The industry is witnessing a battle for the digital consumer of seismic proportions and this requires facing the digital future without fear of cannibalizing legacy business models. Becoming a digital video business at scale today requires a new approach to investment but is the ticket price for a successful future.
Over the past 15 years, video has been the only part of the media industry to sidestep the full impact of digital disruption. The video industry spanning theatrical, home entertainment, pay-TV, advertising-funded, and free-to-air models has remained relatively immune from the trends that have swept music, publishing, and other branches of the media industry.
This is all beginning to change, with a wave of disruptive innovation now engulfing the video industry. Trends that have until recently held sway – rising production costs, traditional value chains, non-disruptive investments, heavy policing of piracy threats, and unmet consumer demand – are becoming unsustainable. As the industry transforms itself, the stakes are high – the value of the global video market surpasses USD 500 billion.
As growth slows in many traditional areas of the video industry, established companies face the formidable challenge of capturing new growth while protecting their existing business. To succeed, these incumbents will need to make some critical decisions about where they fit in the industry's emerging value chain, which is centered around IP distribution of video.
In this evolving value chain, the value of leverage points such as infrastructure, distribution networks, traditional STB devices, sales, and traditional customer relationship management is falling, as digital capabilities and platforms are beginning to change how customers are served. At the same time, scale of reach, quality of experience, data-driven operations, ubiquity, and seamlessness across devices are becoming increasingly critical sources of competitive advantage.
An important consequence of this change is that collaboration between traditional content providers and aggregators is becoming strained, as consumer behaviors evolve and as new businesses and associated operating models begin to capture a greater share of the market.
This article defines and highlights two capability models that offer traditional providers and aggregators an opportunity to reinvent themselves and maintain their relevance in the industry's rapidly changing value chain:
Digital content providers (DCPs) are a new breed of business looking to serve content across a wide array of different digital channels, including OTT and IP distribution. Sometimes, DCPs will offer content directly to consumers; in other cases, they will provide it through collaboration with digital content aggregators.
Digital content aggregators (DCAs) are digital video-aggregation platforms, designed to package multiple DCPs to consumers. In contrast to traditional aggregators, DCAs focus more on providing the data and platforms, such as media distribution and targeting services that DCPs need to engage with audiences directly.
All Change – An Industry in Flux
Constant revolution is nothing new for those working in digital entertainment. But, even by the standards of the media industry, the pace of change in recent years has been exceptional.
Disruption has driven growth across the digital video industry, but the stand-out success has been the over-the-top (OTT) segment, which has been responsible for the vast majority of annual growth – a trend that most analysts agree is likely to continue. Moreover, the growth in traditional markets is not a given for many incumbents, as both churn and average revenue-per-user (ARPU) pressures hit their business, meaning they will need to become nimbler, to both protect their existing growth trajectory and augment it with OTT.
This growth has been propelled by both advances in technology and changes in consumer behavior and expectations:
Technology trends. Continued infrastructure upgrades, in particular fiber-based high-speed broadband, have made OTT propositions a reality. Faster broadband has reduced barriers to entry for new players, who are able to optimize delivery of video on unmanaged networks. HD and ultimately 4K have also raised customer expectations, enabling businesses to differentiate between quality and freemium content. At the same time, cloud technology and big data have provided businesses with an affordable way to personalize services, increasing engagement, and the value of advertising.
Consumer trends. Consumers can buy ever cheaper yet more sophisticated devices and now expect constant connectivity and immediate video provisioning across all their gadgets. The portability of devices is changing content consumption trends, both for long-form and short-form video audiences. Another trend sees video services that have sprung from the Internet rather than broadcasting, tending to offer more free content or lower-cost subscriptions. To an extent, this has set the bar for consumer expectations and influenced their willingness to pay subscription fees. The proliferation of OTT services is popular with consumers, but the increased competition it brings challenges the value of existing carriage agreement deals.
An Evolving Value Chain
Much OTT growth has been driven by new market entrants who have been investing significantly in webscale platforms. These players have no legacy business, granting them considerable commercial and creative freedom, especially if they can procure premium content rights. To position themselves for future growth and take advantage of disruption, established businesses need to make choices about how to pivot. While roles in the traditional value chain have not yet materially changed, their relative attractiveness is in flux. However, a transformation of the value chain is under way. Two important emerging business models lie at the heart of this change: digital content providers (DCPs) and digital content aggregators (DCAs). To stay relevant in the new industry value chain, traditional providers and aggregators will need to consider implementing one of these models.
Traditional Content Providers to Digital Content Providers (DCPs)
Traditional providers typically own or acquire rights and monetize them across different distribution channels. With either a business-to-business (B2B) model– striking carriage deals and selling advertising – or a model based on offering premium subscriptions to consumers, they manage content programming, curation, scheduling, and linear distribution, while relying on aggregators for consumer relationship. The reliance on advertising revenue drives a focus on market share, and winners distribute to as many platforms (satellite, cable) as possible. That scale is important, and without it many traditional content providers have struggled to launch their own direct-to-consumer (D2C) models.
Traditional providers are best placed to pivot into digital content providers (DCPs). This new breed of business aims to serve content it has acquired or produced across a wide array of different digital channels, including OTT and IP distribution. Sometimes DCPs will offer content directly to consumers; in other cases, they will provide services through collaborations with DCAs.
Traditional Aggregators to Digital Content Aggregators (DCAs)
Traditional aggregators consolidate content from multiple providers and serve it to consumers, providing them with a broader content proposition through subscription services. Cable companies own networks that market, sell, and fulfill video services to consumers. They own the customer relationship, packaging and bundling providers, and rely on audience scale in negotiations with providers to create a profitable subscription business.
DCPs are transforming the role of traditional providers by becoming more digitally enabled organizations. They are using their creative abilities as curators to forge engaging and interactive experiences around the content they supply. Some DCPs with the requisite scale will be able to adopt direct-to-consumer (D2C) models, but others will need to collaborate with DCAs to meet consumer demand for content. Consequently, the role of traditional aggregators is also changing as DCAs focus more on providing the data and platforms, such as media distribution and targeting services that DCPs need to engage with audiences directly.
Industry moves suggest increasing flexibility in business models, as companies innovate to discover their optimum position in the new value chain.
Traditional content aggregators face rising programming costs, as they have little flexibility with channels and bundling. In contrast, DCPs can manage programming costs by leveraging data and analytics, allowing them to have relatively significant content propositions without requiring participation in an aggregated service/product bundle. In addition, increases in technical and product support costs are a common feature of traditional content aggregators.
DCPs help reduce content delivery costs by optimizing delivery across different channels and devices, leveraging purely cloud technologies for infrastructure, and by digitizing their support model, mainly through the use of innovative software. This allows technology budgets to be primarily reserved for continued software development and less for infrastructure. In a digitally disrupted ecosystem, traditional providers fret about the power of aggregators and their own increased distance from their audiences.
Traditional aggregators, meanwhile, face stiff competition and need to court a range of providers to appeal to fickle consumers. Both traditional providers and aggregators are responding by experimenting with new business models and, in some cases, moving toward a DCP or DCA model:
Staying Ahead of Disruption
Traditional providers still need to grow audience scale by working with as many traditional aggregators as possible; exclusive vertical integration with a single aggregator without global scale has rarely proved to be a winning strategy. And the pressure to own the consumer relationship as digital becomes ever more important means many are exploring D2C OTT propositions, though more as lateral than primary strategic moves.
For DCAs, the growth of IP and OTT services has increased consumer choice, meaning they now need to relate to two customers – their users and the DCPs they support. Some have now created D2C provider propositions, even though these may cannibalize their pay-TV business. Whatever the strategy adopted by each business, it is clear the pivot requires investment. This could be in content creation or acquisition, building new capabilities and services, or optimizing distribution costs with an eye on quality of experience.
The collaboration between DCAs and DCPs is the key. Although some companies will diversify, testing both DCA and DCP roles, ultimately each must decide which type(s) of business they intend to operate and start building for success now.
An accelerating wave of disruption is transforming both the traditional and digital video industry. Conventional business models are under pressure, squeezed by shifting customer expectations and competition from digital rivals. Traditional content providers and aggregators will need to adopt new business models to capture growth, protect market share, and boost profits.
Propelled by the proliferation of IP distribution, disruption of the once stable video market is accelerating. Traditional companies have generally navigated their business models around this distribution in order to protect their existing revenue channels. While this conservative and tactical approach may have worked in the past, it is no longer viable. Digital natives have built digital platforms, skills, and capabilities that are growing in value as consumer and advertiser wallets shift away from traditional pay-TV and broadcast.
It is now critical for traditional providers and aggregators to accelerate investments into strategic digital capabilities that underpin success in IP-based business models. At the same time, they need to leverage their existing advantages in the marketplace to transform themselves into DCPs and DCAs. Furthermore, they must re-examine their existing relationships in the value chain to benefit all parties – giving consumers a broad range of content more flexibly and cost-effectively, while allowing the ecosystem to grow and remain profitable.
These are industry-sized challenges with seismic impacts to shareholder value. But a big bang can be avoided, as long as traditional companies recognize the dangers of inaction. If their vision and roadmap are not calibrated to move toward building the right digital capabilities, their ability to react in the future will be tightly constrained – unless they spend heavily. The future is digital, and the focus on becoming a digital video business at scale is the ticket to a successful future.