The pay-TV industry remains, in many respects, a global success story providing a growing range of services to millions of households around the world. It invests heavily in infrastructure, innovative new products, and advanced technologies. In most markets, pay-TV providers have continued to grow during the last ten years, despite the global economic downturn at the end of the last decade.

The global pay-TV industry is experiencing a period of change and disruption, with service providers in many markets facing a perfect storm of slowing growth, intensifying competition, and business model disruption. In many markets, broadband quality and availability continue to improve steadily and connected devices, such as smart TVs, digital media players, and smartphones, are gaining traction. This is providing consumers with access to a much wider range of video content and allowing new OTT entrants as well as content owners to retail premium TV and film content directly to consumers. A large number of telcos, both global and local, have aggressively entered the pay-TV market, leveraging their network capabilities and existing customer relationships to offer highly attractive multi-play bundles.

These developments are unevenly distributed across different geographical regions and are at a relatively early stage in many markets, where pay-TV remains a robust part of ten highly profitable businesses. Many pay-TV providers have responded to increased competition by expanding into telecoms services, scaling up their investments in content, developing multiscreen and OTT offerings, and offering adjacent services, such as advanced advertising and smart home. Nonetheless, a growing number of pay-TV executives around the world believe that the external pressures are intensifying and the industry is entering a transitional period, with future growth becoming significantly more challenging. The majority of pay-TV markets exhibited either a small, less than 5 percent increase or a decline in subscribers over the last year. Only a handful of pay-TV markets, mostly in emerging countries, such as Indonesia, Mexico, Vietnam, Philippines, have seen double-digit annual subscriber growth over the last two years, with growth still slowing over the last year. However, most of this growth is believed to have come from lower value subscriptions.

As growth slows down across the existing product and service portfolios, pay-TV service providers will need a new playbook, leveraging their key assets, expertise, and relationships to develop innovative, high-growth propositions. Despite growing competitive threats, many industry participants believe that this is a great time for pay-TV providers to innovate and transform their businesses.

Key Challenges Facing the Pay-TV Industry

There are many trends and developments impacting the pay-TV industry. Three major challenges facing the industry include the proliferation of OTT services, changing consumer behavior, and demand and content piracy, fuelled by illicit streaming devices.

These trends are truly global, but there are important regional differences to consider. The pay-TV industry in North America is seen as the most severely disrupted by the new consumption trends, primarily due to high levels of pay-TV penetration and high ARPUs. The pay-TV industry in Asia-Pacific and Latin America, on the other hand, faces its own set of challenges brought about by the rapid growth in content piracy, mostly due to the widespread availability of illicit streaming devices. In this context, the pay-TV industry in EMEA appears to be the least disrupted, but there is significant variation within the region.

The proliferation of OTT services. Globally, the growth and development of cheaper OTT services, free content, and new device and service ecosystems are stimulating intense competition and having a strong impact on pay-TV businesses leaving them with little choice but to respond. The pay-TV market in the United States is widely believed to be the most impacted by cheaper OTT services. The impact of OTT services is felt by pay-TV providers across all regions. Many pay-TV providers in Asia-Pacific are reporting increasing pressures from SVOD service providers pursuing aggressive pricing strategies and offering their services for free for extended periods of time as well as AVOD services that are growing in popularity in some markets. Many industry participants argue that pressures from OTT services will only intensify in the future, particularly due to the growing presence of digital giants. As OTT distribution becomes a feasible alternative to pay-TV platforms, a growing number of content owners are also looking to launch direct-to consumer offerings and distributing them over new streaming platforms and devices.

Changing consumer behavior and demand. As the availability of IP-connected consumer devices and alternative OTT services continues to grow, consumer expectations about video services are shifting, with users becoming accustomed to advanced functionalities and features, such as multiscreen, on-demand viewing, greater pricing and packaging flexibility, and personalization. Many of these trends associated with the emergence of younger generations of consumers cannot be ignored. Going forward, many industry participants expect to see a decline in the number of linear channels carried by pay-TV platforms as distribution moves from a linear to nonlinear environment, requiring more flexibility and cooperation between content owners and pay-TV platforms.

Content piracy. Pay-TV piracy is believed to be most widespread in Latin America and Asia-Pacific, with 15 percent and 14 percent of TV households, respectively, using illegal pay-TV services. These regions are followed by North America and EMEA, where 9 percent and 7 percent of TV households, respectively, are believed to be using illegal pay-TV services. The total value lost to pay-TV piracy can be estimated by assuming that all users of illegal pay-TV services would instead subscribe to a legal service. If that happened, the global pay-TV industry could generate an additional USD 28 billion in revenues. However, not all of this lost value can be captured through legitimate offerings. It appears that the gains from curtailing pay-TV piracy could be significant. While traditional content protection technologies, such as conditional access systems (CAS) and digital rights management (DRM), remain highly relevant to secure content delivery over a managed network or a public IP network, the new anti-piracy challenge today is to reduce the impact of rapidly growing illicit streaming services. These services typically enable global distribution of content that is illegally captured in a single market. Reducing the impact of these services requires pay-TV providers and content owners to pro-actively watermark content and monitor, track, and take down illegal services. There are a growing number of successful pan-industry cooperation initiatives being set up to collectively address the challenges of piracy.Although progress has been made, improved and more effective collaboration and coordination between content owners and pay-TV platforms are still widely seen as a key priority to reduce the impact of piracy.

The Innovation Imperative

Innovation is becoming ever more important to the pay-TV industry in all markets, as providers look to drive future growth, remain competitive, and satisfy the increasing expectations of customers and investors. Innovations may be new to the market or industry, but they may also be evolutionary, based on previous advances and existing offerings. Innovation may involve invention, but successful innovation requires other elements too, such as: anticipating, testing, and exploring demand, the development of viable commercial propositions, and good partnering skills. There is a strong consensus that the pay-TV industry faces a more competitive future as consumers gain access to a greater choice of services, often delivered at lower prices, new entrants take advantage of falling barriers to entry, and studio broadcasters look for new routes to market. This creates a challenge for pay-TV providers to remain profitable while migrating to new technology platforms and innovative – and often lower-priced – products and services. As a result, there is an equally strong consensus across the pay-TV industry that future growth will depend on diversification as providers find new ways to monetize.

 

Main areas of innovation opportunity. Over the years, pay-TV service providers have innovated and developed their portfolios to encompass a variety of products and services. We distinguish between three key areas of innovation:the core pay-TV offers, which consists of TV platform, online TV services, and adjacencies. In some cases, major pay-TV groups are also diversifying their businesses by investing in a broad range of companies.

State of pay-TV innovation varies by region. Pay-TV providers in North America are notably ahead of their peers in other regions as they offer the most advanced and diversified product and service portfolios. On average, pay-TV providers in EMEA and Asia-Pacific are not as advanced innovators as their North American peers. Innovation capabilities vary substantially by territory. Operators in advanced Asia tend to have more advanced pay-TV portfolios compared to those in emerging Asia; similarly, operators in Western Europe tend to be ahead of their peers in Southern and Central and Eastern Europe. At the lower end of the spectrum, Latin American pay-TV providers lag behind their peers in other regions due to low purchasing power and high levels of income inequality, poor fixed-broadband infrastructure, and easy access to free or illegal high-quality alternatives, such as free-to-air TV and pirated content. Pay-TV providers in North America and EMEA, already the most innovative compared to their peers in Asia-Pacific and Latin America, are also the fastest in bringing innovation to their customers, with 81 percent and 72 percent, respectively, upgrading their product and service portfolios over the last year.

Core pay-TV offer. IP-connected set-top boxes and personal video recorders (PVR) are widely deployed, with nearly all major pay-TV service providers in North America and EMEA offering these functionalities on their top-of the-range set-top boxes. Operators in Latin America and Asia-Pacific are also trying to keep up, with many introducing these functionalities over last year. The availability of more advanced features – such as 4K video, voice control and search, content recommendations and touch-sensitive remotes – remains limited. However, these features are more common among advanced service providers in North America, EMEA, and Asia-Pacific pay-TV providers in EMEA, in particular, have been active in 4K video functionality, with 17 percent introducing it over the last year. Among the online TV services offered by pay-TV providers, multiscreen TV Everywhere services remain the most widely deployed, with 83 percent of providers offering them to their customers. Pay-TV providers in EMEA, Asia Pacific, and Latin America have been active in introducing standalone OTT services.

 

Key enablers of pay-TV innovation. The key factors underpinning the most diverse and advanced pay-TV portfolios are well-established and include both internal capabilities and external economic factors. In general, the most innovative pay-TV providers tend to be major enterprises with large subscriber bases or customer footprints, access to funding, and substantial technology resources. Pay-TV service providers that are operating in highly populous, high-income markets tend to have the largest addressable opportunities, while those operating in competitive markets have the strongest incentives to innovate as their survival depends on it. As the pay-TV industry becomes more IP-centric, it is expected to see a new wave of innovation.

Challenges. Despite innovation being at the top of agenda of many pay-TV executives globally, it remains a complex, time- and resource-consuming undertaking that many businesses struggle to deliver. Many pay-TV providers do face significant innovation challenges. The industry faces a number of challenges, with legacy technology and infrastructure, lack of fit-for-purpose processes and culture, and corporate risk avoidance seen as the most common ones. The industry understandsthe need for a technological transformation of their businesses but face significant commercial challenges. It is held back by the significant cost of replacing legacy technology and infrastructure, which are typically associated with large capital expenses that need to be amortized over multiple years. Similarly, around half of the industry believes that pay-TV providers struggle with innovation because they do not have the right processes and culture in place to support innovation and suffer from corporate risk avoidance.

Looking Ahead

There is considerable scope for innovation in pay-TV products and services to help drive the next stage of industry growth. There is a strong consensus that the pay-TV market is maturing in most territories and future growth will require new and innovative approaches.

Asia- Pacific is also looking to develop more consumer-focused and diversified product portfolios. The majority of pay-TV providers globally are expected to invest in strengthening their core pay-TV on platform proposition, while those in more developed and mature markets also expect to develop strong and differentiated multiplatform offerings, with some also expanding into adjacencies. Pay-TV industry is more cautious about the opportunities to expand significantly into adjacencies. Innovation in this category is expected to be driven by the innovation leaders – namely, major telcos and large-scale pay-TV service providers. On the other hand, most pay-TV providers in emerging markets with lower broadband and pay-TV penetration tend to focus on developing products and services to drive take-up and attract new customers. Innovation has become even more of a priority during the last 12 months, as challenges and opportunities proliferate. Pay-TV providers in all markets see future growth to be increasingly challenging, as competition intensifies, piracy evolves, and margins come under pressure.

Based on a September 2017 white paper, The Global Pay-TV Innovation Landscape: Industry Perspectives on a Year of Change by NAGRA and MTM.