1.
Over the Top video
Over the Top (OTT) video services came into the spotlight in recent years with the success stories of
different players positioned in different market segments. Netflix, the leader in streaming video ondemand (SVOD), earned $3.2B in worldwide revenues in 2011. Hulu, the centralized catch-up TV /ad
supported VOD platform, is the number one video website in terms of ad impressions, far ahead of
YouTube despite having only a fifth of the audience of YouTube. iTunes rules the transactional VOD
(TVOD) market with a 60% market share despite the efforts of competing heavyweights with deep
pockets (Amazon, Wal-Mart/Vudu, Microsoft/Xbox Live, Google/YouTube rental store).
What all these services have in common is that they are delivered over unmanaged networks. They
also all leverage premium content that has demonstrated its ability to garner a large audience. Finally,
they all have an international reach, providing distribution agreements with content owners.
In each of these verticals the competition is not based on price. TVOD services have a similar price
point ($3-4 for a rental and $15 for an electronic sell through (EST)). Instead, they compete on the
device environment that goes with the service. One key to iTunes’ success is the ease of accessing
content on different devices. SVOD services average a $6-8/month price point, and leverage exclusive
content through output deals with movie studios for the pay TV window and original content. Hulu is
uniquely positioned in the catch-up TV segment, thanks to its content owners’ stake hold, but this
status as a stand-alone service is compromised over the long-term: content owners are starting to
strike distribution agreements with pay TV operators to integrate Hulu-like services with pay TV
bundles.
Entering any of these verticals is tricky. Would-be TVOD services need a platform of installed devices
to leverage. SVOD hopefuls are entering a business where expensive exclusivity deals drive low
margins, original content brings risk, and catch-up TV services are controlled by TV networks which
either keep control (Hulu, CBS.com) or strike deals with their natural allies (pay TV operators).
On the technical side, the big challenge of OTT video services is the need to navigate the
fragmentation of connected devices. HTML5 could be the solution to this problem but it is not ready
for prime time. A common approach is to use an infrastructure that is compatible with low margins,
and can easily scale by outsourcing to Amazon Web Services while customizing open source software
layers.
As far as user experience is concerned, the most innovative services are Netflix and Hulu. Both rely
on data-driven approaches to iterate their service, and increase consumer engagement and
consumption. Both utilize A/B testing to test the website interface, and both leverage user ratings and
preferences to make recommendations.
This report will analyze some of the main OTT video services on the following dimensions:
1.
2.
3.
4.
5.
6.
7.
8.
High level comparison of the main services
Content acquisition strategies
Revenue and pricing models
Infrastructure
Approach to HTML5
User interface
User experience and consumer satisfaction
International expansion and consumer acquisition

2. Introduction
What is “over the top video”? “Over the top” (OTT) video refers to video services that decouple
access to the content from access to the delivery infrastructure for said content. In contrast
with pay TV, where subscribers compensate pay TV operators for building and maintaining a delivery
mechanism (cable, satellite or telecommunications network), OTT video services offer access to
content only; their users must subscribe to a third party network operator to enjoy this content. For
the purpose of this report, we will limit our analysis to TV and movie content. User generated
content, music videos and non scripted professional web content are outside the scope of this report.
What is not OTT? Multi-device video delivery is not, in the strictest sense, OTT video. Services that
require users to have an existing subscription with a pay TV operator are not, for the purpose of this
report, considered OTT. While some of these services have on-the-go features (the content might be
delivered through a third party network), the business model cannot be considered OTT. Such services
include Streampix (the new SVOD service by Comcast Xfinity, available for Comcast subscribers only)
and HBO Go (which requires authentication).
This report provides a picture of the current landscape of OTT video in the US, in terms of
available content, usage and revenue streams. This report does not address the balance of power
between OTT providers and pay TV operators and it does not answer questions about cord-cutting.
In summary, the overwhelming majority of OTT video is time-shifted content rather than live
broadcast. As a result most of the available content is scripted content, which has a longer shelf-life
than news, sports, or reality TV.
A major factor in the rise of OTT services is the increasing number of connected devices within US
households. A study by Strategy Analytics conducted in Q3 2011 found that 51% of Americans
watch TV shows / movies on the internet either by streaming or downloaded said content.
Of these 51%, 89% access the content via PC, 58% watch the content on a TV display, 23% do so on
their smartphones and 16% on a tablet (NB: totals do not add up to 100% because respondents have
the option to pick several devices; these results also highlight that internet video viewers do not
choose between screens: they watch their internet video content on a variety of screens). While the
PC remains the most popular device for internet video consumption, viewers enjoy a
growing number of options to connect their TV to the internet for the purpose, among
others, of online video viewing. Among those viewers who watch internet video on their TV screen,
60% did so by using a connected game console (there is an installed base of 75 million game consoles
in the US, and 20-25% of the time spent using these consoles is dedicated to video viewing), 58%
connected their PC to their TV via HDMI and 35% did so using a home network, 30% used a
connected blu-ray players and 22% an internet media player (these players, often referred to as OTT
boxes, have an installed base of 12 million, half of which are used on a daily basis), 20% relied the
built in connectivity of a smart TV.
Internet video viewing goes beyond the TV screen however. Twelve percent of US households view
internet TV and movies on their Smartphone (Half of Americans with a mobile phone own a
Smartphone) and 8% do so on a tablet (35-40 million installed base in the US).
The proliferation of connected devices makes OTT video services more compelling for users.
The OTT video services studied in this report can be classified in four different categories:
1.
2.
3.
4.
Transactional VOD: iTunes, Amazon VOD, Vudu, YouTube
Ad supported VOD: (catch up TV): Hulu
Subscription VOD: Netflix, Hulu to a certain extent, Amazon Prime
Original web programming: Netflix, Hulu, YouTube

3. 1.
High Level Comparison of the Main Services: OTT video services are positioning
themselves to be the new Wal-Mart, the new Blockbuster or the new HBO.
Netflix
streaming
Positioning
EST
/
rentals
EST
/
rentals
SVOD
Extensive
catalog
Extensive
catalog
Original
(movies
and
TV
(movies
and
TV
programming
shows)
including
shows)
including
new
releases
new
releases
Price
iTunes
Amazon
VOD
Transactional
$7.99/mo
Rentals
$4
EST:
$10-­‐$15
TV
shows
for
EST
only,
no
rentals
$3
Catalog
Transactional
Rentals
$5
EST:
$15-­‐$20
TV
shows
for
EST
only,
no
rentals
since
August
2011
$3
14K
movies
Users
n/a
n/a
Usage
Movies
30M
EST
transactions/year
(80K/day)
100M
VOD
transactions/year
(270K/day)
Revenues
$550M
in
2011
(E)
Movies=
$310M
($180M
EST
and
$130M
VOD)
TV
shows=
$220M
(EST
only
since
August
2011)
Content
spending
n/a
100K
titles
Amazon
Prime
SVOD
Original
programming?
*Prime
is
first
a
program
offering
free
delivery
$79/year
30K
titles
(US)
17K
titles
23.5M
subscribers
worldwide
(21.7M
US
and
1.9M
int’l)
Movies
Q4
2011:
2B
2M
EST
hours
transactions/year
streamed
(5K/day)
(1h/day/sub)
7M
VOD
transactions/year
(20K/day)
$40M
in
2011
(E)
Domestic:
Movies=
$25M
$1.5bn
(E)
($12M
EST
and
($150M
$13M
VOD)
operating
TV
shows=
$15M
profit
(E))
(EST
only)
Int’l:
$83M
revenues
($103M
operating
loss)
n/a
$2.32B
(2011)
Hulu
Hulu
Plus
YouTube
Catch
up
TV
Original
programming
Catch
up
TV
Original
programming
SVOD
Rentals
(movies)
Original
programming
Ad
supported
$7.99/mo.
And
ad
supported
Transactional
(movies)
$2-­‐$4
Ad
supported
(original
programming)
25K
TV
episodes
(E)
30K
titles
(29K
5K
titles
(E)
TV
episodes
100
channels
and
1K
original
prog.
movies)
1.5M
paid
n/a
subscribers
5M
(E)
30M
monthly
(not
all
of
users
whom
might
be
using
the
SVOD
service)
n/a
Average
time
spent
on
the
site:
3h10m
n/a
n/a
n/a
$420M
$100M
(E)
(including
subscription)
$320M
in
revenues
only
(E)
n/a
n/a
$500M
(E-­‐
2012)
$100M
(original
prog.)
n/a

4.
iTunes
Margin
30%
(gross
margin)
30%
(gross
margin)
Connected
iOs
devices
devices
Footprint
International
2.
Amazon
VOD
Netflix
Amazon
Prime
streaming
11%
(operating
n/a
income)
Amazon
is
rumored
to
lose
$11/user
with
Prime,
mostly
because
of
the
shipping
costs
200
devices
80
devices
300
devices
International
47
countries:
US,
Canada,
UK,
Ireland,
Mexico,
etc
US
Hulu
Hulu
Plus
30%
(gross
n/a
margin)
NB:
if
ads
are
sold
by
partner
networks,
Hulu
doesn’t
cover
any
of
the
costs
involved
Computers
300
devices
only
US
US,
Japan
YouTube
n/a
Browser
equipped
International
Content Acquisition Strategies:
Content is key for OTT services, and the
increasingly competitive landscape impacts negotiations with studio partners.
The key question for OTT video services is the relationship with content owners, who command
the value of rights acquired.
2.1
Transactional OTT video services are the new Wal-Mart
Transactional VOD services (iTunes, Amazon VOD and YouTube rental stores) are always
welcome by studios. They constitute an additional avenue to reach potential customers,
while respecting the traditional model of paid transactions on which home entertainment has
been thriving since the 1980s when VHS was introduced. Vudu is Wal-Mart’s effort to
preserve revenues from home entertainment as DVD sales decline.
2.2
SVOD services, struggling with increasing content costs for newly released movies,
have to shift to episodic TV and original programming
SVOD services are trying to imitate the success story of premium TV network HBO.
Launched in 1970, the network transitioned from older catalog content to premium studio
content via exclusive output deals with major studios (20th Century Fox, Universal and
Warner movies are first released on TV on HBO exclusively) and sports content. As HBO’s
model proved profitable, competitors started to emerge and outbid HBO for content from
other studios (Starz deals with Disney and Sony, while Showtime deals with DreamWorks,
The Weinstein Company and Summit). HBO had to start betting on original programming.
Producing original content is riskier than licensing content that already has an
audience but the payoff, if the content is successful, is greater.
2.2.1 Netflix’s spending on content grew 36x between 2009-2011; Netflix is ideally positioned
as the repository of serialized TV dramas
Netflix’s approach to content acquisition is heavily data driven. Observing patterns of
consumption helps Netflix content executives determine how much money they should
spend based on how much interest the subscribers will have in the content. Between
2009 and 2011 Netflix’s spending on streaming content grew 36 fold, from $65M to
$2.3B. By contrast, the volume of content available grew only 2.5 fold. With
competition from Amazon Prime, Hulu Plus, and the incumbent TV networks, Netflix

5. opted to (1) license more TV content instead of movie content, and (2) develop original
programming. The value of focusing more on TV content is dual: First, the episodic
nature of TV content encourages long term engagement and reduces churn (TV
accounts for 60% of viewing time on Netflix streaming compared to 20% for the DVD
by mail part of the business), and second, the economics of TV make it easier for
Netflix to license content at a cheaper price.
As a SVOD service, Netflix is looking for full seasons of canceled shows or past seasons
of current shows. As such, it competes with the cable networks that usually acquire TV
content for syndication. But cable networks, which don't have a dedicated following that
will tune in every day at a specific time, favor sitcoms or procedural dramas, whose
episodes can be seen independently of one another. Serialized dramas (Lost, 24), with
complex story arcs developing over the course of the full season, require viewers to be
very engaged. These are not a good fit for syndication but they are extremely
appealing to Netflix.
True to its catalog on-demand nature, Netflix makes full seasons of its original shows
available at once, betting that addicted subscribers will view several of them back to
back. It is also picking branded projects: the licensed Norwegian show Lillyhammer
features Steven Van Zandt of The Sopranos’ fame, House of Cards is the remake of a
British show directed by Academy Award nominee David Fincher with Academy Award
winner Kevin Spacey, and Arrested Development was produced by Academy Award
winner Ron Howard among others, and aired on Fox between 2003 and 2006 to an
average 3-4 million viewers.
Netflix is not giving up on movie content but the service emphasized the need for
exclusive content. It won’t be able to outbid all the premium TV networks for exclusive
output deals with Hollywood studios, and it needs TV content to sustain viewer
engagement.
2.2.2 Hulu was an experiment that highlighted the market potential of ad-supported catch-up
TV; strategically, its TV networks owners should partner with pay TV operators for such
services
Hulu (and Hulu Plus) is an anomaly; Hulu was created when TV networks perceived
YouTube as an outlet for infringed content, and it was designed to provide a legal (and
revenue generating) avenue for time-shifted TV consumption. Hulu, a joint venture of
three of the major TV networks ABC, Fox, and NBC, is relatively shielded from content
price increases. Additionally its positioning as a catch-up TV service, focusing on
TV content, makes it an alternative to the DVR. The content available expires (the
latest five episodes of a show are available) and partnering networks can establish rules
as to availability (Fox makes some shows available the day after airing, only to
authenticated Direct TV subscribers). Hulu Plus extends the amount of content available
(full seasons and movies) but the main benefit of Hulu Plus is it’s availability on
connected devices (tablets, Smartphones, consoles, connected TVs etc).
Hulu is opting for a TV-like approach: new episodes are released each week at a
specific date/time, similar to a TV station schedule. In early March, Hulu struck a deal
with international TV production and distribution company Fremantle to distribute some
of its original programming in foreign territories where Hulu doesn’t operate - a
common practice for TV networks.

6. 2.3
YouTube and Amazon are playing catch-up
Amazon entered the SVOD game late and it is ramping up its Prime video catalog (17
thousand titles). Originally, the service was designed to offer free two-day shipping
to Prime subscribers. The service is rumored to cost Amazon, but it is unclear if this is due
to the free shipping or to the licensing fees for content. Amazon is the main driver of content
price inflation for Netflix. The importance of original content is not lost on Amazon: in March
2011 the company hired an alumnus of 20th Century Fox and Comedy Central whose title
briefly appeared online as VP of Original Television. Netflix, which is built around the video
viewing experience only, invented the queue system for users to manage their viewing. In
contrast, Amazon SVOD service is just a simple player linked to a catalog, similar to the
Amazon VOD player, without the charge for authenticated Prime members.
Finally, YouTube is making the boldest move, launching 100 channels aimed at niche
audiences. YouTube’s ambition is to compete with the cable TV industry, which includes
hundreds of TV networks focused on niche markets. YouTube is investing $100M in original
programming and working with professional TV players (Disney, Reveille Production) as well
as household names (skater Tony Hawk, and singer actress Madonna). The investment is an
advance on ad revenues; YouTube will recoup its investment once marketers spend money
on ad spots in the newly created channels. The goal for YouTube is to create sustainable
audience numbers in known places, and then let advertisers buy the ad space around this
audience, instead of chasing the new hit video and then playing catch-up by going after
advertisers. Each channel offers 25 hours of programming daily. To put this into perspective,
each year a broadcast network may develop 20 pilots for new TV shows, for a price tag in the
$100M range for all pilots combined.
3.
Revenue and Pricing Models: OTT services have similar price points for similar
value propositions, and increased competitive in the SVOD landscape is
bringing the margins down.
Services are differentiated by price, not content available. Transactional VOD services are
mostly undifferentiated: rental prices are around $4 with a $1-2 premium for HD. After purchase,
rented titles can be seen during a window of a month; the window decreases to 48 hours once
playback of content has started. The critical component is the device environment. iTunes is the
leader in the online TVOD market - with 60% market share - because it can rely on the installed
base of Apple devices. To gain market share, challenger Vudu (3rd with a 7-8% market share)
negotiated a deal with studios regarding Ultraviolet; Wal-Mart will be the exclusive provider of
“disc to digital conversion” until fall 2012, and DVD owners will be able to get digital copies stored
in a Vudu account in exchange for a $2 conversion fee.
SVOD services have a similar price point: Netflix Streaming and Hulu Plus cost $7.99/month
while Amazon Prime subscriptions cost $79/year (for $6.58/month the service provides free twoday shipping in addition to the video catalog).
In the online world, commanding subscription fees is already a challenge and pricing higher than
$10/month is hard. With rising streaming content licensing fees, margins on SVOD
services are small: Netflix streaming has a 12% profit margin, compared with 50% for the DVDby-mail business.

7. 4.
Infrastructure: Key to the OTT Entertainment success is
infrastructure and the deeper relationship with content owner.
the
low-cost
OTT services address a mass market, not a marginal audience. Netflix is priced at $7.99/month much lower than pay TV’s average revenue per user of $70/month. The strategy for OTT services
like Netflix is to offer tier-2 content (with limited tier-1 titles) at a very low price, and scale it to
millions of users globally. OTT players like Netflix know that they can’t reduce the content
acquisition cost, so they work very hard to reduce capital and operating expenses. Following is a
quick analysis of the infrastructure of the two key OTT players.
Netflix: Public Cloud for business agility and unpredictable growth
4.1
Netflix is a global company with 25 million
subscribers in 40+ countries streaming 2
billion hours in fourth quarter 2011.
Customer base in first quarter 2011 grew
69% over Q1 2010, and API requests
went up 37 fold between Jan 2010 to
2011 to almost 20 billion requests.
Netflix
employs
only
two
thousand
employees.
Netflix deployment on Amazon Web Services (AWS):
•
•
•
Video masters are deployed on EC2
(virtual server)/S3 (virtual storage)
combination. These video masters
are delivered using Akamai,
Limelight and Level 3 CDNs.
Logs: Netflix uses open source
bigdata tools (Hadoop, Cassandra,
Hive) to conduct business
intelligence and personalization.
These tools are also deployed on
AWS’s virtual machines and
storages.
APIs: Netflix exposes APIs for
Metadata, device configuration, and
other movie playback
functionalities.

8. Hulu
4.2
Hulu has approximately 30 million unique
users/month. Like Netflix, Hulu serves billions
of hours of videos per month. Their last
speculated employee strength was around 380.
Hulu also uses open source components like
MongoDB, Memcache, or HTML5.
Hulu’s system has three main components:
•
•
•
Data Sync: Data sync layer is to minimize load
on the main database;
Web service: The web services are load
balanced and serve the majority of metadata (in
XML or JSON) found on Hulu devices;
CMS: The CMS component has a front-end UI
written in JavaScript with jQuery and uses Jinja
HTML5 templates.
One of the key problems with OTT is quality of service. Hulu has built custom solutions that
serve that purpose. Video players periodically send beacons to the back end QOS system with
various parameters. This is used to identify problems that need resolution.
5.
Approach to HTML5: HTML5 can be a savior but a solution is needed for the
lack of DRM and the “brewing conflict” between Google’s WebM and MPEG LA’s
H.264.
Fixed and Mobile connected devices offer great opportunity and challenge for the TV ecosystem. In
2011 alone, over 100 new tablets and 400 new Smartphones were introduced. As a result Netflix,
a must have OTT service, tested its service on over 1000 Android devices before
releasing it. While the Xbox, PS3, Roku, iPad and iPhone penetrations are well known, smart TVs
are not far behind. Samsung, Sony and LG each shipped 20 million units in 2011. HTML5 can be a

9. savior in this fragmented ecosystem, but before that can happen HTML5 itself needs saving.
Content protection is the biggest
flaw
in
today’s
HTML5
ecosystem.
It is clear to content and pay
TV providers that HTML5 is
the
superior
presentation
format, but HTML5 is far
from
being
a
complete,
standardized and acceptable
solution.
For now, a combination of
HTML5 for UI, HLS encryption
for security/DRM, and HLS for
video delivery can convince tier2/3 content providers, or lastwindow
(broadcast)
content.
But true DRM like Flash Access
2, Widevine or PlayReady are
needed for tier-1 premium
content
such
as
pay
TV
programming. Recently Google,
Microsoft, and Netflix submitted
a draft proposal to the W3C to
add encrypted media extensions
to the web standard's spec.
Video codec is in competition
with HTML5; Google is throwing
its weight behind its open source
VP8 video compression format via WebM (an audio-video format designed to provide royalty-free,
open video compression for use with HTML5 video). VP8 is in direct competition with MPEG LA’s
H.264.

10. 6.
User Interface:
proposition.
Building web based embedded UI is not a straight forward
The device landscape is extremely complex. While WebKit is emerging as the standard for
embedded browsers, fragmentation is still a big problem. For example PS3 uses WebKit, Philips
uses Opera (close to WebKit), Samsung uses Maple but is switching to WebKit 2012, LG, Google
TV and iPad use different variants of WebKit, Panasonic uses JavaScript (not browser), Xbox uses
Silverlight and Roku uses BrightScript. Netflix is testing their android app on almost a thousand
devices.
This gets further complicated as CPU for these devices can range from 600MHz to 3.2GHz and
memory can range from 88MB to 512MB. Simply put, UI’s memory budget can be calculated by
subtracting memory requirements of OS, browser, SDK and network buffer, which is miniscule in
many cases.

11. 7.
User Experience and Consumer Satisfaction: The challenge for OTT services is
to move beyond a dead-end experience and create increased consumer
satisfaction and loyalty.
The very nature of TV is to be a very lean-back experience requiring little interaction. It builds on
the passivity of viewers. By contrast, OTT services need to bridge gap between the leanforward/on demand model and the lean-back model to carry consumers beyond a “dead end
experience” (the experience stops when the video stops).
7.1
Netflix built on its recommendation engine to keep users captive and reduce churn
Netflix leverages a database of 5 billion user ratings to feed its recommendation engine.
Recommendations are heavily personalized, and the first step after sign up is to rate a
number of movies to give Netflix and idea of the new user’s tastes. Netflix’s goal is clearly
stated: increase consumption to reduce churn. The logic of the recommendation engine
works like CTR forecast for ad/search results. Since Netflix pays a flat fee for streaming
content, it might as well push as much consumption as possible. In contrast, their DVD-bymail service comes with increased shipping and administrative costs if consumption
increases.
75% of Netflix users select movies based on recommendations. Recommendations are
generated based on explicit data (user’s ratings), and implicit data (consumption profile,
recent plays, completion rate, etc). They also factor in freshness of content (new catalogue
additions) and diversity of suggested titles (capping the number of TV titles suggested).
The best illustration of work on personalized recommendations is found in the
“personalized genre” rows. The first screen presented after log-in features rows of
suggested titles organized in different genres that are customized based on each individual
user’s consumption pattern and interests.
The screen shot below shows Netflix
recommendations: Classic Movies about Marriage from the 1950s, Independent Dramas
based on a Book, Critically-acclaimed Suspenseful Movies. Each row is accompanied by
elements of “context” and “evidence” that explain the suggestion to the user by
demonstrating past interest in similar titles. This transparency reduces user’s confusion.

12.
Netflix found that personalized genre becomes very important for member satisfaction:
moving personalized rows to top of the home page on connected devices increased retention.
Netflix keeps on improving its user experience by adopting a very data driven approach: they
make a hypothesis about the impact of a new feature/design on member engagement, design
a test to confirm or infirm this hypothesis, run the test and let the data prove or disprove the
hypothesis.
Netflix historically enjoyed a very
high consumer satisfaction rating.
Netflix angered many customers in
summer 2011 when it announced it
would separate DVD and streaming
plans (resulting in up to 60% price
hike, from $10 to $16/month), and
made several PR blunders.
As a
result its score on the American
Consumer Satisfaction Index slid from
88% to 74% between 2010 and
2011. But Netflix seems to have
recovered from this debacle: a
Citigroup survey conducted in
March 2012 found that 81% of
customers still report some level
of basic happiness with the
service
(extreme
satisfaction,
however, is down to 10% from 50%).
53% said they were not at all likely to cancel Netflix in the coming month (up from 46% in
December 2011 and 43% in May 2011). Usage of the service was stable with 82% of users
reporting similar usage level as when they started subscribing (9% reported much heavier
usage and 9% reported much lighter usage).

13. 7.2
Hulu uses auto-play and cross promotion to deepen usage of the service
Hulu monetizes content using ad impressions. For Hulu, increasing consumption means
increasing revenues (more views = more ads = more revenues). This differs from the Netflix
strategy of minimizing churn.
Hulu’s solution
to counter the
dead
end
experience is to
roll out an auto
play feature: the
service
will
automatically
launch
a
new
video after a user
is
done.
Hulu
sometimes
uses
some
of
the
inventory to do
cross
promotion
(viewers of this
show are X times
more likely to like this other show) or
announces the video clip it picked to
show after the program the user is
currently watching is over.
Finally, Hulu offers personalized
options to viewers who want to
have deeper control of their ad
viewing. The ad selector offers users
a choice between three different Ads,
usually for the same brand (see the
example on the left).
Viewers can also
“swap”
ads
(prompting
an
overlay
of
alternative ads to
appear) and can
educate
the
system
by
indicating
whether
the
currently playing
ad is relevant to
them.

14. 8.
International Expansion and Consumer Acquisition: Device and content
acquisition strategies are key to achieving TV scale, but traditional TV
advertising and operators’ bundles are required.
Contrary to traditional media players, OTT video services cannot leverage a partner’s
platform to get reach. Premium TV networks such as HBO and Showtime benefit from their
alliance with pay TV operators in the form of promotional operations led by those operators (such
as HBO free for 6 months for new triple subscribers), as well as marketing effort (mailing etc). The
nature of OTT providers is that they have to manage this effort on their own.
Consistent with its broadcasting owners’ nature, Hulu opted for traditional advertising. Hulu
famously aired a 60 second ad during the Super Bowl 2009, where 30 second ad-spots cost
around $3M. In contrast, Netflix built its DVD-by-mail service then added streaming service using
online direct response advertising. The company now extends to radio advertising as well as TV
advertising. Growth fueling growth, Netflix’s domestic subscriber acquisition cost (SAC) went down
from $110 in 1999 to $15 in 2011.
Both services led international launches: Netflix in Canada, then Latin America, and recently
in UK/Ireland, and Hulu in Japan. Details on the marketing campaigns for these launches are
scarce; no numbers, in terms of subscribers’ base or engagement, are available regarding Hulu’s
Japanese launch.
The two main requirements to decide which international markets to target for an expansion,
aside from size of the market, are quality of broadband infrastructure and available rights to
content. To the second point, a key parameter to take into account is the prevalence of piracy in
target countries. Some countries are lost territories for Hollywood (the pirated DVD market in
China is estimated at $6bn/year to be compared with Chinese box office of $1.5bn/year; India
reportedly loses close to $1bn/year on pirated content). If OTT providers can create a legal
alternative in these markets with high piracy rates, it would be easier for them to negotiate rights
with studios.
As far as Netflix is concerned, these launches seemed successful. Launched in September
2010, Netflix Canada had 800 thousand subscribers in a little over 6 months. Out of these
800 thousand subscribers, 130 thousand were free subscribers with a 30 day free trial period;
that’s a 16% free-to-all-subscribers percentage (similar to what Netflix had in the early years of
its U.S. launch). Six months after launch, more than 60% of Canadians were aware of
Netflix, and 6% were subscribers. 60% of those who signed up for the free trial of Netflix
became paying subscribers.
Key elements of a successful launch, in addition to advertising, are the breadth of content
available, and the number of connected devices on which the service can run. At time of launch,
Netflix Canada had 7.5 thousand titles and was available on PCs, PS3, Wii, iOS devices and
various Blu-ray players from Samsung and Toshiba. The growth slowed after Q1 2011, forcing
Netflix to focus on increased content acquisition. In March 2011, Netflix signed a groundbreaking
five-year deal with Paramount to be the exclusive distributor of 350 upcoming new releases in the
pay TV window.
Using the Canadian launch as a blueprint, Netflix started signing deals with independent giants
Lionsgate, MGM, Miramax, and local content owner BBC Worldwide, as early as November 2011,
for a January 2012 launch.
8.1
Netflix’s natural direction, in the long term, is to be available in operators’ bundles
Netflix is currently considering evolving its stand alone strategy. In a public
presentation, Netflix CEO Reed Hastings mentioned that the company is setting a goal for 90

15. million U.S. subscribers. This is more or less the whole landscape of pay TV subscribers.
Hastings also said, at the Morgan Stanley Technology, Media and Telecom Conference,
“Many (cable service providers) would like to have a competitor to HBO, and they
would bid us off of HBO. [For Netflix to become a premium TV network] “…is not in
the short term, but it is the natural direction for us in the long term.” Hastings said,
in a public presentation, that the total estimated market for Netflix was 90 million U.S.
subscribers - meaning Netflix thinks it can be in almost every TV household in the U.S.
He emphasized the importance for Netflix to maintain its brand, but basically opened the door
to a future partnership with pay TV operators that could - similarly to what they currently do
for premium networks such as HBO - bundle Netflix with a pay TV, broadband, or dual play
subscription. Comcast, the leading pay TV operator in the US, said on the record that it
wasn’t interested in such a partnership; Comcast announced its own multi device SVOD
service, Streampix, available for Comcast subscribers only (and therefore not OTT according
to our definition).
8.2
Hulu should be dissolved in the different operators’ catch up TV/free VOD offers - a
$6B opportunity
Hulu, however, is a different animal: a joint venture between three leading broadcast
networks, Hulu was designed to keep control over premium programming (distribution,
quality and online ad revenues) by creating a legal alternative to YouTube. As such, it
succeeded brilliantly. The website has a fifth of the unique viewers YouTube manages to
gather in a month. A Hulu viewer spends 3h10m/month on the site, compared to 7h30m for
the average YouTube viewer. But Hulu ranks as the first online video network in terms of
number of ads served. Thanks to its primetime TV programming, Hulu gets the advertising
dollars of the major marketers. Hulu proved that there was a market for time-shifted ondemand programming. Moreover, it defused the threat of DVR - a key problem for
broadcasters - by satisfying viewers’ appetite for time-shifting, while preventing users from
fast-forwarding through content. It protected the existing business model.
There is no clear long term strategy for Hulu, a joint venture headed by three different
media moguls with diverging views on the terms according to which they should put content
online. Fox wants to reserve the full-week window-of-availability for pay TV subscribers only.
A more logical approach for pay TV operators would be to design a better catch-up TV service
that would mirror Hulu. Comcast is already licensing TV content from the major broadcasters
for day-after airing availability, but these deals are not comprehensive, and are by no means
standard. As insiders in the TV world with deep pockets, pay TV operators could license the
content of their existing partners, and create a comprehensive catch-up VOD offer for their
subscribers. A recent report by research firm The Diffusion Group came to the same
conclusion, adding that pay TV operators had “fumbled a $6B opportunity” by not
working on ad supported VOD.