SVOD MARKET: Survival of the Fittest - Broadcasting & Cable

SVOD MARKET: Survival of the Fittest

In a saturated sector, several services could find it hard to stay alive, let alone thrive
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Darwin was right about nature and technology: only the strong survive. The broad deployment of speedy broadband services and a small-but-accelerating trend of pay TV cord-cutting have ushered in a boom in over-the-top subscription VOD content services. But as with other markets, boom times raise the specter of corrections to come.

As Netflix, Amazon and Hulu lock up subscribers for general entertainment SVOD services, a massive number of new OTT offerings from traditional programmers, alongside a mix of genre- and niche-focused offerings aimed at super-serving target audiences, are fleshing out the market.

Just last week, Fox News entered the SVOD fray with plans to launch Fox Nation, an OTT streaming service, in the fourth quarter. The announcement follows direct-to-consumer OTT offerings from premium programmers like HBO, Showtime and Starz, as well as specialty VOD/ live hybrid services such as CBS All Access.

The vast number of SVOD services have also fueled the rise of aggregation offerings such as Amazon Channels and VRV.

To put the current volume of services into perspective, Parks Associates, at last check, was tracking 207 different OTT services in the U.S. (about double the figure from 2014), with 87% of them having some sort of a subscription angle.

“Choice has become almost infinite for SVOD,” Soumya Sriraman, president of BritBox, the SVOD service from the BBC and ITV focused on U.K. television, said. “But I think choice has also become crippling.”

The sheer number of SVOD services certainly makes it difficult for new entrants to gain notice, and raises questions about whether there’s enough revenue to keep all these players afloat. Once consumers shell out for a general entertainment SVOD platform such as Netflix or Hulu, there’s not much left for everyone else.

TiVo’s Q3 2017 Online Video and Pay-TV Trends Report found that the largest segment of consumers, 31.4%, spend from $9 to $11 per month on SVOD services. However, 10.5% are spending between $18 and $20: that group has grown by 6.7% over the past three years.

Meanwhile, Parks Associates found that more half of U.S. broadband homes subscribe to multiple OTT video services, but just 15% of them take three or more. If you’re an SVOD service seeking a bright spot, the positive takeaway is that the latter example, despite being a small percentage, also represents the fastest-growing segment.

Still, the old adage of what goes up must come down appears to apply to the world of SVOD. Evidence shows that there’s a correction taking place.

Several services, including NBCUniversal-backed comedy service Seeso and Shomi, the Canadian SVOD offering from cable firms Rogers Communications and Shaw Communications, have already shut their doors, while other planned SVOD services never got off the ground

Winnowing the Herd?

Perhaps the bigger surprise is that more haven’t exited the market — yet. “We’re finding that there are many services that are … getting enough subscribers just to be able to be sustainable,” Brett Sappington, senior director of research at Parks Associates, said.

That’s been enough to keep the doors open, but many outlets — particularly smaller, niche offerings — are seeing their subscriber levels plateau.

“They don’t have the marketing knowledge or complexity and the capital to be able to effectively market their service,” Sappington said. “They get kind of stuck, or find themselves growing slowly over time.”

Many industry observers, including those who play in the SVOD arena, say a bigger shakeout is inevitable or already underway.

“Of course, there’s going to be some shakeout,” said Jeff Weber, CEO of Zone TV, a company that’s focused on getting OTT-style content, including SVOD services, integrated into the set-tops of cable operators and other pay TV partners. “We see a lot of activity in this space and not everybody’s going to win.”

“The premise that there are too many [SVOD services] today is an accurate one,” Clint Stinchcomb, chief distribution officer of Curiosity-Stream, an SVOD service focused on fact-based programming and documentaries, said.

Added VRV general manager Arlen Marmel: “I think the shakeout is here. It was something we anticipated when we started a couple of years ago. We always anticipated a correction.”

“We’ve seen a quick boom and a bursting of the bubble for SVOD,” Adam Lewinson, chief content officer with Tubi, a free, ad-supported VOD service, said. “It really has become over-saturated.”

A challenge for many providers is perpetual upkeep: Making sure a service is always freshly stocked with new and interesting content.

“There has to be a significant refresh of programming on a regular basis,” Marmel said, holding that the aggregation model helps to close that gap and take some pressure off the individual SVOD services in a bundle.

But the lure of standalone services is there, with the SVOD surge building in part because media companies and programmers want to exploit digital content rights that might just be sitting fallow.

“So, if I set up a service and I get anything that covers my delivery costs … that’s gravy,” Sappington said, adding that the SVOD model is akin to “adding another window to the windowing system.”

Patience: More than a Virtue

But the model doesn’t always breed success. Both Shomi and Seeso were shut down in part because their owners set up lofty expectations and lost patience with the speed on the return on investment.

“Ultimately, what we’re seeing is that the ones that are falling out either can’t get the capital to stay in the market to grow and cover their costs, or their ROI plans or expectations are so high that they aren’t able to get there in the short term,” Sappington said. “Some, if they stuck it out long enough, could probably get by and maybe be better than break-even.”

VRV’s Marmel said patience is more than a virtue for SVOD. It’s a necessity. While some players have big expectations for that first year, they could be well served to make course corrections and hold tight.

“It think that this is really a multi-year endeavor,” Marmel said. “The focus with SVOD is often on subscribers, but I think, longer term, these services are building brands.”

Zone TV’s Weber believes that some traditional programmers that enter the SVOD sector will also face major challenges because they are trying to apply traditional business models to the revenue-sharing realm of SVOD.

“Some players are mixing cost structure and top-line and — surprise, surprise — that’s not always a winning combination,” Weber said. “Some people are trying to find that balance of really good content without a cost structure that’s so high that it forces you into an old business model that doesn’t work. You need a cost structure that can accommodate all of that.”

Differentiating in a Fragmented Market

In order to survive and thrive, SVOD services will need to deliver on tactics and strategies that set them apart. That spans a lot of areas — content, price, distribution and, in the case of more genre-focused offerings, developing a special bond with their communities.

“I don’t think it can be about token differentiation” for an SVOD service to thrive, VRV’s Marmel said. “It [the service] has to have a reason to be. Otherwise, just sell yourself through Amazon Channels or license content to another player as opposed to building your own independent service.”

By centering on the source — British television from the BBC and ITV — BritBox is clearly trying to differentiate with content.

“We can afford [customers] with access to content that others can’t,” Sriraman said. “There is a passion base that seeks this [content] out.”

CuriosityStream, the service developed by Discovery Communications founder John Hendricks that launched in March 2015, is tackling differentiation through a blend of content and an aggressive distribution strategy on various streaming platforms for its standalone service and integrations with MVPD partners.

CuriosityStream operates on the notion that 75% of viewing is for general entertainment, and 25% is focused on factual entertainment programming. On the latter, the service saw a big opening when programmers such as Discovery, TLC and History spent less of their resources on documentaries and other fact-focused content.

“We’re appealing to considerable pent-up demand from consumers,” Stinchcomb said, adding that CuriosityStream’s digital rights give it distribution potential. “The first, big advantage is that we’re global. Our content travels extraordinary well.”

CuriosityStream is also spreading its bets, obtaining agreements with well over a dozen distributors, including Comcast, Layer3 TV (now part of T-Mobile), Sling TV, Amazon Channels and VRV. It also recently cut a deal with the National Cable Television Cooperative, an organization that represents hundreds of independent cable operators.

“I’m in the friction minimization business,” Stinchcomb said.

While content and pricing for any SVOD service is important, creating and cultivating a community of like-minded viewers and customers has also become a focus for Rooster Teeth, a comedy and video games-focused service that offers multiple subscription levels, sells merchandise tied to its brand and even runs its own live, on-location events.

On the subscription end, its baseline, ad-free “First” offering for its core fan base has about 250,000 subscribers. Rooster Teeth also targets super fans with Double Gold, a premium-level offering that includes everything in First, plus discounts on merchandise, early access to live event VIP passes and a box of goodies.

“We approach [SVOD] as more of an integrated experience with the brand and the community,” Matt Hullum, Rooster Teeth’s CEO, said. “It’s important for any of these services to have a personality and a vision and a clear brand statement … a genre is not necessarily a brand.”

Like Rooster Teeth, Alpha, a platform that packages two complementary OTT services, Nerdist and Geek & Sundry, also emphasizes the community connection.

“For us, it’s about how we can super-serve that audience in a way that isn’t necessarily just video,” Adam Rymer, president of Legendary Digital Networks, which runs Alpha and its associated services, as well as Amy Poehler’s Smart Girls.

In addition to video, Alpha features chat rooms and forums, live events and discounts on merchandise. It’s also looking to expand into other kinds of content, including books and magazines.

“If you can’t own the genre, it’s difficult to compete against those big players,” Rymer said.

The Aggregation Advantage

The fragmented landscape of SVOD has also given rise to aggregation and bundling models that, in some ways, follow the path that was originally blazed by cable TV.

VRV hit on the SVOD aggregation model early. In addition to selling SVOD services on an a la carte basis, it also sells a $9.99-per-month premium bundle that includes its own curated house channel, VRV Select, as well as Crunchyroll, Funimation, Mubi, DramaFever, Cartoon Hangover, CuriosityStream and Rooster Teeth, among others.

Rooster Teeth has been able to build its base largely though its standalone offering, but has seen some doors open through its partnership with VRV. “It’s been complementary,” Hullum said of the VRV partnership. “It also helps us get into markets and find like-minded people in a more curated way.”

Nerdist and Geek & Sundry are also partnered with VRV, but Rymer said he sees more refinement coming to the way the SVOD world will ultimately evolve.

“Bundling feels like a natural progression of how things will evolve in the same way they evolved with cable networks,” Rymer said. “We look at ourselves, at least from a video standpoint, as a next-generation cable network.”

Rather than creating small, medium and large-sized bundles, Rymer predicted the emergence of more genre-based bundle options around areas such as sci-fi or anime.

“We can do a lot of things on our own,” Rymer said. “But it’s important for us to be able to work with partners, like a VRV and a PlayStation Vue to a YouTube TV, in this next phase of evolution as they start to add digital channels into the offering.”

SVOD bundles are taking shape in other forms, particularly with mobile carriers. T-Mobile, for example, has its “Netflix on Us” promotion, while Sprint bundled in Hulu’s subscription SVOD service (though not its new live TV offering).

Darwin was right about nature and technology: only the strong survive. The broad deployment of speedy broadband services and a small-but-accelerating trend of pay TV cord-cutting have ushered in a boom in over-the-top subscription VOD content services. But as with other markets, boom times raise the specter of corrections to come.

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