The development of the connected TV ecosystem opens up new possibilities for channels that are distributed through pay-TV services including OTT.

The transformation of TV has been largely driven by digitization and IP distribution. It has facilitated the development and take-up of on-demand and over-the-top (OTT) TV services and has led to a proliferation of screens on which these services could be watched.

The development of the connected TV ecosystem opens up new possibilities for channels that are distributed through pay-TV services including OTT. More and more channels and networks are moving away from traditional models, with some networks opting for direct self-distribution on the web (OTT). Over the past several years, a number of broadcasters/channels have rolled out their own OTT services, which are now available on a wide range of connected devices - the most notable exceptions being pay-TV providers' DVRs.

Broadcasters and pay-TV providers are not involved in the device market. So connected TVs provide them with an opportunity to make up for this handicap and establish ties with consumers via software interfaces, to bolster both their offerings and their performance. With new players and new solutions, the connected TV market continues to evolve against a backdrop of consolidation for 
on-demand TV services and the never-ending enhancement of available products.

Connected TV Trends

An important milestone was passed in early 2016 - more than half the TV sets shipped globally in first quarter 2016 were smart TVs. The acceleration in the uptake of Internet-connected TVs was led by China, where four out of five TV sets shipped were with smart functionality. Meanwhile, despite a seasonally quiet quarter, 56 percent of North American TV shipments were smart TVs. Global shipments of all connected TV devices including smart TVs, Blu-ray players, game consoles, and digital media streamers totaled 220 million units in 2015, following record shipments of 84 million in Q4. Smart TVs accounted for 54 percent of all connected TV devices shipments in 2015 reaching 120 million units.

Ownership of connected TV devices is not restricted to one device over another. Broadband homes own an average of 2-3 such devices giving them multiple means by which to stream video and audio content to the TV.

China and North America continue to experience growth in the share of smart TVs, and the feature is now established in entry-level products. European shipments have remained stable at the 40 to 45 percent level for the past two years. It is all about content; where the local offering is relatively weak, consumers are reluctant to pay extra for built-in Internet TV services. Good streaming content in local languages remains the key to value in smart TV.

The Android operating system now accounts for almost half of smart TV shipping in the first quarter of 2016. However, when examined more closely, the first quarter of this year was exceptional, with seasonally strong sales in China, but weak sales elsewhere, and it is clear the Android-based solutions have a global lead.

Evolving Standards

Broadcasters have begun taking back control of the TV-viewing interface, in response to the growing prominence of competing platforms, thanks to initiatives such as HbbTV. Aimed at harmonizing the broadcast and broadband delivery of entertainment services to consumers, this specification has been making real strides across Europe and around the world.

Compared to other platforms, this type of solution opens up entirely new possibilities, thanks to the ability to switch seamlessly between live and OTT content. Linear channels thus become a gateway to catch-up TV and VOD, which in turn help strengthen broadcasters' brand and presence, and provide them with new monetization opportunities.

The most recent version of the specification, HbbTV 2.0 was availed in early 2015. It provides compatibility with HEVC, and support for smartphones, tablets, and push-VOD. The first HbbTV 2.0 compatible devices are expected on the market in 2016.

The development of the connected TV ecosystem opens up new possibilities for channels that are distributed through pay-TV services including OTT.

Domestic Broadcasters in TV Content Production Economics

Over time, domestic pay-TV channels (and pay-TV retailers) have taken over a large part of the role of domestic FTA broadcasters in supporting content creation and funding for premium sports, films, and, more recently, for high-quality TV series. The current transformation of the TV markets and audiences means that (i) the linear TV channel content of the historical broadcasters can be unbundled to a significant extent and offered on demand, and that (ii) international audiences can be built more easily if the content has global appeal. New global media players like Netflix, Amazon, and YouTube have a global reach and have achieved revenue predictability due to their large audiences and subscriber numbers. In contrast, domestic pay-TV broadcasters in Europe in most cases have less than 10 million subscribers, which enables new global media players to compete for a leading position in EU TV content creation.

Implications for TV Content Creation

The transformation of TV, led by Internet and OTT market developments, is changing TV content creation and funding models for broadcasters and independent TV production. Media players need to evolve their strategies by type of TV content, taking into account the impact of OTT, as they unbundle the TV schedule.

  • Major rights holders are adapting their rights windows to exploit the opportunities that OTT and Internet developments offer. They are exploring the entrance of new rights buyers as well as going direct to consumers.
  • FTA broadcasters and pay-TV broadcasters (pay-TV retailers and telcos) are adapting by offering OTT and Internet access to complement scheduled TV programs, while focusing on local distinctiveness with potential global appeal.
  • Independent TV producers are focusing on global formats and international rights, where possible. Independent TV producers in some countries are benefiting from a favorable regulatory framework.
  • New global media players are focusing on the production and distribution of TV-on-demand content with global appeal. They have started by focusing on TV series and films, but as technology develops and the players reach a subscriber level comparative to the level of the pay-TV broadcasters they are competing against, they could also compete for premium sports.
  • Understanding these changes is essential not only for the media players, but also for investors in a dynamic mergers and acquisitions media market, and for policy makers and regulators, keen to promote original content creation in their own markets and across the boundaries.

    Tuning in to the future

    There are a number of future industry scenarios, centered on content ownership and aggregation that together bound the range of outcomes from gradual, evolutionary change to one of the following potential disruptive changes:

  • Multiplatform navigation, with cross-platform content-navigation capability as the entry point to all video and the key asset to acquire customers.
  • Exclusive content, where platform-exclusive high-profile content (for example, sports or original entertainment content) are the key content assets acquired exclusively by distributors to differentiate in a multiplatform world and drive customer acquisition.
  • Direct-to-consumer service, which bypasses infrastructure-based distributors, content, and broadcast networks with high-quality content and strong channel brands.
  • Linear streaming aggregation, which is online content aggregators' ability to obtain streaming content licenses from key FTA and subscription TV channels, is the key asset-disrupting facilities-based aggregation and distribution.
  • The implications of each scenario lead to distinct actions across incumbent and new players. Content creators continue to be advantaged across all scenarios, particularly those that own must-have content that drives significant audiences or small, loyal fan bases.

    The scenarios are not mutually exclusive. Many markets are expected to develop into hybrids. Which scenarios play out in which markets will be influenced by market maturity, key player moves, and the regulatory environment.