As we leave 2022 and head into the new year, it seems that the video industry is more volatile than ever before. While we appear to be more or less out of the pandemic, and most of us have returned to pre-covid ways of doing business, there are certainly new dark clouds on the horizon. Inflation, interest rate increases and geopolitical instabilities, as well as a turbulent media industry with mergers and cost cutting programs at some of the larger video services, are all factors that contribute to a high level of uncertainty as we enter into 2023.Amidst all this volatility, it’s certainly more difficult than ever to predict where the industry is headed. Instead of the usual approach of looking at specific technology or usage trends, I will therefore discuss three possible market scenarios, looking at the various factors that impact their respective feasibility and ultimately try to draw some conclusions.
Going by the book, a fast growing market which slows down should lead to consolidation. Some companies will draw the conclusion that, with a decelerating market, they will not be able to reach the profitability level needed to justify them going on their own. Instead, they will join forces with other players, creating economies of scale and increasing their profitability.However, in the TV and video industries, you can of course also argue that while consumer growth is currently slowing down, most experts are still forecasting steady growth over the coming ten years. The transition from traditional pay TV and linear broadcasting to OTT is still ongoing and even if expansion has slowed down considerably from the Covid-induced growth spurt, the OTT industry will certainly continue to grow at the expense of traditional linear offerings.In addition, one could argue that some of the investments made in the largest global services over the past five years may have been excessive. Content budgets consisting of billions of dollars are difficult to motivate unless the market is growing at a steady and rapid rate. Consolidation could therefore serve as an alternative route to attain an attractive and premium content portfolio in a slowing yet highly competitive market.
On the other hand, the TV market has actually never really consolidated in the past, even if it wasn’t particularly fast growing in the ten years prior to the emergence of OTT. In my opinion, the main reason is that the taste for TV content is much more local than one might think. I think there is way too much attention on what the global video services are doing, rather than what is happening in each local or niche market where smaller video services need to step up their efforts to compete with the likes of Netflix and Disney, but in an environment where the economics look completely different. These providers probably have an existing user base, as well as a library of content which is appreciated by their market, and can operate in a way that they’re comfortable with. They are in a position to generate enough profits for their particular markets, without ever looking to create a 200 million user service.Today, such services don’t need to invest as much as Netflix or Disney, neither in content nor in technology. On the technology side, which is obviously where Accedo operates and I have most of my knowledge, there are a number of cost efficient options, either end-to-end or modularized solutions which will offer good and competitive alternatives to the video technology Netflix and Disney have created on their own. It’s clear that it will become easier to deploy and run a state of the art video service. Customers of our Accedo One platform dramatically lower the cost of running a video service compared to having an inhouse team doing the work - something that was the standard practice as recently as five years ago. With lower technology costs, we’ll see continued experimentation which may lead to increased service fragmentation going forward.
OTT opens the possibility to go direct-to-consumer in a way that wasn’t possible in the past. Historically, content was presented in the form of TV channels in operator packages. Choice and supply of a large package of channels was as important as exclusive content when consumers chose which operator they wanted. It’s been liberating for all content providers to have the possibility to completely control their own destiny, including consumer relationship, pricing, content promotion and branding. However, many providers of D2C initiatives have discovered that it’s not easy to handle fickle consumers. Churn is higher than expected, users don’t behave in the way you expect them to, and the cost of marketing and customer support can be very high.This may lead several D2C video services to either exit completely or, more likely, combine D2C business models with more traditional set-ups. It may be better to monetize some content via other distribution options, either by creating a FAST channel with selected content, or by licensing content to another video service or operator. While distribution technology is completely different, the business models are suddenly more akin to what was the norm twenty years ago. We see an opportunity to create win-win scenarios, where some of the larger video services can no longer afford the same content budgets and need to license third party content, and consumers are still willing to experiment with new ways of finding their favorite things to watch. Smart video services will establish B2B as a complement to B2C business models to lower short term cash flow and minimize risk in the business.
With the industry, and world, as it is right now, it is clear that we’re not going to come to a conclusion on where the market will head long term in 2023. I’m convinced that we’ll see signs of all three scenarios, potentially slightly different in different parts of the world, depending on the maturity of the markets and in particular how active operators will be in driving video services in those regions.My personal view is that we will initially see rapidly increasing experimentation with new business models (Scenario C). In particular, many of the regional video services will no longer have the same content budgets, and will thus be forced to find other routes to content to protect their current business. Long term, when we’re heading out of the macro-economic headwinds, content budgets will likely be freed up again, but over the coming two years, I believe that we’ll see more cross-service content licensing deals happening.In a slightly longer perspective, I think the improved underlying financials for video services (lower content budgets, lower technology costs, gradually increasing revenues) will continue to encourage everyone to launch new OTT video services, i.e. increased fragmentation (Scenario B). The days of new video services being funded with +$100M initial investments may be gone, but the speed of service innovation is likely going to pick up again over the coming year. It’s easier than ever to launch your own D2C service, and that will continue to stimulate innovation.So, what about Scenario A: consolidation? Won’t the market be ready for a “super service” with all available content packaged into one combined offering? For example, there is speculation about the merged Warner Bros Discovery video service called “Max” or other consolidations of that nature. But is it really a good idea to push all content of Discovery+ and HBO Max into one service? I would argue that there is a ceiling of how much consumers are willing to pay for a generic premium video service, and it would be better long term value to expose more content in separate, cheaper services that each target specific audience groups. One option would be for WBD to create multiple tiers with different subsets of content, which could make it possible for them to widen the market appeal while also creating upselling opportunities inside the service. However, while this would widen the market, it is still unlikely that any consumer would want to pay more than $15/month for what is perceived as a single video service. If the theory holds up, this means that consolidation among larger services will not generate the desired revenue synergies. After a period of trying and experimenting with different revenue models inside the main service, we’ll start to see the introduction of new niche services again with some content being taken away from the so called super services.To summarize, as we head into 2023, I’m convinced that this coming year will be all about going to profitability. This will stimulate business model innovation and new initiatives to retain and upsell to existing viewers. I’m looking forward to Accedo contributing to this experimentation in the market.
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