With the increasing ubiquity of high-speed Internet and a momentous shift towards mobility, the possibility of content creators “cutting the middleman” by moving to over-the-top (OTT) has become more real. Recent announcements by content creators show they are ready to take bold steps to transform the content value chain.
The move to OTT seems natural as it provides content creators a direct relationship with end consumers, empowering them to attract “TV nevers” (those starting their adult life without traditional pay TV subscription service) with a tailor-made experience, pricing and promotions.
In a world where content distributors are aggregating through mergers and acquisitions, OTT can play a key role in maintaining balance in terms of supplier power. This balance, and the resulting competition, will ensure that content distributors continue to find innovative ways to reach customers. Strategically, OTT is easily justifiable, but operational complexities and challenges play into its feasibility for content creators.
Bypassing distributors means that content creators will have to develop new organizational capabilities including marketing, sales channels, billing management, customer service and enhanced operations. New OTT players will require major capital investments in developing these capabilities from the ground up, followed by a significant increase in operating expenses. Per PwC analysis, we expect the increase in opex (per subscriber per year) in the first few years to be between $50 and $80. As these OTT delivery providers improve their operational efficiency, opex may fall to between $35 and $45. In spite of these costs, OTT service will likely result in profits because content creators will be able to commercialize their existing content libraries to new, broader audiences.
This analysis does not suggest OTT would immediately be a preferred channel of delivery. Pay TV distributors have a bundling and scale advantage that is not likely to fade, keeping the pay TV model more profitable than OTT at least until new forms of OTT aggregation evolve. Additionally, Internet-service providers may start collecting higher interconnect fees due to the increasing content tra ffic. These factors may likely encourage content creators to adopt OTT as an additional medium to attract “TV nevers” rather than as a replacement to pay TV.
The next few months will be critical in shaping the new ecosystem for the media and entertainment industry as we gain more clarity on the Federal Communications Commission’s stance on Internet neutrality. Their decision may influence the number of companies willing to adopt OTT as well as how quickly ISPs develop the high-speed Internet infrastructure. After all, a la carte is only attractive when the service is good and the menu has a variety of good options.
Rohan Patel is management consulting and IT strategy principal at PricewaterhouseCoopers.
