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Will Inflation Kill Growth in the OTT Industry?

Will Inflation Kill Growth in the OTT Industry?

Will Inflation Kill Growth in the OTT Industry?
Michael Lantz
CEO, Accedo
INSIGHTS BLOG /
 August 2022

Inflation is everywhere at the moment. With the underlying increase in energy prices driving up the cost of everything and the war in Ukraine and unreliable weather driving up the cost of food, this has a real impact on consumers. With salary increases in most cases lower than cost inflation, most consumers will have less disposable income to spend on e.g. OTT services. At the same time, many OTT services are increasing prices with the latest major price increase coming from Amazon on the Prime video service.

The OTT industry has been steadily growing for a long time, and projections point to  continued growth for the foreseeable future. However, the question I’m asking myself is whether we’re going into a period of slower or no-growth or whether growth will continue unabated through this inflationary period.

The case for slowing growth

First and foremost, additional OTT services should certainly be considered a discretionary spending. Once you have 1-2 video services, you have enough content to entertain you for years and you don’t really need additional video services. Rational consumers will set a budget for their monthly content spend and will limit signups to new services, impacting growth.

Secondly, any time you implement and communicate a price hike, you introduce a potential churn event. Consumers who get the message about a price hike, inevitably need to make another purchase decision at that point in time. Some consumers will certainly decide that that particular service is not worth the money anymore and will churn at that point.

Finally, we’re certainly seeing slower growth in supply. With less access to cheap capital with the tightening financial markets, we’re seeing fewer OTT start-ups and we’re seeing less ambitious international growth plans from some of the more risk-averse larger players.

The case for continued rapid growth

The most important driver for OTT growth is still cord cutting/cord shaving. Cord cutting, while painful for pay TV operators and pay TV channels, free up consumer budgets. Typically those freed up budgets are spent on OTT services, with no additional increase in household spending on TV. 

Furthermore, TV and video service spending is resilient in the face of recession. While a discretionary spending, it’s a comparably cheap discretionary spending, and it is likely that reduction in holiday travel spending or restaurant visits will be materially more important for most middle class consumer groups than reduction in OTT spending.

Finally, we are still in the relatively early days of good enough technology availability for OTT services in the developing world. Increased coverage of broadband internet, improved availability of online payments, as well as access to better online devices, create a massive growth of potential OTT consumers in large parts of the world.

My conclusions

I think we’ll continue to see double digit growth in the OTT industry over the coming years. Yes, total user growth will undoubtedly be reduced, but I expect that the total market increase will be quite resilient. Partly this will be due to price increases, where average price per subscription service certainly will tick up at least a few per cent, but more importantly I believe that we’ll see a rapid increase of availability of FAST services in the market. With maturing technology and improving advertising solutions, the business case is much better than it was pre-pandemic and we’ll see many new experiments in this area.

Historically, ad spend in OTT has been dominated by the catch-up services from local and regional broadcasters, but I believe that we’ll see plenty of new initiatives from international new players. These new initiatives may be lower ad-funded tiers like the one Netflix has communicated it will launch, or completely separate services with separate brand names or target groups like Pluto TV. Long term I believe that the OTT industry should be 50% powered by advertising, and if I’m correct, ad-funded OTT services will grow faster than subscription services over the coming years.  

 At Accedo, we think it’s more important than ever for video services to focus on user engagement. It will be even more important in an ad-funded world where more engaged users generate significantly more revenues. 

We will be at IBC from 9th – 12th September. Book a meeting at IBC to discuss how we can support you in your journey towards a world-class video experience.

 

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