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Pay TV innovation forum industry perspectives 2018

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In its third year, the programme seeks to identify how innovation is driving opportunities for content owners and service providers around the world as they face a disrupted market. The findings are based on extensive regional research conducted in Europe, North America, with a special focus on the United States, Asia-Pacific and Latin America.

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Pay TV innovation forum industry perspectives 2018

  1. 1. DTV.NAGRA.COM/PAYTVIF WHITE PAPER – AUGUST 2018 INDUSTRY PERSPECTIVES ON A YEAR OF PAY-TV AND OTT CONVERGENCE
  2. 2. 2 NAGRA, the digital TV division of the Kudelski Group (SIX:KUD.S), provides security and multiscreen user experience solutions for the monetisation of digital media. The company offers content providers and DTV operators worldwide secure, open, integrated platforms and applications over broadcast, broadband and mobile platforms, enabling compelling and personalised viewing experiences. PLEASE VISIT DTV.NAGR A.COM FOR MORE INFORMATION AND FOLLOW US ON T WITTER AT @NAGR AKUDELSKI AND LINKEDIN MTM is an international research and strategy consulting firm, focused on media, technology, communications and advertising. MTM helps its clients to understand and respond to digitally-driven change, providing award- winning consumer research, industry insight and analysis, advice on strategy, growth and business development, and support for organisational change. PLEASE VISIT W W W.MTMLONDON.COM FOR MORE INFORMATION.
  3. 3. 3 Launched in 2016, the Pay-TV Innovation Forum is a global research programme for senior executives, developed by NAGRA and MTM, and designed to explore and catalyse innovation across the pay-TV industry at a time of unprecedented change. This third annual report summarises our findings from this year’s programme. It explores key market developments and progress over the last year, highlights some of the most significant challenges facing pay-TV providers and examines industry perspectives on the most attractive areas of opportunity and innovation priorities for the industry – in Europe, Asia Pacific, Latin America and North America. The findings in this report were developed between March and August 2018 and are based on MTM research and analysis, and extensive engagement with pay-TV, OTT and content industry executives from around the world. We hope that our findings prove useful to the industry. All quotations used in the report come from in-depth interviews and seminars with senior pay-TV industry executives held across four global regions. All sessions were completed under the Chatham House Rule (no attribution without prior permission), with some contributors permitting us to quote them. Any views and opinions expressed in the quotations are those of the interviewees and do not necessarily reflect the views of their companies. MTM and NAGRA would like to thank all those who have contributed to the programme in 2018: Inevitably, this paper provides only a partial view of a highly complex industry: it represents a snapshot of industry perspectives at a particular moment in time. The opinions expressed in this paper are solely those of the authors and reflect MTM’s judgement at the time of writing, based on the available information. These views do not necessarily represent the views of the contributors. Any errors or mistakes are entirely the responsibility of the project team. INTRODUCTION TO THE PAY-TV INNOVATION FORUM Europe, the Middle East and Africa Asia Pacific North America Latin America
  4. 4. 4 As captured in the following sections of this report, the way people consume video content is changing drastically around the world, especially for younger generations and other demographics that appreciate the convenience of anytime, on-demand watching on any screen, transforming the pay-TV landscape for good. While still interested in linear TV, and live sports in particular, a growing segment of TV viewers have also started to associate OTT with both high quality on-demand content and start-over functions, navigating as they wish through series, movies and linear programmes without constraints. The increasing capabilities of mobile devices to deliver video content mean consumers now expect a compelling and consistent experience from their traditional TV service provider across devices, blurring the lines between traditional linear TV and online video. As consumer expectation rises, differentiation based on content exclusivity alone is no longer enough. The user experience (UX) is now one of the key factors that consumers will consider when choosing an operator. From providing easy access to on-demand content, start-over, catch-up TV and cloud DVR, to on-boarding OTT apps and content like Netflix, voice search and serving linear channels to any screen, industry leaders have started to evolve their TV platforms to provide more convenience and better access to content. Yet many are still struggling to get their subscribers to fully embrace the new experience, either because the content (short form, original premium content), the service offering (intuitive on-demand features and multiscreen capabilities) or the core features (user-friendly UI, multi-audio, subtitling) are still insufficient or missing. Innovating to fix these distribution issues is clearly the way forward. Without a doubt, the next generation of content delivery is an all-screen play where user experience, content value protection and data analytics are critical components. Facebook, Twitter, Google and other global and regional silicon giants are trying to capture eye share on smartphone, tablet or laptop mobile devices and extend their presence to the TV. Pay-TV operators cannot afford to let this digital transformation movement pass them by. But if they do invest in smart solutions, the opportunities are considerable. Properly executed, next generation solutions will open up new revenue streams and potentially attract a whole new mobile-first customer base. With the right innovation strategy, investments and partners, pay-TV service providers have the opportunity to be the aggregator of choice on any device, while also providing an exciting next generation big TV screen experience. At NAGRA, we work with 555 service providers worldwide, both large and small, to achieve just that. As a trusted partner with more than 25 years of pay-TV industry experience, we are excited to help service providers and content owners redefine the paid content industry and stay successful in the years to come. Simon Trudelle Sr. Director Product Marketing NAGRA FOREWORD
  5. 5. 5 In the global pay-TV industry, change remains the one constant. It is driven by a number of converging factors, such as evolving consumer demand, rising content costs, falling barriers to entry, and growing competition from a wide range of companies offering attractively-priced and readily-available paid content packages. Despite such challenges, the pay-TV industry remains successful and is valued by millions of customers worldwide. However, 84% of executives surveyed expect competition for paid-video services to increase dramatically over the next five years. Among the many trends and developments impacting the pay-TV market in 2018, our research among industry executives across the globe identified six key themes: + ‘Skinny bundles’ are not replacing lost pay-TV revenues: Virtual MVPDs are gaining popularity with subscribers but may not be economically sustainable + OTT services are growing, but monetisation is still a challenge: In a crowded market, standalone OTT services may struggle + Content piracy remains a significant threat: In many markets, pirate services threaten the long-term sustainability of pay-TV and OTT businesses + Major pay-TV providers are scaling up: Pay-TV providers and networks are consolidating to compete in the new environment + Smaller pay-TV providers turn to Android: Operators looking to optimise costs are turning to Android as their next-generation TV platform + Competition for content rights is intensifying: As pay-TV providers battle for viewers’ attention, the need to acquire the best content has grown in importance. Pay-TV providers must continue to evolve and change, as they adapt to the challenges and opportunities in the new rapidly converging ‘post-OTT’ landscape that encompasses a variety of paid-for video offerings such as pay-TV services provided by telcos, a range of large-scale and small-scale standalone OTT subscription and transactional services, as well as content owner direct-to-consumer services. To do that, the pay-TV industry is rethinking the way it addresses its customers, becoming more diverse in its business models and embracing innovation. Indeed, a growing number of service providers are embarking on the next stage of innovation, which requires a carefully orchestrated approach encompassing improvements to the product and service portfolio, commercial model, technology platform, and operating model. Pay-TV providers remain optimistic they can continue to appeal to paying consumers, but agree that innovation must now be at the core of their strategies. Executives from Asia Pacific remain the most optimistic, followed by their peers in EMEA and North America, while those in Latin America are the least optimistic. Overall, 90% of the executives surveyed believe that to grow, pay-TV providers will have to innovate strongly over the next five years. EXECUTIVE SUMMARY
  6. 6. 6 This year’s research highlights a number of key areas in which pay-TV operators are innovating: Continued investment in next-generation pay-TV services Most pay-TV providers (65%) have improved their portfolios in the last 12 months, primarily focusing on the core pay-TV proposition as they deploy next-generation set-top boxes that support advanced functionalities such as third-party apps, personalised content recommendations, and 4K. However, the propensity to innovate continues to vary, indicating a widening innovation gap between the lead innovators and followers. Despite that, there is an overall increase in the propensity to innovate globally and – as many service providers have rolled out next-generation pay- TV platforms over the last two years – the focus is now shifting to increasing the take-up of these platforms and driving commercial innovation. Offering a more diverse set of multiscreen pay-TV propositions Looking forward, pay-TV executives expect that the most attractive opportunities in the core pay-TV offer will relate to: + Offering a more diverse range of packages and services that cater to the needs of different customer groups: 77% of the executives surveyed believe that pay-TV bundles as we know them today will change substantially over the next five years, with more focus on low-cost services, personalised packages, new thematic content packages, and potentially even freemium models. + Delivering a seamless and converged pay-TV/OTT experience across multiple devices and optimising it to ensure it is user-friendly and personal: 89% of the executives surveyed agree that pay-TV providers will have to innovate to enhance customer experience, delivering improved UI features to support content discovery, personalisation, and seamless multi-platform content offerings. The next wave of aggregation – super-aggregators As the new ‘post-OTT’ pay-TV landscape becomes increasingly fragmented, many industry executives expect to see “the second wave of content re-aggregation”. This model, where companies offer a range of content and services - including pay-TV and a range of OTT services – via a single subscription, is seen as a way of simplifying a fragmented marketplace for consumers, while also offering additional growth opportunities for some of the well-established telcos and pay-TV platforms. Converging pay-TV/OTT offerings The lines between pay-TV and OTT are blurring. Most traditional pay-TV providers are now looking to offer converged pay-TV/OTT services to their customers, as service providers move towards a platform-agnostic model. As a result, the pay-TV market is transitioning into a paid-for-video market. Moving beyond the owned set-top box In many markets, we are seeing the value proposition of pay-TV providers move beyond the core content services traditionally delivered via a set-top box. As we see greater diversification in the products and services offered by providers, many industry executives believe that network infrastructure and billing relationships – rather than proprietary set-top boxes – are now the gateway to the customer. Growing focus on diversification, particularly connectivity Fixed and mobile broadband services are expected to grow in importance in future as providers pursue bundling strategies to deliver better value and more ‘sticky’ offerings, while consumers expect to spend less on paid-for video services. However, pay-TV executives remain cautious about the opportunities to expand significantly into other adjacencies, such as advanced TV advertising, Smart Home, home connectivity and entertainment devices. Despite the recognised importance of diversification, there is no consensus on the best strategies to achieve it.
  7. 7. 7 1: Question: Thinking about developments affecting pay-TV industry revenues in your country through to 2022, how much do you agree or disagree with the following statements? (% of respondents indicating “strongly agree” or “agree”; n = 125) 2: Recode, You can watch Netflix on any screen you want, but you’re probably watching it on TV (2018) What steps do pay-TV providers need to take to ensure they are fit for the future and well-positioned to grow and remain competitive? This year’s research highlights three main innovation priorities for the pay-TV industry: IN THE GLOBAL PAY-TV INDUSTRY, CHANGE REMAINS THE ONE CONSTANT The overriding theme from this year’s Pay-TV Innovation Forum is a familiar one: The global pay-TV industry continues to face a period of change and disruption. This is driven by a number of converging factors, including changing consumer demand, falling barriers to entry and growing competition from a wide range of companies offering attractively-priced and readily-available paid content packages. 1 – THE PAY-T V L ANDSCAPE TODAY – A CONVERGING INDUSTRY 84% OF EXECUTIVES AGREE THAT “COMPETITION IN THE PAY-TV INDUSTRY IS SET TO INCREASE DRAMATICALLY, AS PAY-TV COMPANIES, TELCOS AND OTT SERVICE PROVIDERS COMPETE FOR SUBSCRIBERS”, IN LINE WITH 82% LAST YEAR.1 PAY-TV INNOVATION PRODUCT AND COMMERCIAL INNOVATION Rethink commercial relationships with content partners to support more flexibility and risk-sharing, while continuing to invest in next-generation products OPERATING MODEL INNOVATION Deploy new business processes focussed on operational excellence and cultivate digital, data-driven culture to support innovation TECHNOLOGY PLATFORM INNOVATION Smartly manage investments in the advanced technologies needed to support business transformation and growth Premium OTT video services continue to enjoy rapid growth across all regions in the world. In most markets, the global giants – Netflix and Amazon – are leading the growth in OTT, but we are also seeing a growing number of smaller local or regional services entering the market. For these paid-for video providers, growth is being driven by the proliferation of connected devices creating new distribution opportunities. In many markets, notably those in Asia Pacific and Latin America, viewing of OTT services is driven by the growing adoption of smartphones and the growing access to cheaper broadband. In other markets, however, most viewers are accessing video content on larger screens via streaming set-top boxes, dongles, gaming consoles and Smart TVs. Netflix claimed in March 2018 that globally, 70% of views of its content were now on a TV2 . Exhibit 1: 2018 innovation priorities for the pay-TV industry
  8. 8. 8 Thus, competition for pay-TV providers is not just between the TV and other devices, but is happening on the TV itself as well. In response, the pay-TV industry is rethinking the way it addresses its customers, becoming more diverse in its business models, and embracing innovation. Traditional pay-TV service providers are now operating in a new, rapidly converging ‘post-OTT’ landscape that encompasses a variety of paid-for video offerings such as pay-TV services provided by telcos, a range of large-scale and small-scale standalone OTT subscription and transactional services, as well as content owner direct-to-consumer services. In this new competitive landscape, traditional pay-TV subscriptions are generally plateauing or going down, with growth reported in only a few emerging markets5 . The greatest reported subscriber losses are in the USA, where major Multichannel video programming distributors (MVPDs) continue to face cord-cutting and spin-down to cheaper products, also known as cord-shifting. In other markets, slow-growing pay-TV subscriptions are being overtaken by OTT subscriptions. In the UK, for example, the total number of subscriptions to the UK’s three most popular online streaming services – Netflix, Amazon Prime and Sky’s NOW TV – reached 15.4 million in Q1 20186 , exceeding for the first time the number of pay- TV subscriptions, at 15.1 million. It is worth noting, however, that UK pay-TV subscription revenues – £6.4 billion in 2017 - continue to dwarf subscriptions revenues from OTT services, which reached £895 million in the same period. (Note also that many households have multiple SVOD subscriptions - the number of UK households with at least one SVOD subscription is 11.1m - and that most SVOD subscribers are also pay-TV subscribers.) Industry executives recognise that it will be challenging for traditional pay-TV service providers to grow in an increasingly crowded marketplace. They anticipate a decline in conventional linear ‘big channel bundle’ pay-TV services, with growth instead coming from skinny bundles, personalised packages, subscription OTT services and content owner direct-to-consumer services: “I think growth is very challenging. It is the skinny bundlers and the OTT players who are pushing ahead, and what we are seeing is a change in the make-up of the industry.” 3: Question: Thinking about developments affecting pay-TV industry revenues in your country through to 2023, how much do you agree or disagree with the following statements? (% of respondents indicating “strongly agree” or “agree”; n = 138) 4: Question: Thinking about developments affecting pay-TV industry revenues in your country through to 2023, how much do you agree or disagree with the following statements? (% of respondents indicating “strongly agree” or “agree”; n = 138) 5: Advanced Television, Multiscreen Index shows lowest ever TV sub increase (2018) 6: Ofcom, Media Nations: UK (2018) 7: Question: Which of the following statements best describes your opinion about the growth prospects for the pay-TV industry in your country through to 2023? (n = 138) 66% OF EXECUTIVES AGREE THAT “COMPETITION FROM STANDALONE SUBSCRIPTION OTT SERVICES WILL HAVE A NEGATIVE IMPACT ON THE PAY-TV INDUSTRY, PUSHING DOWN PRICES AND INCREASING CUSTOMER CHURN,” IN LINE WITH 67% LAST YEAR.3 72% OF EXECUTIVES AGREE THAT “THE MAJORITY OF PAY-TV SUBSCRIBERS WILL ALSO SUBSCRIBE TO AT LEAST ONE DIRECT-TO-CONSUMER SERVICE FROM CONTENT OWNERS LIKE DISNEY, HBO, FOX, OR EUROSPORT.”4 69% OF EXECUTIVES THIS YEAR BELIEVE THAT THE PAY-TV INDUSTRY REVENUES WILL GROW MODERATELY / STRONGLY OVER THE NEXT FIVE YEARS, UP FROM 55% LAST YEAR.7
  9. 9. 9 Pay-TV providers are responding to increased competition in a variety of ways: by scaling up or refocusing their content investments; by offering additional telco service bundles; and by developing additional revenue streams, such as advanced advertising and Smart Home solutions. As a result, executives in 2018 are slightly more optimistic than they were in 2017 about the prospects for growth in overall revenues. ‘SKINNY BUNDLES’ ARE NOT REPLACING LOST PAY-TV REVENUES With more competition for viewers’ time and money than ever before, pay-TV businesses in most markets face growing price pressures and accelerating subscriber losses. Amid a shift in the perceived value of pay-TV, consumers continue to subscribe to broadband services, but ‘cut or shift the cord’ in favour of cheaper pay-TV and subscription OTT services. Pay-TV providers concerned about falling demand for their core product, especially from younger customers, are offering cheaper ‘skinny bundles’ - internet-delivered services targeting both cord-nevers (who have never had a pay-TV subscription) and cord-shifters (pay-TV subscribers who spin down to a cheaper alternative). In the last three years, virtual MVPDs in the USA – online pay-TV services such as DirecTV Now and Sling TV – have attracted more than five million subscribers and have become a feature of other markets around the world. But questions remain about the economic viability of vMVPDs, with many services believed to be operating at a loss. Unless pay-TV providers can use vMVPDs as a way of upselling additional services, the current model may prove to be economically unsustainable. Given this, service providers in the USA and elsewhere are shifting their focus to other parts of their portfolios – particularly high-speed broadband – which can offer better growth prospects. While pay-TV remains a key part of service provider portfolios, executives are looking to grow their overall revenues through a more diverse service offering, encompassing different forms of content bundle, apps, broadband, mobile, and other types of services. At the same time, as the value that consumers attribute to content goes down, due to the proliferation of cheaper options, platform owners will likely not be able to maintain their content spend levels. As a result, content owners, who have been enjoying strong demand for their content over the last few years from new buyers in the market, will have to look for innovative ways to work with platform owners and new avenues to monetise their content, such as going direct-to-consumer. OTT SERVICES ARE GROWING BUT MONETISATION IS STILL A CHALLENGE The growth in adoption of premium OTT video continues across the globe, with Netflix still leading the way in many markets. However, the proliferation of paid OTT services now offered by traditional pay-TV providers and the growing availability of OTT services on TVs increasingly blur the distinctions in consumers’ minds between pay-TV and pure OTT. However, executives understand they will have to work hard to achieve that growth, given the continued downward pressure on ARPUs, amid competition from lower-cost alternatives. ONLY 12% OF EXECUTIVES THINK THAT AVERAGE REVENUES PER SUBSCRIBER FOR THE MAJOR PAY-TV SERVICE PROVIDERS WILL GROW STRONGLY FROM CURRENT LEVELS.8 8: Question: Thinking about developments affecting pay-TV industry revenues in your country through to 2023, how much do you agree or disagree with the following statements? (% of respondents indicating “strongly agree” or “agree”; n = 138)
  10. 10. 10 Given these challenges and the lower revenues associated with OTT services, compared to traditional pay-TV, executives are becoming less bullish than before about the prospects for standalone OTT services. Only 43% of respondents in the 2018 survey see them as an attractive opportunity for pay-TV providers, down from 64% in 2017. Some markets are more bullish than others. OTT service providers in Asia appear to be more optimistic. Providers like HOOQ, iflix, and Viu, with hybrid business models, offering ad-funded and premium packages (often with multiple tiers), and a mix of local, regional, and international content, have seen strong uptake across the region. Partnerships with telcos have also been effective in attracting users attracted to OTT subscriptions bundled with telecoms services. However, monetising OTT services is still seen as challenging, particularly in emerging markets across Asia Pacific and Latin America, due to low willingness to pay, widespread piracy, and high costs of localisation and customer acquisition. And while some providers have been very effective at getting users to try their services (often for free or at low-cost), there is still the longer-term challenge of converting such users into paying subscribers. CONTENT PIRACY REMAINS A SIGNIFICANT THREAT Content piracy remains a significant problem for pay-TV providers and content owners, with 47% of respondents in 2018 (broadly in line with 50% in 2017) believing that it will lead to greater pressures on the industry over the next five years and less than a third (31%) believing it is a diminishing problem. As the pay-TV industry evolves its distribution model, so the threat from content piracy is also evolving. The idea of an OTT service as a separate, standalone option is changing, as pay-TV operators increasingly look to aggregate such services alongside their own offerings. Indeed, Netflix’s strategy of developing a wide range of distribution partnerships with telcos, pay-TV providers, streaming device and TV set manufacturers has evolved as the blueprint for others to follow. In many markets, there has been a proliferation in the last 12-18 months of smaller local and regional OTT services. However, many industry executives believe that the growth in the number of OTT services is not sustainable in the medium- to long-term and expect to see consolidation. Services that fail to engage audiences or which lack a distinct value proposition are unlikely to survive. The US market, for example, has seen several OTT services shuttered in the last 12 months, most notably Seeso (backed by Comcast and NBCUniversal) in August 2017 and Fullscreen (backed by AT&T) in January 2018. Alongside these high-profile closures, many smaller OTT services have also struggled to gain traction. “Idon’tbelievemanynicheSVODservicesareheretostay–theylaunch,gettoacertainnumberofsubscribersand then stagnate to either disappear or merge with another service. The market is going to straighten itself out, and there is going to be only a few brands that will stay around.” Philip Mordecai, Director, Curzon Digital Ventures “The whole pirate ‘industry’ has grown up and become well-organised and more commercial, with a lot of change happening behind the scenes. For example, various aggregated illicit streaming services are retailing access to thousandsofchannels,whichdependonwell-establishedB2B-stylemarketplacesforsourcestreams.Othershave become really good at marketing themselves to consumers, leveraging social media platforms.” Kieron Edwards, Group Technical Director, Content Protection, Sky “The term ‘OTT’ is increasingly redundant. The emerging, future version of pay-TV services – which is cloud-based and reliant on IP delivery – looks like an OTT service.” Michael Fleshman, CTO, HOOQ
  11. 11. 11 The extent of piracy is hard to gauge for a number of well-established reasons. In this study, we focus more specifically on commercial pay-TV piracy, which encompasses signal piracy (e.g. cloned cards, control word sharing or pirate set-top box solutions) and streaming piracy (e.g. pirate IPTV set-top boxes and access to illicit streaming devices). This type of content piracy is arguably easier to estimate as it often occurs at the household level and substitutes a legitimate pay-TV subscription. To produce global estimates, we asked pay-TV industry executives to gauge the proportion of TV households in their countries that they believe engage in these forms of pay-TV piracy. Pay-TV piracy is believed to be most widespread in Asia Pacific and Latin America, with 17% and 16% of TV households, respectively, estimated to be using illegal pay-TV services9 , compared to 14% and 16%, respectively, last year. These regions are followed by EMEA and North America, where 12% and 11%% of TV households, respectively, are believed to be using illegal pay-TV services, compared to 7% and 9%, respectively, last year. These shifts in industry sentiment confirm the growing scale of the issue. “Asconsumersstartgettingaccesstofasterandcheaperbroadband,theystartmigratingtoOTTservices.However, with the growth in broadband, we also see a big increase in IP piracy, which is a more significant concern. People havelessmoneythantenyearsago,andpiracystartstobecomeanattractivealternative.Moreover,pirateservices are becoming more professional and better in terms of both quality and user experience, so we need to respond.” Marco Dyodi Takahashi, CMO, Claro Brasil Globally, online streaming is seen as the most significant type of content piracy, with executives in every region concerned about the threat it represents to their business. 57% of executives see it as ‘a challenge’ or a ‘major challenge’, though this is a notable improvement from 2017’s 79%. Peer-to-peer downloads are still seen as a significant threat in all regions, too, although similarly, the proportion of executives identifying this as a threat has gone down from 57% in 2017 to 43% to 2018. Recording on screen, in contrast, is seen as a growing threat, especially in Latin America and Asia Pacific. Exhibit 2: Online streaming, IPTV piracy, and P2P downloads seen as the most important forms of piracy10 % of respondents saying “a challenge” or “major challenge” 57% 46% 43% 29% 28% 26% 79% 45% 57% 30% 19% 43% ONLINE STREAMING IPTV PIRACY VIA PIRATE STBS AND ILLICIT STREAMING DEVICES PEER-TO-PEER DOWNLOADS PIRATED DVDS / USB STORAGE RECORDING ON SCREEN SIGNAL PIRACY 2018 2017 % of respondents saying “a challenge” or “major challenge” 57% 46% 43% 29% 28% 26% 79% 45% 57% 30% 19% 43% ONLINE STREAMING IPTV PIRACY VIA PIRATE STBS AND ILLICIT STREAMING DEVICES PEER-TO-PEER DOWNLOADS PIRATED DVDS / USB STORAGE RECORDING ON SCREEN SIGNAL PIRACY 2018 2017 9: Question: As a rough estimate, what proportion of all TV households in your country do you think use illegal TV services, either via signal piracy or hardware piracy? (n = 138) 10:Question: In your opinion, how big a challenge are the following types of content piracy to pay-TV businesses in your country? (% saying “somewhat a challenge” or “major challenge”; n = 138)
  12. 12. 12 IPTV piracy via illicit streaming devices, such as KODI boxes, is a significant threat to pay-TV providers in those markets in Asia Pacific and Latin America where piracy-enabling devices are readily available at low cost in retail stores. 60% and 53% of executives in Latin America and Asia Pacific, respectively, describe IPTV piracy as either ‘a challenge’ or a ‘major challenge’. “Piracy in our region, in some cases, is a bigger driver of cord-cutting than OTT services. Pirate organisations, some of which even have brick and mortar shops, are among the largest TV operators in certain countries in the region.” Luciano Ramos, VP Technology & Product, Liberty Latin America In Asia Pacific and Latin America, the take-up of pirate services in many markets is seen as a genuine threat to the long-term sustainability of pay-TV and OTT businesses: “Piracy is a huge problem in the [APAC] region – it reduces willingness to pay and creates an expectation that content should be free.” In Europe, piracy is a major issue in some Southern and Eastern European markets, where industry executives describe it as “endemic”: “In Eastern Europe, consumers often equate pirated content to free… once that habit settles in, it’s very difficult to convince anyone to pay for the same content.” When it comes to tackling piracy, third-party anti-piracy solutions, such as CAS and DRM, are considered effective by 77% of executives, while only 47% consider their country’s regulatory and legal framework effective. However, most believe that pay-TV providers and content owners need to take a multi-pronged approach to fighting content piracy. The most effective strategies and approaches should combine third-party anti-piracy solutions, such as CAS and DRM, third-party anti-piracy services that help monitor, track, and take down illegal providers, and pan-industry cooperation initiatives. Exhibit 3: Third-party solutions and services as well as pan-industry initiatives seen as the most effective anti-piracy strategies11 77% 69% 63% 50% 47% USE THIRD-PARTY ANTI-PIRACY SOLUTIONS (E.G. CAS AND DRM) USE THIRD-PARTY ANTI-PIRACY SERVICES (E.G. MONITORING, TRACKING AND TAKE DOWN) TAKE PART IN PAN-INDUSTRY COOPERATION INITIATIVES RUN OWN PIRATED CONTENT MONITORING SERVICES RELY ON REGULATORY AND LEGAL FRAMEWORK 11: Question: In your opinion, what are the most effective anti-piracy strategies and approaches? % of respondents saying “somewhat effective” and “very effective”; n = 138)
  13. 13. 13 In a positive development, the industry is ramping up its collective efforts to tackle the challenge of piracy. A growing number of co-operation initiatives are being set up in the ongoing fight against pay-TV piracy, with significant new coalitions launched during 2017 and 2018: + In June 2017 a group of 30 entertainment companies, including Netflix, Amazon, the Hollywood studios and many of the largest regional broadcasters and pay-TV platforms in Europe and Latin America - formed a new worldwide coalition aimed at fighting piracy, the Alliance for Creativity and Entertainment (ACE)12 . + In October 2017, AVIA (formerly CASBAA), the trade association for the video industry in Asia Pacific, formed the Coalition Against Piracy (CAP) to lead a pan-industry effort against illicit streaming devices in the region13 . + In April 2018 the MPAA, the trade body of the Hollywood studios, joined with the Content Delivery and Security Association (CDSA) to launch the Trusted Partner Network aimed at reducing the risk of TV shows and movies leaking to piracy networks before their release14 . + These new initiatives are in addition to existing pan-regional industry anti-piracy bodies such as Alianza in Latin America, the Audiovisual Anti-Piracy Alliance (Europe), the International Broadcaster Coalition Against Piracy (IBCAP), and Nordic Content Protection (the Nordics). There is an emerging consensus that the industry needs to do more collectively to combat piracy. To that end, it is developing new approaches to monitor, track and stop the distribution of illegal content, and increasing investment to support effective anti-piracy initiatives. The approaches taken by industry bodies tend to vary, but they are typically focused on improving pan-industry coordination, implementing a range of effective technological solutions, lobbying to develop the legal framework and enforcement strategies, and educating consumers. At the same time, pay-TV executives believe that the industry can do more to offer affordable and user-friendly legitimate video services that appeal to consumers who currently choose pirate services: “We need to take a ‘carrot and stick’ approach to fighting piracy – ensuring that we have flourishing legitimate services that delight customers and limiting pirate services as much as possible.” LARGE PAY-TV PROVIDERS SCALE UP AS THE MARKET CONSOLIDATES… To face the challenges ahead, pay-TV and content businesses are not just diversifying their businesses; they are scaling up through a new wave of consolidation, partnership and vertical integration, notably in the US market, which is by some distance the largest in the world. In the USA, companies providing internet access and those providing content are increasingly joining forces in the expectation that such an integration can strengthen their ability to grow their businesses in the future. The deal between AT&T and Time Warner that concluded in June 2018 is unlikely to be the last tie-up between a network provider and a content provider. It remains to be seen how this will play out, as the players circle each other, but while an expanded pay-TV provider will be bullish about its ability to buy rights more cost-effectively across multiple territories, it might be negotiating with a stronger content producer after another round of mergers and acquisitions. “Now we are seeing more partnership-like relationships, particularly in relation to piracy as it is probably the biggest common enemy for both sides. With initiatives like the Coalition Against Piracy we now have platforms and content providers all sitting around the same table and working with the government and regulatory authorities to address piracy. This has never happened before.” Anoop Manghat, Director Commercial Strategy and Sales Planning, Fox International Channels 12: Variety, Entertainment Giants Forge New Alliance to Fight Piracy, Sue Offenders (2017) 13: CASBAA, Southeast Asia’s New Coalition Against Piracy (CAP) Unveiled at CASBAA Convention 2017 (2017) 14: Variety, MPAA Leads Partner-Vetting Initiative to Cut Risk of Movie, TV Show Leaks and Hacks (2018)
  14. 14. 14 Structural changes in the USA have implications for the global pay-TV market, too. Any restructuring or rethinking of the US pay-TV market will impact the global pay-TV industry, as the major US studio broadcasters have content and/or channel operations in almost every pay-TV market. Moreover, given the challenges in the home market, big US pay-TV companies – including platforms and content providers - are investing more in international opportunities. “Given the challenges that the traditional US players face, I think international expansion is a must-do for them because of the domestic challenges, while there is still a lot of room for international growth. There is no international streamer for sports, games, or non-scripted content, so I think we are going to see some very interestingmovesinthecomingmonthsandyears.” Wim Ponnet, Chief Strategy and Commercial Officer, Endemol Shine Group “Advancedpay-TVoperators–likeSkyorLibertyGlobal–arespendinghundredsofmillionsdevelopingproprietary set-top boxes. The only way they can do this is because of their scale. On the other hand, we recognise that there’s a lackofdigitalagilityinproprietaryDTHset-topboxes.Asaresult,moreoperatorsaremovingtoAndroidplatforms, which offer more flexibility, agility as well as wider opportunities to monetise new features and aggregating other OTTapps.Ofcourse,wehavetobeverytargetedinthewaywerollouttheseboxessothattheyarenotreplacingthe premiumservicesthatourexistingcustomerssubscribeto.” Swee Lin Liew, Group COO at Astro Malaysia Holdings … WHILE SMALLER PAY-TV PLAYERS TURN TO ANDROID If the big US-based players are getting bigger, smaller pay-TV platforms, especially in emerging markets with lower ARPUs, may struggle to compete, especially in terms of investment in the platform itself. Pay-TV has traditionally been a national business, with players typically active only in their home territory. However, new OTT competitors such as Netflix are global in their outlook. As such, they are able to invest heavily in both their own distribution platform and original content knowing that they can offer both to subscribers in more than 200 markets worldwide. Very few national pay-TV providers have the scale – in terms of subscriber numbers and revenue – to compete. That helps to explain the increased importance and take-up of Android TV, as an increasing number of operators in Asia Pacific commit to launching an Android-based set-top box. The operating system helps service providers reduce the costs of rolling out pay-TV services, opens up platforms to a wide range of partners and developers, offers access to an established app ecosystem, and supports a variety of advanced features and functionalities such as voice control, which is powered by Google Assistant. However, larger-scale providers are less willing to adopt Android due to concerns about giving up control of their set-top box environments, allowing Google to have more influence over their pay-TV businesses, and Google’s increasingly important role in the TV ad market. But for smaller pay-TV providers without the scale or resources to develop a proprietary platform, Android is an increasingly popular solution.
  15. 15. 15 COMPETITION FOR CONTENT RIGHTS IS INTENSIFYING As pay-TV providers compete with new market entrants for viewers’ time and attention, the need to acquire the best content has grown in importance. 83% OF EXECUTIVES NOW AGREE THAT “COMPETITION FOR PREMIUM FILM, TV AND SPORTS CONTENT WILL INTENSIFY DRAMATICALLY, WITH A GREATER NUMBER OF COMPA- NIES SEEKING TO ACQUIRE THE MOST ATTRACTIVE RIGHTS”, UP FROM 71% LAST YEAR.15 The impact of greater competition in the rights market has been increased investment in content production by some pay-TV providers, who are keen to ensure they retain the ability to offer exclusive content to their subscribers. High-end drama has been especially sought after as a differentiator and a lure to attract paying audiences. Another impact of Netflix and Amazon’s entry into the market, however, has been the upward pressure on production budgets, making it difficult for all but the largest players to compete for the best creative talent. In many markets, local content still dominates viewing and executives question whether US-based global players, even as they increase their investment in non-English language content, can compete with local service providers. “While content is increasingly becoming global, local content is still incredibly important as a differentiator for both pay-TV and OTT providers.” Some content providers are bullish about their prospects in what they consider to be a sellers’ market: “Technology-wise,itisfairlyeasytolaunchanOTTplatformandreachalotofusers.Todoitatscaleandsuccessfully is by no means simple, but ultimately, the content and access are going to make the difference here. There’s never beenabettertimetobeanintellectualpropertyowneroracreativeenginethannow.” Wim Ponnet, Chief Strategy Officer, Endemol Shine Group However, pay-TV operators facing declining revenues have a different view of the market and the impact of competition on the value of rights. 2018 has already seen several instances of pay-TV platforms removing channels from their services as part of a rights negotiation, as the dynamic between buyers and sellers in the pay-TV industry continues to evolve on both sides. Buyers will be focused more than ever on only acquiring content that can deliver good return on investment – rather than mandatory channel bundles, for example – and will expect to have access to rights across multiple platforms, in line with consumer expectations. Sports rights owners have experienced strong demand and dramatic price rises in recent years, and as the 2018 FIFA World Cup demonstrated, live sports can deliver huge and highly engaged audiences, even in territories where viewing has now become fragmented across multiple services and devices. However, traditional pay-TV providers remain the biggest buyers of sports rights, while the deals done by the new buyers – Amazon, Facebook, and Twitter - have so far been relatively small scale. As far as sports rights are concerned, the threat to traditional pay-TV providers from new entrants has yet to materialise fully. The last round of the English Premier League rights auction, for example, delivered lower revenues than expected, with the new digital disrupters not willing or able at this stage to compete on a per-territory basis with the incumbents. However, industry executives still believe that competition for rights will continue to increase. 15: Question: Thinking about developments affecting pay-TV industry revenues in your country through to 2023, how much do you agree or disagree with the following statements? (% of respondents indicating “strongly agree” or “agree”; n = 138)
  16. 16. 16 Innovation as a term is widely overused and often misunderstood. It can be defined in various ways and encompass multiple elements. However, for this report, our focus is on the creation of viable new customer-facing products and services that can deliver value to the pay-TV enterprise. In this sense, innovations may be new to the market or industry, but they may also be evolutionary, based on previous advances and existing offerings. Innovation may entail rolling out new products, business models, or new forms of customer engagement. It may involve invention, but successful innovation requires other elements too, such as anticipating, testing and exploring demand, the development of viable commercial propositions that can deliver a sustainable return on investment, and the ability to partner effectively16 . IS INNOVATION A STRATEGIC PRIORITY FOR PAY-TV PROVIDERS? 2 – THE STATE OF PAY-T V INNOVATION TODAY With the definition mentioned above in mind, it is no surprise that innovation is highly important and increasingly more urgent for the pay-TV industry. 77% of executives consider it to be one of the top three strategic priorities for the industry (See Exhibit 4), in line with 74% last year. More importantly, 74% of executives think that innovation has become more important to the pay-TV industry over the last 12 months, with an additional 24% saying that it remained as important as it was 12 months ago. 90% OF EXECUTIVES AGREE THAT “TO GROW, PAY-TV SERVICE PROVIDERS WILL HAVE TO INNOVATE STRONGLY OVER THE NEXT FIVE YEARS,” UP FROM 85% LAST YEAR.17 Exhibit 4: The majority of pay-TV executives see innovation as one of the top three strategic priorities18, 19 Where does innovation rank among the pay-TV industry’s top strategic priorities? 11% 66% 21% 2% THE NUMBER ONE PRIORITY A TOP THREE PRIORITY IMPORTANT, BUT NOT A TOP PRIORITY NOT IMPORTANT 77% SEE INNOVATION AS ONE OF THE TOP PRIORITIES FOR THE INDUSTRY 16: Larry Keeley, Ten Types of Innovation (2013) and Alexander Osterwalder, Business Model Generation (2010) 17: Question: To what extent do you agree or disagree with the following statements about innovation and the pay-TV industry? (% of respondents indicating “strongly agree” or “agree”; n = 138) 18: Question: Where does innovation rank among the pay-TV industry’s top strategic priorities? (n = 138) 19: Detailed descriptions of each of the areas are provided in the Appendix
  17. 17. 17 Although perspectives on the importance of innovation still vary by market and region, there is no longer a significant difference in views between service providers from advanced markets and those from less developed markets. Previously, service providers operating in wealthy, mature, and highly competitive pay-TV markets clearly had stronger incentives to innovate compared to those in less developed markets, where consumers have limited purchasing power and broadband and pay-TV penetration is low. Today, however, service providers in less developed markets, such as India and Indonesia, face a much more challenging competitive landscape, with rapid growth of broadband, proliferation of cheap, and sometimes free, pay-TV and OTT services, and high levels of piracy. Innovation has become a higher priority in such cases. There is a strong consensus that the pay-TV industry faces a more competitive future as consumers increasingly have a greater choice of content services, often delivered at lower prices. New entrants are taking advantage of falling barriers to entry, moreover, and content providers are looking for new ways to monetise their intellectual property. This creates a challenge for pay-TV providers who need to remain profitable while migrating to next-generation technology platforms and new products and services. “I believe we need to take a 360-degree view of innovation. In addition to being more agile and flexible on the technology side through various software-based and IP solutions, we need to consider the whole user experience and needs.” Bee Lian Ong, VP of TV Engineering, StarHub A growing number of pay-TV providers are embarking on the next stage of innovation, which requires a carefully orchestrated approach encompassing innovations in and improvements to the product and service portfolio, commercial model, technology platform, and operating model. This represents an important evolution of how pay-TV providers develop their businesses. Three to five years ago, most providers tended to focus primarily on improving their product and service portfolios and upgrading technology platforms to enable the delivery of these new products and services. However, today we are seeing more and more pay-TV providers taking a holistic approach to transforming their businesses by adjusting the commercial model and rethinking business operations to deliver valuable products and services to their customers in the most efficient and effective way.
  18. 18. 18 HOW HAVE PAY-TV PORTFOLIOS DEVELOPED OVER THE LAST YEAR? Pay-TV service providers are at varying stages of developing and diversifying their product portfolios, ranging from highly advanced portfolios, mainly offered by major pay-TV operators and telcos in North America (AT&T / DIRECTV, Comcast Cable, DISH Network, Charter Communications, Cox, and Altice USA), Europe (Sky, Vodafone, and Canal+), and Asia Pacific (StarHub and SK Broadband); down to the very basic service offerings, usually offered by small-scale local pay-TV operators and, in some cases, major pay-TV operators in emerging markets, such as India. However, the fact that a service provider has deployed an advanced product or service does not necessarily imply that their entire customer base has access to it or is using it. Service providers tend to have diverse customer bases, using a range of low-, mid- and high-end set-top boxes. For example, Sky Q, Sky’s next-generation set-top box, has so far been rolled out to 2.5 million homes across the UK, Ireland and Italy, or around 14% of their retail customer base20 . Exhibit 5: Pay-TV service providers innovate in the following product and service areas B2B services Smart homeTV Everywhere Standalone OTT 3rd party apps Advanced set top boxes Video on demand 7. Home entertainment devices1. Content pricing and packaging 4. Standalone OTT 8. Advertising and data services2. User interface and user experience 5. Multiscreen TV Everywhere 3. Content proposition 6. App-based pay-TV Smart home 9. Internet of Things / Smart Home Pay-TV Telecommunication services Platform services Focus of the programme CORE PAY-TV OFFER: TV PLATFORM AND ONLINE TV SERVICES ADJACENCIES Content production, aggregation and distribution Corporate venturing 1) The service provider-managed end-to- end TV platform for distributing video content, typically via high-cost networks or satellite platforms connected to dedicated CPE 2) Online services that distribute video content via any fixed or mobile broadband connection to a variety of consumer devices, including PCs, smartphones, and connected TV sets 3) Adjacencies – products and services in ‘nearby’ categories that leverage existing pay-TV service providers’ assets, capabilities, and relationships to deliver profitable growth 20:Source: Sky, Results for the nine months ended 31 March 2018 (2018) WHICH ARE THE KEY AREAS OF PAY-TV PRODUCT AND SERVICE INNOVATION? 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 innovation19 : TV platform and Online TV services (which together comprise the core pay-TV offer), and Adjacencies (See Exhibit 5).
  19. 19. 19 Most of the innovation leaders from 2017 have maintained their leading positions in the top 10 (see Exhibit 6), but three operators – Sky in Italy and Ireland, Canal+ in France and Vodafone in Portugal – have entered the leader board by showing significant improvements in their offerings. Pay-TV service providers around the world are investing to strengthen and grow their product and service portfolios, with almost two-thirds (65%) improving their offerings in the last 12 months (see Exhibit 7). Exhibit 6: The most advanced portfolios tend to be offered by major pay-TV operators and telcos21 Exhibit 7: Most pay-TV providers continue to invest in new products and services22 However, the propensity to innovate continues to vary significantly by type of provider, and we continue to observe a widening innovation gap between the lead innovators and followers. The top third of the most innovative pay-TV providers, as measured by the innovation score, continue to be much more likely to innovate, with 84% of them improving their propositions over the last 12 months. In contrast, only 40% of the bottom third have improved their propositions over the same period (see Exhibit 8). Nonetheless, we are seeing an overall increase in the propensity to innovate globally, with more providers upgrading their portfolios this year compared to last year (65% and 61%, respectively). PORTFOLIO SCORE (2018) PAY-TV SERVICE PROVIDERS LEAST ADVANCED MOST ADVANCED Most advanced portfolios Rising stars Change: % of providers Positive 3% 65% No change 32% PORTFOLIO SCORE (2018) PAY-TV SERVICE PROVIDERS LEAST ADVANCED MOST ADVANCED Negative 21: Pay-TV portfolio rankings by innovation score (n = 228); For methodology, see the Appendix 22:Pay-TV portfolio rankings by innovation score (n = 226, on a like-for-like basis)
  20. 20. 20 Areas of focus vary as well: Pay-TV providers in the middle ground and laggard categories are usually playing catch up with the innovation leaders by focusing their investment on tried-and-tested additions to their portfolios, such as introducing 4K video quality to their set-top box services or launching new online TV services. Innovators, on the other hand, are much more focused on transforming their core pay-TV propositions – by, for example, introducing new ways to package and distribute their services – and identifying brand new and complementary revenue streams. Their strategies tend to vary from provider to provider but typically involve significantly more experimentation. Exhibit 9: Areas of focus for innovation vary significantly between the innovators and other providers Exhibit 8: Top innovators in 2017 were the most likely to improve their portfolios over the last year23 … Innovators (top 33%) Middle ground (middle 33%) Laggards (bottom 33%) 84% 69% 40% % OF OPERATORS IMPROVING THEIR OFFERING IN THE LAST YEAR Notes: Proportion of providers improving their offerings – i.e. introducing new products, features or functionalities – during the 2017/18 period (n = 226, change YoY, on a like-for-like basis) 80% 67% 37% 2018 2017 … Innovators (top 33%) Middle ground (middle 33%) Laggards (bottom 33%) 84% 69% 40% % OF OPERATORS IMPROVING THEIR OFFERING IN THE LAST YEAR Notes: Proportion of providers improving their offerings – i.e. introducing new products, features or functionalities – during the 2017/18 period (n = 226, change YoY, on a like-for-like basis) 80% 67% 37% 2018 2017 Standalone OTT Multiscreen TV Everywhere Content pricing and packaging User interface and user experience Content proposition Innovators (top 33%) Middle ground (middle 33%) Laggards (bottom 33%) Advertising and data Internet of Things / Smart Home Home and entertainment devices Standalone OTT Multiscreen TV Everywhere App-based pay-TV Content pricing and packaging User interface and user experience Content proposition Content pricing and packaging User interface and user experience Content proposition Multiscreen TV Everywhere Other new products and services Internet of Things / Smart Home Key: Products and services offered Focus areas … … TV PLATFORM ONLINE TV SERVICES ADJACENCIES 23:Proportion of providers improving their offerings – i.e. introducing new products, features or functionalities – during the 2016/17 period (n = 220, change YoY, on a like-for-like basis)
  21. 21. 21 Adjacencies, such as Smart Home solutions and advertising and data services, continue to be offered by a limited number of providers, mostly the innovation leaders. Leaving adjacency diversification aside, a large proportion of pay-TV providers have now deployed advanced core pay-TV propositions that are, in many regards, similar to those offered by innovation leaders. As a result, their key priority for the next few years is to increase the take-up and usage of these new features and services. As providers roll out their next-generation pay-TV propositions to more customers, the introduction of new features and functionalities will also become much simpler and faster as many of them will simply require a software rather than a hardware upgrade. With 32 of the pay-TV providers covered in the research programme introducing new set-top boxes, advanced functionality remains a key area of innovation, mainly through the addition of content recommendations, 4K video quality, support for third-party applications such as Netflix and YouTube, and voice control. Exhibit 10: Adjacency diversification remains limited to innovation leaders24 Exhibit 11: Proportion of service providers offering adjacent services (2016-18, %)25 The core pay-TV proposition, including the TV platform and online TV services, remains the main focus of investment among operators globally, with 55% and 27%, respectively, showing improvements in these two areas over the last 12 months. Adjacency diversification remains less common, with only 11% of operators showing improvements in this area (see Exhibit 10). 24:Pay-TV portfolio rankings by innovation score (n = 228) 25:Base: n = 213, on a like-for-like basis Basic pay-TV proposition Innovation in the core pay-TV offer as well adjacencies Well-developed on-platform and online propositions TV platform Online services Adjacencies PORTFOLIO SCORE (2018) PAY-TV SERVICE PROVIDERS LEAST ADVANCED MOST ADVANCED Innovation in the core pay-TV offer and adjacencies 16% 14% 9% 4% 21% 15% 11% 8% 26% 18% 14% 10% 1% Adjacent services Home security Home automation Advertising and data services Home entertainment devices 2016 2017 2018 Launches: 16% 14% 9% 4% 21% 15% 11% 8% 26% 18% 14% 10% 1% Adjacent services Home security Home automation Advertising and data services Home entertainment devices 2016 2017 2018 Launches: 16% 14% 9% 4% 21% 15% 11% 8% 26% 18% 14% 10% 1% Adjacent services Home security Home automation Advertising and data services Home entertainment devices 2016 2017 2018 Launches: 16% 14% 9% 4% 21% 15% 11% 8% 26% 18% 14% 10% 1% Adjacent services Home security Home automation Advertising and data services Home entertainment devices 2016 2017 2018 Launches:
  22. 22. 22 Exhibit 12: Proportion of service providers offering features on their top of the range STB (2016-18, %)26 Exhibit 13: Proportion of service providers offering online TV services (2016-18, %)26 The further roll-out of online TV services is slowing down, with no significant change in any of the three categories, namely, multiscreen TV Everywhere, standalone OTT, and app-based pay-TV services (see Exhibit 13). Major online TV service launches over the 2017-2018 period include Vodafone TV in New Zealand and TELEBEE from SkyLife in South Korea for standalone OTT services, and Spectrum TV Stream in the USA for app-based pay- TV services. At the same time, a few service providers, such as T-Mobile in the Netherlands and Orange in Poland, have closed down their standalone SVOD services. HOW DOES THE STATE OF PAY-TV INNOVATION VARY BY REGION? Major pay-TV providers in North America are notably ahead of their peers in other regions in offering the most advanced and diversified product and service portfolios. This is due to a number of factors, including high purchasing power and consumer appetite for state-of-the-art in-home services, high pay-TV and broadband penetration, and high levels of disruption, which drives innovation and portfolio diversification. In general, pay-TV providers in EMEA and Asia Pacific are not as advanced in terms of innovation as their North American peers. However, innovation capabilities vary substantially by territory. For example, 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 Central and Eastern Europe. At the lower end of the spectrum, Latin American pay-TV providers, on average, lag behind peers in other regions due to low purchasing power and high levels of income inequality, poor fixed-broadband infrastructure, and easy access to high-quality content from free-to-air broadcasters and illegal pirated services. Pay-TV providers in EMEA and North America, 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 69% and 68%, respectively, 32 OF 230 PAY-TV SERVICE PROVIDERS COVERED IN THE PROGRAMME LAUNCHED NEW STBS OVER THE LAST YEAR 87% 84% 55% 36% 35% 12% 5% 85% 82% 45% 21% 23% 7% 3% 81% 79% 39% 19% 14% 6% 3% IP connectivity PVR Third-party apps Recommendations 4K video Voice control Touch remote 2018 2017 2016 82% 28% 1% 84% 32% 4% 86% 33% 6% TV Everywhere Standalone OTT App-based pay-TV 2016 2017 2018 26: Base: n = 213, on a like-for-like basis
  23. 23. 23 upgrading their product and service portfolios over the last year. However, fewer pay-TV providers in EMEA and North America improved their portfolios this year, with the reverse happening in Asia Pacific and Latin America (See Exhibit 14). This development could potentially be pointing to a shift as pay-TV providers in Asia Pacific and Latin America attempt to catch up with their more advanced peers in North America and EMEA. Exhibit 14: Pay-TV providers in EMEA and North America were more likely to introduce new features27 Exhibit 15: Proportion of service providers offering features on their top of the range STB (%)28 Pay-TV providers in EMEA continue to invest in improving the consumer experience, mainly focusing on supporting 4K video quality and adding content recommendations, third-party apps, and voice control to their core pay-TV propositions. Their North American peers have invested in similar core pay-TV offer areas, while also developing app-based pay-TV services. Providers in Asia-Pacific are shifting their investment focus away from more basic functionalities, such as IP-connectivity and recording capabilities, to supporting content recommendations, third-party apps and 4K on their set-top boxes, while also investing in online video services. In contrast, service providers in Latin America are still mostly focused on rolling out more basic core pay-TV functionalities, such as IP-connectivity, TV Everywhere, and PVR. However, a growing number of them are also now launching next-generation set-top boxes that support advanced features, such as 4K video quality and content recommendations. THE CORE PAY-TV OFFER 86% 83% 100% 100%94% 93% 71% 62% 85% 85% IP connectivity PVR Global North America EMEA Asia Pacific Latin America +3% 0% +3% 0% +8% +2% 0% +1% +2% +5% Nearly all major pay-TV service providers in North America and EMEA have deployed IP-connectivity and personal video recorder (PVR) functionality on their top-of- the-range set-top boxes, with cloud PVR also increasingly offered in the region. Pay-TV providers in Latin America are the most active in introducing IP-connectivity and PVR functionality, while their peers in Asia Pacific have slowed down their adoption of these functionalities compared to last year (see Exhibit 15). 27:Proportion of providers improving their offerings – i.e. introducing new products, features or functionalities – during the 2016/17 period (n = 220, change YoY, on a like-for-like basis) 28:Base: Major pay-TV service providers in Asia Pacific, EMEA, Latin America, and North America (n = 230); YoY change on a like-for-like basis indicated at the bottom of the bars North AmericaEMEA Asia Pacific 69% 68% 63% Latin America 56% Focus 4K, recommendations, third-party apps, voice Third-party apps, app- based pay-TV, recommendations, voice Recommendations, third-party apps, 4K, standalone OTT Recommendations, IP connectivity, 4K, TV Everywhere, PVR 2018 2017 72% 81% 50% 45%
  24. 24. 24 Exhibit 16: Proportion of service providers offering features on their top of the range STB (%) The availability of more advanced features – such as 4K video, content recommendations, and voice control – is on the rise, with service providers in EMEA and Asia Pacific being the most active in introducing them. In most cases, pay-TV service providers introduce these new advanced features as they roll out their next-generation set-top boxes. Third-party applications on set-top boxes have become much more widespread over the last year – as pay-TV platforms become more open to new forms of collaboration with content partners – and are now offered by 55% of providers globally, up from 45% last year. YouTube and Netflix are the most common partners for third-party set- top box applications, offered by 32% and 27% of providers, respectively. Third-party applications are now almost ubiquitous in North America and EMEA, provided by 95% (up from 79%), and 60% (up from 51%) of service providers, respectively. On the other hand, service providers in Latin America are less willing and slower to on-board third- party applications, with only 26% offering them, up from 23% last year. Among the online TV services offered by pay-TV providers, multiscreen TV Everywhere services remain by far the most widely deployed globally, with 86% of providers offering them to their customers (see Exhibit 17). However, there were very few new launches over the last year, apart from in Latin America, where 5% of providers launched TV Everywhere services (e.g. Entel in Chile launched its EntelTV app for smartphones). … Source: MTM analysis of pay-TV service provider portfolios in Asia Pacific, EMEA, Latin America, and North America (n = 233, 42 countries) 55% 35% 33% 11% 4% 95% 58% 32% 21% 0% 60% 41% 43% 13% 5% 52% 25% 34% 12% 8% 26% 26% 8% 0% 0% Third-party apps Recommendations 4K video Voice control Touch remote Global North America EMEA Asia Pacific Latin America +10% +16% +9% +14% +3% +14% +5% +16% +17% +10% +12% 0% +18% +8% +5% +4% +5% +8% +2% Source: MTM analysis of pay-TV service provider portfolios in Asia Pacific, EMEA, Latin America, and North America (n = 233, 42 countries) 55% 35% 33% 11% 95% 58% 32% 21% 60% 41% 43% 13% 52% 25% 34% 12% 26% 26% 8% 0% Third-party apps Recommendations 4K video Voice control Global North America EMEA Asia Pacific Latin America +10% +16% +9% +14% +3% +14% +5% +16% +17% +10% +12% 0% +18% +8% +5% +4% +5% +8% +2% Exhibit 17: Proportion of service providers offering online TV services (%)29 … Source: MTM analysis of pay-TV service provider portfolios in Asia Pacific, EMEA, Latin America, and North America (n = 233, 42 countries) 86% 32% 5% 100% 32% 11% 93% 35% 7% 74% 34% 5% 82% 21% 0% TV Everywhere Standalone OTT App-based pay-TV Global North America EMEA Asia Pacific Latin America +2% 0% +1% +3% +5% +1% 0% 0% +5% 0% +5% … Source: MTM analysis of pay-TV service provider portfolios in Asia Pacific, EMEA, Latin America, and North America (n = 233, 42 countries) 55% 35% 33% 11% 95% 58% 32% 21% 60% 41% 43% 13% 52% 25% 34% 12% 26% 26% 8% 0% Third-party apps Recommendations 4K video Voice control Global North America EMEA Asia Pacific Latin America +10% +16% +9% +14% +3% +14% +5% +16% +17% +10% +12% 0% +18% +8% +5% +4% +5% +8% +2% 29:Base: Major pay-TV service providers in Asia Pacific, EMEA, Latin America, and North America (n = 228); YoY change on a like-for-like basis indicated at the bottom of the bars It has been a slow year for standalone OTT services from pay-TV providers, with only a couple of new launches in Asia Pacific. Pay-TV providers who have not yet launched a standalone subscription OTT services are hesitant to do so, perhaps because of the significant investment requirements and an increasingly competitive landscape. Nonetheless, most pay-TV providers recognise the importance and benefits of OTT delivery and are looking for ways to leverage OTT for the distribution of their core pay-TV proposition.
  25. 25. 25 WHAT MAKES INNOVATION DIFFICULT? While many of the new disruptors reshaping the TV landscape – including Apple, Google, Amazon, Samsung and Facebook – are prominent on global lists of the most innovative companies30 , few traditional pay-TV providers are featured. This is partly because such rankings tend to favour large international players, while pay-TV businesses are generally active in a small number of markets at most. But it also reflects the fact that innovation, though at the top of many pay-TV executives’ agenda, remains challenging. It needs investment in time, resource and expertise, and in many cases requires a cultural shift to move away from legacy business models: “Innovation can mean discarding successful high-margin approaches, which is very hard to do”. However, industry executives believe that innovation is becoming more accessible as the technologies enabling it – such as software-based solutions, cloud capabilities, and machine learning – are becoming more widely available and, in some cases, more affordable to pay-TV providers. Nonetheless, many pay-TV companies still face major innovation challenges (see Exhibit 19). Legacy technology and infrastructure, corporate risk avoidance, lack of fit- for-purpose processes and culture, and lack of funding are seen as the most significant ones. Exhibit 18: Proportion of service providers offering adjacent services (%)29 App-based pay-TV services remain significantly less common than TV Everywhere and standalone OTT services, with only a few providers in North America, Europe, and Asia Pacific (e.g. Charter Communications, AT&T, Canal Plus, Vodafone Spain, and Korea Telecom) offering them to their customers. However, despite initial scepticism, more industry executives are now reconsidering the app-based pay-TV model as they start to think about the potential hardware costs associated with rolling out their next-generation platform. ADJACENCIES Pay-TV providers in North America remain the most advanced ones in adjacencies, both in terms of Smart Home solutions and advanced advertising services (see Exhibit 18). However, over the past 12 months, they have been slow in introducing new services, while Charter Communications even took a step back from Smart Home, discontinuing their IntelligentHome offering. While there has been some progress in other regions, service providers in EMEA were the fastest ones to introduce new adjacent services (+7% compared to last year), particularly in Smart Home security and automation. … Source: MTM analysis of pay-TV service provider portfolios in Asia Pacific, EMEA, Latin America, and North America (n = 233, 42 countries) 25% 18% 13% 9% 1% 74% 42% 42% 53% 0% 22% 17% 12% 6% 2% 26% 18% 12% 6% 2% 8% 8% 5% 0% 0% Adjacent services Home security Home automation Advertising and data services Home entertainment devices Global North America EMEA Asia Pacific Latin America +5% +5% +7% +3% +3% +3% -5% +6% +2% +3% +3% -5% +4% +3% +3% +1% +5% 30:BCG, Most Innovative Companies 2018 (2018) … Source: MTM analysis of pay-TV service provider portfolios in Asia Pacific, EMEA, Latin America, and North America (n = 233, 42 countries) 55% 35% 33% 11% 95% 58% 32% 21% 60% 41% 43% 13% 52% 25% 34% 12% 26% 26% 8% 0% Third-party apps Recommendations 4K video Voice control Global North America EMEA Asia Pacific Latin America +10% +16% +9% +14% +3% +14% +5% +16% +17% +10% +12% 0% +18% +8% +5% +4% +5% +8% +2%
  26. 26. 26 Exhibit 19: Executives highlight the following innovation challenges across the pay-TV industry31 The cost of replacing legacy technology and infrastructure is still seen as a major innovation challenge by the largest number of industry executives, although the percentage of executives that nominated it, 61%, is significantly lower than the 74% that did in 2017. This points to the reduction in technology costs driven by cloud-based solutions and the roll-out of cheaper technologies such as Android TV, especially in emerging markets. Corporate risk avoidance and fear of failure remains a critical barrier to innovation for 52% of executives. Many pay-TV providers believe that adherence to traditional pay-TV models can inhibit the innovation required for longer- term success. “The whole industry needs to change. Saying that we need to protect our business in its existing form is the old way of thinking. Everyone is fighting for today’s business, but no one is really thinking about tomorrow and the long term.” Lack of funding is seen as a significantly bigger issue this year, cited by 46% of executives versus 34% in 2017. This suggests that pressures on the pay-TV business model have a direct impact on providers’ ability to invest in new product development: “The biggest challenge we have is legacy economics. Even if we want to innovate, from the current P&L perspective, which is tied to the legacy business, it is very difficult to invest in something new.” Lack of skills is less of an issue for industry executives in 2018 (cited by 34% in 2018, down from 46% in 2017). This suggests that companies are gradually acquiring the skill sets needed for new product development and innovation, although it could also relate to the trend towards outsourcing or partnering with third-party providers, who are then responsible for investing in innovation: “On the technology side, pay-TV providers are definitely in a much stronger position than they’ve ever been, with manytransitioningtoall-IP.Thisenablespay-TVproviderstobuildengaginguserinterfaces,introducevoicecontrol, and make use of artificial intelligence, machine learning and deep learning algorithms that will identify the best content for a particular customer.” Luciano Ramos, VP Technology & Product, Liberty Latin America “Owning a proprietary platform might become the Achilles heel of an MVPD as they struggle to keep up with the innovation on larger-scale platforms like Roku, Android, Amazon, or Apple.” Scott Boyarsky, Digital Video Technology and Product Executive 31: Question: What do you see as the most important innovation challenges facing the pay-TV industry in your country? (% saying “somewhat a challenge” or “major challenge”; n in 2018 = 138; n in 2017 = 125) % OF RESPONDENTS SAYING “A CHALLENGE” OR “MAJOR CHALLENGE” 61% 52% 49% 46% 46% 43% 43% 40% 40% 34% 32% 74% 51% 51% 34% 45% 42% 47% 49% 42% 46% 34% 2018 2017 Cost of replacing legacy technology and infrastructure Corporate risk avoidance and fear of failure Lack of fit-for-purpose processes and culture to support innovation Lack of funding Dependency on technology partners / suppliers Lack of senior management consensus about priorities Limited access to content rights Difficulties in measuring return on investment Lack of cooperation Lack of skills and capabilities internally Limited time from key personnel
  27. 27. 27 One clear finding is that pay-TV providers, faced with rising content costs and diminishing ARPUs, are prioritising innovation across the whole business – from content acquisition to customer service, from sales enablement to technology partnerships – as part of a wider transformation programme: 3 - LOOKING AHEAD FUTURE AREAS OF OPPORTUNITY Industry executives believe that while there is considerable scope for innovation in pay-TV, future growth will be more challenging and will require significant investment and new approaches. Nonetheless, industry executives remain relatively optimistic, with nearly half of them – 49% – saying that there are a lot of commercially attractive opportunities open for pay-TV providers. Executives from Asia Pacific remain the most optimistic relative to other regions, followed by their peers in EMEA and North America, while those in Latin America are the least optimistic. “We’ve been relentlessly focused on delivering operational efficiencies to redirect savings to content investments andfundingnewdigitalventures.Goingforward,wewillcontinueourrazor-sharpfocustoensurecostlinesarefit- for-purpose.Forexample,we’reprogressivelymigratingcustomerservicetoself-careplatforms,drivingadoption of online sales channels, an end-to-end enablement from sales to fulfilment, migrating legacy platforms to the cloud and digitalising content processing work flows.” Swee Lin Liew, Group COO at Astro Malaysia Holdings Exhibit 20: Proportion of survey respondents agreeing that “there are a lot of commercially attractive opportunities open to pay-TV service providers in their country”32 Overall 49%2018 2017 North America 45% 30% EMEA 48% 39%40% Asia Pacific 59% 52% Latin America 33% 44% So, which are the most commercially attractive and strategically important areas of opportunity for the pay-TV industry over the next five years? The core pay-TV offer remains the key area of focus for most service providers, but 86% of executives32 (in line with 90% last year) also believe that “to grow, pay-TV service providers will have to develop new products and services to sit alongside the core pay-TV and over-the-top propositions”. Although investment priorities vary significantly by market and service provider type, the majority of industry executives remain committed to strengthening and differentiating their core pay-TV offer. As many service providers have rolled out their next-generation pay-TV platforms over the last two years, the focus is now on increasing the take-up of these platforms and driving commercial innovation – i.e. offering a more diverse range of packages and services at a wider range of price points – while the key priorities in product innovation are to deliver a truly seamless and converged pay-TV/OTT experience across multiple devices, and to improve the user experience. 32:Question: To what extent do you agree or disagree with the following statements about innovation and the pay-TV industry? (% of respondents indicating “strongly agree” or “agree”; n = 138)
  28. 28. 28 Despite significant similarities – such as providing a more diverse range of packages and services – there are also clear differences in pay-TV service provider investment priorities by region: + Pay-TV executives in North America are focusing on developing increasingly diversified businesses that offer triple- or quad-play bundles and other adjacent services. In particular, as pay-TV subscription revenues decline, service providers are focused on unlocking the full potential of advanced TV advertising. + Despite challenging market conditions, industry executives believe that pay-TV providers in Asia Pacific still have room to grow in TV and video markets. They see potential growth from more flexible pricing and packaging, a booming mobile video market, and advanced TV and video advertising. Aside from TV and video, pay-TV service providers are also looking for ways to develop new revenue streams. In addition to doubling down on connectivity products, some pay-TV and telco service providers are looking to enter an increasingly crowded mobile payments market. + Pay-TV providers in EMEA remain heavily focused on developing their core pay-TV offers, with little interest in developing adjacent business lines beyond connectivity and, in some cases, Smart Home solutions. In terms of the core pay-TV proposition, the key focus is on delivering superior multi-platform user experience. + Given the growing pressures from illegal pirate services and new OTT entrants, pay-TV providers in Latin America are focused on strengthening their core pay-TV offers to deliver affordable and user-friendly multi-platform TV services to their customers. Connectivity and pay-TV bundles are expected to play a more significant role in the future, while some providers are also now exploring opportunities in advanced TV advertising. Exhibit 21: Pay-TV executives see strengthening the core pay-TV offer – with growing focus on a converged pay-TV/OTT offering – as the most attractive area of opportunity33 7. Home entertainment devices1. Content pricing and packaging 4. Standalone OTT 8. Advertising and data2. User interface and user experience 5. Multiscreen TV Everywhere 3. Content proposition 6. App-based pay-TV 9. Internet of Things / Smart Home Key: Commercial attractiveness / Strategic importance Survey results HighLow CORE PAY-TV OFFER: TV PLATFORM AND ONLINE SERVICES ADJACENCIES 28% 36%67% 64% 43% 59% 50% 67% 41% - 50%67% 78% 64% 61% 53% 74% 42% 2018 2017 Category 33: Question: Thinking about new products and services that can drive growth in revenues and/or help to defend the business and maintain competitive position during the next five years, what do you see as the most attractive areas of opportunity for pay-TV service providers in your country? (% of respondents indicating “attractive” or “highly attractive”; n = 138)
  29. 29. 29 Exhibit 22: Opportunities in the core pay-TV offer - pricing, functionality, and content34 THE CORE PAY-TV OFFER: TV PLATFORM The pay-TV market is transitioning fast into a paid-for video market. Pay-TV executives expect that the significant opportunities in the core pay-TV offer will relate to offering a more diverse range of packages and services that cater to the needs of different customer groups, delivering a seamless and converged pay-TV/OTT experience across multiple devices, and optimising the user experience to make it more user-friendly and personal. Category N. America EMEA Asia Pacific L. America 1. Content pricing and packaging 2. User interface and user experience 3. Content proposition 55% 66% 69% 67% 55% 47% 56% 40% 69% 59% 78% 73% Key: Commercial attractiveness / Strategic importance HighLow Next-generation services will have to address growing consumer demand for flexible content pricing and packaging, low-cost services, a mix of local and international content, personalised user experience, and, in certain mobile-heavy markets (e.g. India, Indonesia), mobile-first consumption. 93% OF EXECUTIVES AGREE THAT “TO RETAIN AND ATTRACT NEW CUSTOMERS, PAY-TV SERVICE PROVIDERS WILL HAVE TO INNOVATE IN PRODUCT PRICING AND PACKAGING.”35 New ways of pricing and packaging content are seen as a particularly important priority among pay-TV executives in Asia Pacific, Latin America, and EMEA (see Exhibit 22). Acquiring new customers will be a key yet challenging priority, which many believe will require a different approach to packaging and pricing: “Whileoptimisingtheofferingfortheexistingcustomerbase,pay-TVproviderswillalsohavetofindwaystoattract and re-engage new, younger customers. Acquisition of this segment will be primarily driven by fixed and mobile broadbandservicesandnotbypay-TVservicesasweknowthemtoday.Togetcustomerstolovethemagain,service providers will have to pursue new forms of content partnerships and bundling deals which are, for example, based on sharing revenues, offering different margin profiles than a typical pay-TV bundle today.” Luciano Ramos, VP Technology & Product, Liberty Latin America 34: Question: Thinking about new products and services that can drive growth in revenues and/or helps to defend the business and maintain competitive position during the next five years, what do you see as the most attractive areas of opportunity for pay-TV service providers in your country? (% of respondents indicating “attractive” or “highly attractive”, n = 138) 35: Question: To what extent do you agree or disagree with the following statements about innovation and the pay-TV industry? (% of respondents indicating “strongly agree” or “agree”; n = 138)
  30. 30. 30 Around the world, service providers will be increasingly offering customisable and à la carte content packages, flexible subscriptions (such as weekly and daily passes) and freemium propositions that offer a mix of free and paid- for content. Industry executives in Asia Pacific and Latin America are particularly positive about the take up of à la carte content packages (see Exhibit 24). HOOQ and iflix, OTT subscription service providers from Asia Pacific, have pioneered the freemium model in online video by combining free and paid services to ensure more users have access to their services and can easily upgrade to premium tiers. Some pay-TV providers have already pursued a similar model, including Sling TV in the USA, which now includes a free tier and à la carte channels, and NOW from Claro Brasil, which offers a free tier of content to all of its broadband and mobile subscribers: Exhibit 24: % of executives agreeing that the majority of pay-TV subscribers will be taking personalised ‘a la carte’ subscriptions rather than traditional big pay-TV bundles37 Exhibit 23: Industry executives see the following areas of opportunity in content packaging and bundling36 77% of executives believe that pay-TV bundles as we know them today will change substantially over the next five years. They see the most attractive opportunities in low-cost pay-TV services (such as skinny bundles), personalised packages, and new content-led packages in various genres, such as sports, film, and kids. 70% 70% 69% 65% 50% Low cost pay-TV services Personalised packages New content-led packages (e.g. in sports, film, or kids content) New ways of packaging OTT and pay-TV content on the STB New content-device-telecoms bundles 67% 73% 69% 67% 62% OVERALL LATIN AMERICA ASIA PACIFIC EMEA NORTH AMERICA “We have an on-demand and OTT service called NOW, which is available to all of our broadband, mobile, and pay- TV customers… As a broadband and mobile subscriber, you can still get access to the service and access all of our video assets available to them, apart from the pay-TV content. We’re trying to drive video viewing across all of our customers by offering a user-friendly OTT platform.” Marco Dyodi Takahashi, CMO for Residential Bundles Business, Claro Brasil 36: Question: Which do you see as the most attractive opportunities for innovation in content packaging and bundling over the next five years? (% of respondents indicating “highly attractive” or “attractive”; n = 138) 37: Thinking about developments affecting pay-TV industry revenues in your country through to 2023, how much do you agree or disagree with the following statements? (% of respondents indicating “strongly agree” or “agree”; n = 138)
  31. 31. 31 As the new ‘post-OTT’ pay-TV landscape becomes increasingly diverse and fragmented, many industry executives expect to see “the second wave of content re-aggregation”. This model, where companies offer a range of content and services - including pay-TV and a range of OTT services – via a single subscription, is seen as a way of simplifying a fragmented marketplace for consumers. As such, it potentially offers additional growth opportunities for some of the well-established telcos and pay-TV platforms. Major telcos, in particular, are widely believed to be well-positioned to ride this wave: “I think telcos have a significant strategic advantage over the other market players. Our business case is not based onsellingcontent,butratheronsellinginternetaccess.Youcandrawparallelsbetweentelcosanddigitalgiantslike Facebook and Google, which are building digital platforms to then sell advertising on them. For telcos, OTT TV is a greatvehicletosellbroadband.”MichaelRoedel,HeadofTVDesignandUserExperience,VodafoneGlobalEnterprise “With the volume of content growing, there is a risk that your home video entertainment experience becomes overcrowded and a bit dry as your customers spend more and more time trying to find what they want to watch. To make this a more appealing experience, you cannot overwhelm the user with the first screen they look at – it needs to provide an interesting entry point” Michael Roedel, Head of TV Design and User Experience, Vodafone Global Enterprise As data analytics capabilities improve, industry executives also expect curation and personalisation of services – rather than simply offering large channel or individual OTT service bundles – will play a more significant role in maximising the value and relevance of pay-TV services in the future: “We’ll see a combination of new pay-TV models existing simultaneously. These will include the super-aggregator model, the ‘bring your own device’ model with pay-TV apps on devices, and the evolved set-top-box-based model offering greater flexibility. As all of this will be overlaid with data, the real opportunity will lie in being able to personalise and segment customers in a much more sophisticated way.” As it is increasingly difficult to differentiate pay-TV services based on content or price, superior user interface and user experience are widely seen as a major priority for companies looking to deliver a successful next-generation pay-TV service, particularly among industry executives in Asia Pacific and North America (see Exhibit 22): “Pay-TV platforms used to compete primarily on access to content and distribution capabilities. Today, there’s a third important element in that mix: user experience. If you do it right, it can become your USP [unique selling point].” 89% OF EXECUTIVES AGREE THAT “PAY-TV SERVICE PROVIDERS WILL HAVE TO IN- NOVATE TO ENHANCE CUSTOMER EXPERIENCE, DELIVERING IMPROVED USER INTER- FACE FEATURES TO SUPPORT CONTENT DISCOVERY, PERSONALISATION, AND SEAMLESS MULTI-PLATFORM CONTENT OFFERINGS.”38 As the amount of content available on pay-TV platforms continues to grow, and as new digital video services raise the bar for user experience, the most advanced pay-TV providers focus on delivering a frictionless and personalised content discovery experience that balances the tastes of different users within the same household, caters to existing viewing preferences, and supports serendipitous discovery of new content: 38: Question: To what extent do you agree or disagree with the following statements about innovation and the pay-TV industry? (% of “respondents indicating “strongly agree” or “agree”; n = 138)
  32. 32. 32 Industry executives believe that next-generation user experiences will be underpinned by linear and on-demand content integration, unified search across all subscriber’s content sources, seamless multi-platform viewing, restart functionality supported by cloud PVR deployments, voice control, and big data and AI solutions enabling personalised content discovery. For most pay-TV providers, content investments remain the most significant part of their cost base. As they try to rationalise their content spend, pay-TV providers are also looking to develop a stronger and more diverse portfolio of content propositions. 67% of industry executives see new types of content offering as a commercially attractive and/or strategically important area of opportunity, with those based in Asia Pacific, Latin America, and North America being the most positive. Approaches do vary significantly by market and service provider. For example, the majority of pay-TV platforms (55%) have now embraced partnerships with third-party set-top box app providers like Netflix, but many industry executives believe that the real opportunity lies in offering a truly integrated pay-TV/ OTT experience in a single interface, which so far has only been done by a few major platforms, including Comcast in the USA, Vodafone in Spain, and Sky in the UK. Pay-TV executives also see further opportunities to develop new content offerings that would appeal to increasingly diverse audience tastes and preferences. These include the production – or co-production – of original and exclusive content, on-boarding of a wider range of content partners, content localisation, and new forms of content in areas such as Virtual Reality and eSports. Such moves reflect a growing appetite for more collaborative relationships with content providers, beyond the traditional buyer/seller model. “We’re investingin betterfeatureson theset-topbox,launchingacatch-upfeaturethatyoucangobacksevendays for almost 40 channels, rolling out cloud PVR, and offering seamless viewing on multiple devices… We want to add as many user-friendly features to the box as possible so that people don’t need to switch devices. We want to win what we call the ‘war for HDMI 1’.” Marco Dyodi Takahashi, CMO for Residential Bundles Business, Claro Brasil “Sky Atlantic and Amazon already have co-production deals on some of our shows, such as Tin Star where Sky AtlanticgetsrightsinoneoftheirmarketsandAmazongetsrightsinalltheothermarketsoutsideofSky’sfootprint. Given how well European content is doing and travelling, we expect to see more of these types of deal, but the industry still needs to find a model for collaboration in that space.” Wim Ponnet, Chief Strategy and Commercial Officer, Endemol Shine Group
  33. 33. 33 “I think any forward-looking pay-TV provider should make it their priority to have a 100% cloud-based platform, to ensure their customers have complete freedom to access all of their content wherever they are… At Vodafone, we have successfully deployed a pay-TV service that is fully cloud-based – we do not even have a hard drive in our set-top boxes. With the success of OTT boxes and HDMI dongles like Chromecast we are seeing that customers want to have small or no set-top boxes, around the big TV screen, they want access on any device, and they do not want to get locked out because of too many devices being connected simultaneously.” Michael Roedel, Head of TV Design and User Experience, Vodafone Global Enterprise “OTT should be core to any and all pay-TV providers so if you have not yet developed a compelling OTT service, then do it now. If you have one, then don’t position it as sub-standard to your DTH or cable products. And when I say OTT I do not mean on-demand content only – we should not forget that TV companies have live TV content, and live TV attracts big audiences.” Holly Knill, Director – Now, Foxtel, Australia THE CORE PAY-TV OFFER: ONLINE TV SERVICES Exhibit 25: Opportunities in the core pay-TV offer - online TV services39 Category N. America EMEA Asia Pacific L. America 4. Standalone OTT 5. Multiscreen TV Everywhere 6. App-based pay-TV Key: Commercial attractiveness / Strategic importance HighLow 41% 47% 41% 40% 59% 69% 69% 73% 59% 52% 63% 80% Online TV services are increasingly seen as table stakes and, as such, are must-have for all pay-TV providers. The ability to offer seamless multiscreen TV services is seen as one of the most strategically important priorities, particularly among executives in Latin America, EMEA, and Asia Pacific. Importantly, industry executives argue that the lines between the core pay-TV proposition and online TV services are blurring, with service providers moving towards a platform-agnostic model of pay-TV services: “The future of pay-TV is about the convergence between pay-TV and OTT – providers won’t be looking to offer multiple platforms, it will be a single platform for all screens, offering a consistent experience, which is optimised for a given device.” In addition, these converged services are widely expected to help providers reduce costs and speed up the development and introduction of new features and services. 39: Question: To what extent do you agree or disagree with the following statements about innovation and the pay-TV industry? (% of “respondents indicating “strongly agree” or “agree”; n = 138)
  34. 34. 34 On the other hand, fewer industry executives consider standalone OTT services to be a commercially and/or strategically important area of opportunity (43%, down from 64% last year). The decreased appeal is likely to be explained by the increasingly difficult economics of these services and the shift of sentiment towards converged pay-TV/OTT offerings. Similarly, industry executives are more cautious about the prospects of standalone, mobile- first OTT services, given that high-profile examples such as Verizon’s go90 and Vivendi’s Studio+ have been shut down in 2018. Nonetheless, executives remain convinced that multiscreen and, particularly, mobile services are a key element of a strong core pay-TV proposition, and in some markets across Asia Pacific they might even be the primary means for consumers to experience pay-TV. ADJACENCIES Looking beyond the core pay-TV proposition, most executives believe that connectivity services are the key area of focus for many service providers. The majority of 228 service providers analysed (69%) already offer fixed broadband services, with around a half (45%) offering mobile services (see Exhibit 26). Delivering a superior user experience on online services is seen as a key area of differentiation. However, an important challenge for many pay-TV providers is to ensure they have access to all the linear, non-linear and cloud PVR content rights. As they consider the long-term implications of developing and maintaining proprietary set-top boxes, many pay-TV providers are exploring the opportunity to switch to app-based pay-TV services, which could be delivered through applications on connected devices, such as Apple TV, Roku, Android TV boxes, or Chromecast, and Smart TVs. These app-based pay-TV services could help reduce costs and offer an attractive way to reach new customers outside of the existing footprints. The support for app-based pay-TV services is strongest among executives in Latin America, Asia Pacific, and North America (see Exhibit 25). The case for app-based pay-TV services is further reinforced by the changing perceptions about the importance of the set-top box, with some executives now arguing that the service provider’s network infrastructure and billing relationships – rather than proprietary set-top boxes – are the gateway to the customer. “Putting your own service side-by-side with other OTT services, you really start to blur the lines between pay-TV and OTT. All video services are going to be OTT in the future and the investments that some companies are making in their proprietary hardware and infrastructure might not be the things that will drive product and experience differentiation in the future. Running your own technology seems an antiquated model that a lot of MVPDs in the USA are still holding onto because they’ve made a lot of money from leasing and installing all of that hardware and infrastructure.” 69% 89% 68% 72% 63% 45% 47% 56% 44% 27% OVERALL NORTH AMERICA EMEA LATIN AMERICA ASIA PACIFIC Fixed broadband Mobile Exhibit 26: Proportion of service providers offering fixed broadband and mobile services

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