First things first, there are no magic solutions. What we offer in this article is an overlook on the market’s future based on our research and a set of solutions for the problems presented. No one size fits all, but a comprehensive look at the barriers presented might get you to pinpoint what works for your case.
Market Perspective: from past to present
In the last seventeen years the broadcaster’s value chain and business model suffered almost no changes, and perhaps the only relevant and incremental shift came through the proliferation of the Pay-TV Industry. This tweaked the market force’s dynamic but at the same time increased broadcaster value.
Before Pay-TV, broadcasters usually financed/monetized their operation through a mix of advertisement revenue and, in some countries, especially in Europe, with governmental funds. This was due to the fact that Free-To-Air television was seen by several governments as a public commodity.
With the emergence of Pay-TV in the 1980/90’s, despite some changes in market dynamics which converged in the user now having more choices and a broader offer spectrum from cable networks, the truth is that broadcasters are not only staying relevant with a premium content strategy, especially sports and first runs, but also with a new revenue stream that didn’t exist in the past — the Pay-TV carrying fees to rebroadcast their content.
However, even with more content being offered by Pay-TV in the last 30 years, its relationship with broadcasters is perfectly peaceful, with broadcaster position and brand value remaining untouched.
So, why does this happen? Well, several factors come into play:
1) The entry barriers are still high; a public broadcaster license is expensive and it is usually obtained by a public tender that only happens once or twice per decade.
2) There are no real competitor issues; the number of broadcast TV competitors is limited due to an also limited number of frequencies available and these are restricted by public bodies. So, different broadcasters need to compete between themselves in a controlled environment. Naturally, the digitalization at the beginning of the 21st century opened space in some countries for broader licenses and frequency concessions, making it harder, in some cases, for Pay-TV penetration. This happens because it is now also possible to offer niche channels over the traditional broadcasting method and, in some counties, it makes competition with broadcasters more aggressive, affecting broadcaster profitability. A good example of this scenario can be seen in Spain. Despite all this, the linear TV consumption time is still growing and broadcasters continue having a growing number of views and advertisement revenues.
3) Up until recently, broadcasters preferred vehicles used by advertising agencies in order to reach bigger audiences and mitigate the problem of double spending while reaching the same users. The logic behind it was that if they used niche Pay-TV channels, despite a lower cost-per-million views they would probably not reach their target audience with the same ease than a broadcaster, however, if they use both, they will most likely be paying double to reach some users. So the optimization of budgetary expenses was also an essential advantage that broadcasters had in the past in order to stay relevant and have significant revenues from advertisement.
What is changing?
The Television industry, and naturally broadcasters, are starting to face what is most probably the emergence of the most disruptive movement in the television history, a hypercompetitive environment that incumbent players will certainly have problems to control or even be a relevant part of. In my (and major industry studies) opinion, there are five key forces decisively contributing to it:
1) High-Speed internet proliferation across the globe.
2) The deregulation and liberalization of internet usage allowed for new competitors to enter the production and distribution associated to new business models (for example, the Amazon business model relies upon a totally different model than classic industry players).
3) Online content availability increased, not only in quantity but in quality. Certainly Youtube, Netflix, Vimeo, and millions of other websites and online video platforms are contributing to this offer growth, making it available to users at any given moment.
4) The surfacing of cheaper content producing models, leading to more user-generated content that is not only highly appreciated by other users but can also be directly available to them by OTT platforms and without any content distributor, TV content aggregator or broadcaster intermediation.
5) A change in the way people are consuming video. We are witnessing three important viewing displacements that also impact broadcasters:
- Despite the total number of hours on average that a viewer uses its television remains steady, or in some cases even increases, mobile device video consumption is skyrocketing.
- Linear to timeshifted content, 40% of Drama content watched in the UK is done so on demand and not over linear TV anymore. Making the case for a growing tendency.
- This is perhaps even more important, but content is being consumed across multiple platforms (Youtube, Hulu, Netflix, …) and not only through broadcasters or Pay-TV industry channels.
How and why are those changes impacting Broadcasters’ Value Chain and business models?
Some factors are clearly having a negative impact on the current broadcasters’ business model, and the majority of that negative impact comes from relationship shifts in the value chain power:
First of all, content producers/aggregators have much more bargaining power than ever, as content is increasingly more important and there is a steady growth on the demand for quality content. In the same way, premium sports are forcing broadcasters to make an additional effort to buy premium content.
Second thing and, in my opinion, the most important, is that “shelf space” on the internet is unrestricted by the number of channels that are traditionally limited by satellite bandwidth or terrestrial and cable frequencies. Now, users can watch multiple content without the TV programming experience. This change puts the user at the center of the value chain, and now it’s the user who decides what, when and where to watch. This impacts, at first glance, on the channeling of advertisement investment, but it also affects which content is most likely to be watched. In short, what evidence is telling us is that high-value quality content and niche content is more watched and that commercial dramas and movies are being less watched, the content that is mainly driven by broadcasters to fill their programmatic space between news and premium sports, maybe even the occasional premium blockbuster premiere. This reduces user’s appetite for broadcaster content in certain periods of the day to the detriment of other content available on different OTT platforms.
The third significant change, and directly related to new user habits regardless of video consumption, is that advertisement money is flowing towards online video. Although television is still seen as the most effective advertising medium in the goal to reach mass-audiences in major national/global markets, online video advertising is percentage wise a double-digit growing category with a double-digit yearly growth all over the world. Today’s broadcaster revenues are still steady or, at most, facing a slow reduction, but this scenario brings them more vulnerability when facing Internet video consumption growth and macroeconomic fluctuations since it will put these expenses on the top advertising agencies’ lists to be reduced or even cut. Fourth, and also related to user habit changes, we have the diffusion/dilution of the means, the platforms and the screens where users can watch content. This also contributes to the dilution of the broadcaster’s brand, making it harder for users to remember it from the get-go.
Not directly related to the value chain but with an industry change, the Cord-Cutting or Cord-Shaving phenomenon that we are now witnessing on some Pay-TV markets, where users cancel their Pay-TV subscriptions or reduce it to a more basic subscription package, can also impact broadcasters in two ways:
- A negative way related to the carrier-fee collection. Despite Pay-TV operators usually charging an established amount of money per license, ultimately when their revenues and subscriber database becomes eroded, they will most likely need to renegotiate those agreements.
- A positive way related to Cord-Cutting is that users might start to consume or pay more attention to broadcaster content, especially in countries like the USA, where we are watching a trend of sales for bigger television antennas growing exponentially in order to make possible for broadcaster content to be received over the air.
What should we expect in the future?
The dynamics that we currently see in other sectors of the entertainment industry are now moving towards the video. This happened later than audio and books for two main reasons: the habit of linear TV consumption and video being more demanding in terms of high-speed connection.
However, despite the late take-off, I truly believe the intensity will be considerably bigger because video is by far the most consumed media and with the most advertisement investment, making its industry value significantly higher.
So which scenarios are we drawing for broadcasters’ future?
In order to create a solid analysis of different scenarios, I will use a classic analysis framework with two critical vectors: premium content and the capability of content owners to directly reach users. Certainly, we could consider other vectors such as the capability to move faster on live news, the capability to create niche content (niches with favorable budgets), just to name a few strong potential vectors when considering other players in the Industry ecosystem. However, we understand that for the mainstream market the ones chosen are much more relevant.
So, with those vectors in mind, we can draw four potential scenarios that can help broadcasters to create their conceptual framework and define their strategy on this dynamic hypercompetitive environment.
Naturally, this scenario adoption or mutation will vary geographically and in the time, but we believe it will certainly help strategic managers on their decisions.
Scenario 1: A Gradual evolution within the current television industry structure
In this scenario, Pay-TV and broadcasters are cohabiting perfectly with OTT without any disruptive changes. The premium content is still distributed by them using the current market and some part goes online with Netflix, Amazon and YouTube conquering a piece of the pie but not harming the relative importance of these players in the industry. Even if they eventually reach agreements with the streaming platforms to host content owned by broadcasters (the European regulation forcing platforms to have at least 20% of locally produced content will certainly help).
Internet platforms are one more vehicle for broadcasters to place some of their content and one more channel to reach their audience.
This scenario represents the status quo, the maintenance in relative positions towards market incumbents, with a small part eroded by a potential relationship with online video platforms. But in this scenario, the broadcaster’s brand value stays on top of user’s minds, the content, especially sports, will tend to be bought and aired using the broadcaster’s channels (by air, cable or Internet), and the number of hours watched by the average viewer will remain steady as will the advertisement revenue, with a small negative outlook.
This will remain an important scenario in the places where international content is not that popular and broadband penetration is not that high, but certainly, it is not a long-term scenario, we see it as a transitional situation for some markets.
In this case, the broadcaster has the space for a defensive approach or even to expand its market share.
Scenario 2: Multiple Platform content spread and competition for viewer loyalty
This scenario tends to be adopted much faster at more mature markets, where broadband connections have higher coverage, the ARPUs are relatively high and users are considerably active over multiple video platforms, consuming video from different sources.
When it comes to the broadcaster value chain, it maintains the same workflow. Content is bought from distributors or creators and, in turn, gets monetized through carrying fees and advertisement. Content owners drastically increase their bargain power from that point on since they don’t really need broadcaster (neither Pay-TV operators) channels to reach their audience, especially creators with a strong established follower base.
This scenario clearly attacks the current status quo of the typical broadcaster. First up, because the channel lineup in the whole programmatic TV scheme loses its key value and, consequently, induces a loss of brand loyalty and positioning with an audience, massively leading it to consume on-demand content (with the exception of live TV — news/sports/events). Secondly, despite the content diversification that broadcasters might not be used to, derived from physical or governmental constraints, the content format that broadcasters are used to pack is designed for mid-roll advertisement and it is not competitive within online video ecosystem, one that is dominated by short duration videos (the fastest growing content segment in online video), diminishing the broadcaster’s strength when competing at a pure online on-demand level.
Scenario 3: Owner distribution monetization of big events and premium content through a direct-to-consumer approach
In this scenario, the owners of valuable content, especially live events, decide to monetize their content directly to the consumer. Some parallels can be found in what happened with the music industry. Compared with the previous scenario, it is even more aggressive for broadcasters, since the most important and interesting content that a broadcaster can acquire in order to diversify and win audience share is live content and, in this case, the content is solely explored by the content owner with no intermediaries, potentially causing an even bigger brand dilution towards the user.
Despite how plausible this scenario looks on paper, especially for on-demand content, we don’t believe it will be a realistic mainstream scenario for the next 5 years, even on mature and high broadband penetration markets. There are a few reasons leading us to this opinion:
- To deliver online video, especially live feeds, it requires advanced technical knowledge and some infrastructure control in order to deliver it with very low latency and stability, avoiding buffering and service interruption. This knowledge is very specific and the cost to reach, bill and collect payment from users on this scenario is much higher than it would be to a broadcaster.
- The risk is significantly higher because video buffer events and bad video quality experiences are considered by users as the most critical event when renewing or canceling a service fee for an online video subscription. This would transfer all the risk towards the content owner and monetization would become more frail, since they are now trading revenue stability from broadcasters or Pay-TV channels for a direct charge from users on an event-to-event basis. Moreover, the billing capabilities and especially the marketing engine behind the advertisement of content would be completely lost.
So this is a high-risk scenario for content owners, the risk being that at the end of the day all players could potentially end up losing.
Scenario 4: MVPDs (Multichannel Video Programming Distributors) and Virtual MVPDs fighting for premium content
In this scenario, in order to answer the Cord-Cutting tendency, MVPDs aggressively fight with each other for exclusive distribution rights over premium content.
This would make content very expensive for broadcasters, but on the other hand, MVPDs would simply be defending their core and their traditional business. This case is more in line with scenario 1, as the broadcaster needs to have some flexibility over carrying fees to keep a relationship with the MVPDs because they would be paying more for premium content not having any space for increase their fees. This would put off some broadcasters and TV channels since the bundles would inevitably be skinny.
This case is the less harmful for broadcasters since they would increase their revenue stream from advertisement and, as long as MVPDs can guarantee a certain audience reach, at the very most, they would offer a very aggressive and comfortable carrying fee structure to MVPDs.
However, in this scenario, the online video platforms and content diffusion would not disappear and its intensity would be controlled because of MVPDs fighting back, but the video consumption trends for non-premium content would remain. In short, scenario 1 is the one focusing more on MVPDs directly fighting for content.
In our opinion, this scenario (4) is the most relevant in more mature markets all across the globe, it’s already starting to happen. The broadcaster should clearly consider it on their defensive strategies.
Which strategies can a broadcaster develop to defend or grow its market position?
I firmly believe that we are witnessing one of the biggest revolutions in television industry. It is only natural, in a world of where digitalization and the internet can provide a fragmentation, not only of which channels we watch, but also when and where we watch it, directly affecting the current broadcaster business model.
The essence of this article is to serve as a tool to guide broadcaster decision makers on their strategy design and provide counseling on path and alliances to follow. There is no doubt that they should make an extra effort to stay competitive and relevant for viewers.
Based on the four scenarios, we can draw the first considerations and suggestions, however, we should understand that internet online video platforms, user-generated content or on-demand video consumption will not disappear and are not likely to change any time soon. Broadcasters and Pay-TV operators cannot leave the past behind, but they can adapt their strategy to this new environment.
Nevertheless, we shouldn’t only focus on problems and threats. There are also new opportunities to take advantage of, like the vast potential of online video advertisement space, or previous strengths to be leveraged such as brand image and content reputation, that have been built over decades of know-how entertaining their audience.
In my understanding, broadcasters have the following strategies to consider when attacking the market and acquiring better success odds:
a) Control content production and content costs with a vertical integration strategy. This means, acquiring or creating content production houses with three main goals:
- 1) Increase bargaining power across the value chain with lower risks, taking advantage of an established audience and a well-known brand.
- 2) Reduce content costs. In an ultra-competitive market where content prices are increasing each day, broadcasters should produce part of the content carried in order to help to maintain expenses. This is critical, especially if you look at scenario 4 or even in a scenario where MVPDs want to reduce their carrying fees and the advertisement revenues tend to stay the same.
- 3) Adapt content to Online video consumption, making shorter videos or adapting existing ones to an online friendly length, just as an example. It will increase the broadcaster’s competitiveness through different online video distribution channels.
b) The second available strategic option, with particular relevance for scenarios 2 and 3 is the co-opetition strategy. In an article written for the International Journal of Digital Television[1], Evans defines particularly well the fundamentals of this strategy. It starts from understanding how collaboration between close competitors may be an opportunity for revenue and survival in turbulent times, having the maximization of revenue from advertisement as the main goal and taking maximum advantage of the digital world. This strategy looks to improve the advertisement revenue with hyper-personalization but it admits that a broadcaster alone doesn’t have enough catalog relevancy or the depth to be relevant in a streaming application. Therefore, co-opetition between several broadcasters will be incredibly relevant, at least at a local level. Some examples of this course of action are Hulu in the USA, YouView in the UK and Maxdone in Germany.
c) Another interesting strategic option would be an international cooperation strategy between multiple broadcasters, in order to compete for multi-territory advertising deals with their digital inventory. The two main goals here are to create synergies in a non-competitive environment between broadcasters from different countries (German ProSieben is not likely to compete with Portuguese TVI) and working together to compete with Facebook and Google on an international level. This way, all the parties involved can enjoy each other’s brand reputation and assure content value, as well as a multiple language inventory specific for each country, defining a Global Strategy. RTL AdConnect is a good example of this strategy.
d) A fourth one can be a local content and/or niche-based strategy and distribution across multiple online video platforms, developing a niche portfolio and leveraging the current brand power to be an authority in a particular segment. This could be an exciting strategy, especially when you don’t have deep pockets to buy premium content or a broader national audience to monetize it. Niche segments can’t always be perceived as a particular content category in terms of genre, as well as regional content such as local events or sports.
When broadcasters pick this strategy they need to be careful on how they can differentiate themselves from user-generated content since their brand value can get trapped and even more diluted. Moreover, when choosing this strategy, broadcasters need to make their content available, not only across their TV Everywhere app but also across other platforms such as Youtube, iTunes, etc. The Food Network and ABC in the USA are two good examples of this strategy.
As we have stated at the beginning of this article, there are no “one size fits all” solutions. WeTek and I are always researching and connecting the dots in this ever-changing industry, becoming aware of its mutations but also making sure that we have the proper tools to help broadcasters navigate through them with maximum profit.
One thing needs to be cleared from the get-go, broadcasters are still relevant and will continue to be, as long as the right decisions are made and the tools needed are known to them.
Hugo Condesa, WeTek CEO
[1] Evens, T.1 (2014). Co-opetition of TV broadcasters in online video markets: a winning strategy? International Journal of Digital Television, 5(1): 61–74.
