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Why is OTT so painful to linear Pay TV?

Outside observers, not familiar with inner pay television dealings, would probably be puzzled by the fact that a well established industry, with strong ties to (mostly) stable customers around the world, can be shocked by the rise of a single contender (Netflix, we'll later discuss Amazon, Hulu and some of the others), which has gained strong presence in a large number of territories but eventually depends on a continuous output of expensive in-house content, that drains a high percentage of its

It can be added that the value of its shares seems to depend more on its expansion, in terms of millions of subscribers, than on its earnings.

Netflix has already left some casualties along its way to fame: Blockbuster has been the most notorious, but competing OTT's have ben coming and going along these past years, and none (with the exception of Amazon and Hulu, again) has been able so far to capture size market share in the U.S. or Latin America, despite being, in several cases, backed by telcos or broadcasters —such as Televisa in Mexico and Globo in Brazil, to quote a couple of examples.

It is also worth mentioning that Netflix arose initially by taking advantage of a loophole that Hollywood inserted in the linear Pay TV food chain: the pan regional networks had the rights to the top series for a limited amount of time, even in the case of belonging to the same Hollywood group as the studio or producer of the content. The industry has been quick in closing the gap, with some companies —HBO among them— that just refused any deal and now has its Latin American branch selling its original content to its siblings around the world. Of course, this did not take Netflix for surprise, but it has been both painful and expensive for it. Hollywood launched Hulu to serve as outlet for part of its inventory, but it looks like it has been so far unable to establish a policy satisfactory to its partners; ironically, it seems to be more important to Hollywood to make money selling its content to Hulu than fending Netflix.
Another inconvenience has been that Netflix attracted the attention of Jeff Bezos, letting Amazon believe that featuring video content might be an interesting way to promote the selling machine that Amazon really is, in addition to its Cloud computing services, another giant money maker. But this doesn't help linear Pay TV, either.

The OTT business, Netflix included, amounts to no more than 15% of linear pay TV revenues. So, Why should the linear people be so worried? It isn't really a matter of money. It's that the Netflix model is undermining the two pillars on which all the prepackaged channels are based: a) widely available good signal quality (compared to broadcast television) and b) more programming variety (than FTA TV).

There is a third element: price. But, chances are that Netflix will have to curb multiple-user subscriptions and raise prices. And, it lacks sports and news, two linear TV staples. Having Facebook, Twitter and others enter this game will not simplify things.

In the meantime, linear pay TV could manage to correct some aspects where Netflix is superior in dealing with the user and obtaining better consumer satisfaction. Unfortunately, with the exception of a higher percentage of original content (which has to be co-produced in order to pay for the expenses), little attention has been paid so far to the ways in which viewers are being currently mistreated. Hopefully, this will be understood at some time in the future.

 


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