents a significant cooling compared to the recent past, in absolute terms the U.S. will still be adding more revenue than any other single market."
In total, by the end of 2026, OTT video revenue in the U.S. is expected to reach $40.4 billion, an increase of $11.3 billion from 2021.
SVOD will increase its share of the total OTT video market over the next five years and is expected to represent 83%, or $33.6 billion, by the end of 2026.
However, now that traditional entertainment companies have SVOD platforms of their own, they are beginning to pull back content as they look to grow their OTT subscriber bases. As more and more SVOD services are launched, PwC finds "a contrasting state of negotiating power that any single SVOD holds," as the consumer is able to choose from a far larger portfolio of services and platforms.
This loosening of SVOD's grip on the streaming model is featured in a number of data points in the report. Let's look at those:
FAST Channels Solidify
FAST channels are increasingly gaining attention from the gatekeepers in online advertising. Google has agreed a broad-ranging partnership with Pluto TV that will see the FAST channel distributed to Google TV devices. PwC thinks it likely that Google will also be using Pluto TV and other platforms to begin distributing its own content at some point in 2022.
While Pluto TV is perhaps the largest household name, it is joined by a range of other services which are increasingly widely distributed. Rakuten TV is now available across 12 countries, in Europe. Tubi, Peacock, Roku and Crackle all feature some sort of FAST provision, although in some cases alongside paid, creating a hybrid service that can often be used to upsell more-premium content to users once they are within the content ecosystem.
CTV: The AVOD Battleground
Connected TV (CTV) is a varied term, which applies not just to the TV set itself but to any device that connects to it, turning it into a device capable of streaming content OTT. Examples include Roku and Amazon's stick-based devices, but the term also extends to games consoles and smart TVs, like Sky Glass and OS-based solutions like Google TV.
"CTV is a driving force behind the changing nature of OTT thanks to AVOD and ad-insertion and more specifically the hardware companies in control of hardware manufacture," says PwC.
Rather than ads sold at the point of broadcast, ads can be served in a variety of dynamic ways, all the way up to being completely dynamic across unrelated channels, aggregated through the platform rather than the broadcaster.
"While this does not directly affect SVOD and TVOD players, there are several reasons why this will affect them as services are carried across the range of CTV options available to consumers. Hardware manufactures are ceasing to be content agnostic," says the report.
"In the past, a set was primarily designed to provide the best image (for the cost), with other UX components like sound and user interface (UI) coming second. Because CTV represents an increasingly important battleground and revenue-generation stream, the UI is significant. Carriage and prominence within a platform will be affected by the relationship of that player to the hardware manufacturer, not just the popularity of the app with the general viewership."
Pay TV Continued Decline, But…
Traditional TV in the U.S. saw a -7.4% revenue decline across 2021, seeing a loss of over U.S. $6.6 billion, decreasing from $89.4 billion in 2020. By comparison, the global decline in traditional TV revenue was just -1.5%, with regions like Asia Pacific and EMEA showing slight growth.
Cable, which represents 63% of the U.S. market, previously used to best retain its customer base by bundling telco services with pay TV. This has changed in recent years, however, and now internet access is being bundled along with SVOD and OTT services, as well as access to linear OTT such as Comcast Xfinity and Spectrum.
The analysts say this has contributed to fast growth in SVOD and OTT services but has slowed growth in pay-TV. Even so, pay-TV has slowly been growing its market share (in terms of subscriptions), which has increased from 56% in 2017 to 63% in 2021.
…. Pay TV Finally Gains a Foothold in OTT Distribution
Cable companies are at the center of consumer video, says PwC. Cable allows customers to sign up to OTT services through a single package and allows integration of these services through pay TV STBs and platforms.
"This is important because it allows cable to weather the storm of cable-cutting and cord-trimming as users move to using more stand-alone TV providers. Retaining these now lower-paying subs means that as the rebundling of third-party services occurs, cable TV will be able to recoup these losses."
To be specific, this proposition states that while SVOD has unbundled pay TV and caused a huge degree of chaos in the industry, to a major extent this model only works where there are one or two major SVOD services to choose from.
"When there are more, competition between each of these services takes its toll on the performance of all of them. In order to grow revenue across all of these competing companies, it is necessary for a neutral aggregator to play the role of the consumer gatekeeper."
Replicating this kind of model in the SVOD space is expected to be increasingly prominent over the next five years. A light form of pay TV is expected to be bundled with a data subscription, while premium sports and movies will remain as a core pillar of pay TV.
TV and Home Entertainment Outlook
Over the next five years, pay TV is expected to continue to decline in the US, both in terms of subscriptions and, at a slightly slower rate, in terms of revenue.
By 2026 North America as a whole, with the U.S. making up 90% of its revenue, will have seen a significant decline in global market share, decreasing from 44% in 2017 to just 33% in 2026.
In 2026 the U.S. will be worth $65.6 billion, slightly smaller than the EMEA market, which is expected to be bringing in $72.4 billion.
Satellite is expected to continue to be the worst affected platform experiencing the fastest decline due to extensive cord-cutting and an industry shift towards OTT services. Over the next five years, satellite will churn around one-third of its total base (at a -8.0% CAGR), or around 6.7mn subscribers, falling from almost 20mn in 2021 to 13mn in 2026.
Cable is expected to lose 4.5m subscribers over the next five years, with losses slowly decreasing and expecting to stabilise, from -3.9% year-on-year in 2021 to just -0.8% in 2026, shrinking at a -2.1% CAGR.
"By this point, cable distribution is expected to be nearly synonymoU.S.with broadband double-play, meaning that for many of these households there will be little difference between a cable and an effective IPTV home. Indeed, the underlying technologies driving cable and IPTV television continue to move closer together."
VOD usage in particular means that an increasing amount of viewing by cable subscribers is of content delivered through IP—in essence the end product that consumers use is rapidly becoming "an indistinguishable proposition".
Performance of these two platforms is therefore driven more by the proposition than the technology behind the platform.
IPTV Struggling To Standstill
IPTV is expected to decline at a -6.4% CAGR over the next five years, which PwC says largely results from decisions made by platform-owners. This should be considered alongside global trends in the IPTV sector, where in terms of subscriptions, IPTV is outperforming cable, generally due to the efficiencies of a data-first infrastructure strategy.
"It is notable that while the largest IPTV player, Verizon's Fios, has churned some pay-TV subscribers, this is to a much-lesser degree than overall IPTV performance and is expected to stabilise over the next few years."
Other Key Points from the Report
The next generation of broadcast TV, known as ATSC 3.0, will reach 75% of households across the U.S. in 2022. ATSC say that 3 million ATSC 3.0 TVs were sold in the 12 months to January 2022 and they estimate a further 4.5 million will sell in 2022.
The U.S. is by far the world's biggest internet access market, with revenue totalling $200.8 billion in 2021, some way ahead of the second-largest market, mainland China, where total revenue was $158.6 billion in 2021.
The mobile sector is the fastest-growing part of the U.S. market, with an increase at a 4.3% CAGR predicted, compared with an increase at a 3.9% CAGR for the fixed broadband sector.
Mobile internet access revenue, which accounts for just over two-thirds of the market, was $135.4 billion in 2021 and will reach $166.8 billion by 2026.
Despite increasing interest rates, the stock market decline in the tech sector and a potential recession, M&A business among media and telcos is heating up.
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