Every morning, around 8am, I rest my head gently on the shoulder of a woman I’ve never met. A short man nuzzles my armpit with his nose while the blond locks of the girl to my left tickle my face as they catch a brief draft. I can’t stand straight, the noise is ear-splitting and there’s no space to hold a paper or book. It’s my daily trip to the office, chauffeur courtesy of London Underground.

Through a chink of space between the shoulders of my fellow travellers, I entertain myself by reading advertisements for dating sites, tropical beach paradises and, more recently, an offer to “imagine a TV channel that learns what you want to watch.” “Lovefilm is not a TV channel”, it continues, but “it has more movies available to watch instantly online through your TV than all the other TV channels put together.”

Interesting, if slightly schizophrenic, pitch. Amazon-owned Lovefilm’s recent advertising blitz has, of course, been prompted by the arrival in the UK of a trans-Atlantic rival in the form of Netflix. Both services steam content to the TV over-the-top, via PCs, connected TVs, games consoles and other Internet devices. More interestingly from a business perspective, both claim that their main rival is not one another, but pay TV giant Sky.

So where exactly do these precocious upstarts fit in the entertainment value chain and can they really fill the shoes of a giant killer? Any suggestion that they can, has massive implications for the cable TV industry across Europe.
Of one thing I am certain: long term, OTT delivery of content could potentially replicate the service offering of today’s ‘traditional’ pay TV providers. But I am equally certain that, today, they do not. Further, there are fundamental structural reasons why like-for-like competition between OTT and traditional operators may not ever evolve.

It is clear that OTT providers act as content aggregators, following similar business models to premium channels like HBO. Yet it is content that currently sets these operations apart…or rather lack of it. The entrenched economics of the existing pay TV business mean that the OTT providers lack the truly premium content that drives pay TV. That could change. And certainly regulators from the UK and beyond are looking at ways to unbundle SVOD rights from traditional subscription models. A move that surely will devalue the traditional pay TV window to the detriment of content owners.

What about the widely held view that, given access to top-tier first-window content, OTT could fulfil the role of a Sky, Virgin or UPC? The OTT operators’ similarity to a ‘platform’ lies not in the traditional sense of also owning infrastructure, but in a less definable category related to the unlimited breadth of content that could be offered once an aggregator is freed from the linear scheduling. But these are very different things.

For now, OTT aggregators are happy selling direct to the public and transporting their content over the networks of others. But streaming video content is not free, and at the level of the CDN, these operators are incurring distribution costs, while their lack of a physical infrastructure precludes launch of perhaps the most important future pay TV growth sector: add on services.

In mature markets, and increasingly elsewhere too, RGU additions are driving the pay TV business. Pay TV is increasingly a bundled product that includes communications services. And such services are becoming more, not less, important with the latest developments in OTT, multiscreen and out of home content access. If pay TV is now all about the bundle, then OTT cannot compete as an alternative platform.

Even looking at content alone, there is a fundamental difference between OTT providers and the traditional pay TV business model. Pay TV platforms spread much of the considerable cost of content across numerous channel partners which are re-numerated using a model that scales costs to growth. Unless a similar model can be found that works for OTT, such services will be unable to match the content offer of platform operators.

Today’s OTT providers, simply put, are nothing new. They are channels that happen to use an alternative means of distribution. A future in which these operations are brought within the traditional pay TV carriage model doesn’t seem too great a leap.

Cable Congress 2012

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