Amid the proliferation and popularity of subscription-based online video distribution (OVD) services such as Netflix, Hulu and Amazon Prime, the U.S. pay TV industry has suffered a steady erosion of its customer base.
Based on customer acceptance and market dynamics, pay TV providers should consider the following recommendations to improve their viability and stay relevant in the eyes of customers.
Pay TV providers must start experimenting with new video delivery options and business models to attract more customers, including:
OTT TV streaming services: Long-term evolution (LTE) multicast is among the new technologies that could be crucial to ensuring the quality of live content streaming by wireless players. A major challenge for pay TV providers is striking deals that allow them to distribute content over several regions. The movement of new competitors into this area is also upping the competitive ante.
Customization of bundles: A Nielsen report reveals that customers in the average U.S. household view an average of only 17 channels consistently vs. the 189 they receive. Reducing the number of channels per bundle while enabling customers to customize their channel selection would be an attractive proposition for cord-cutters and cord-shavers alike.
Device performance analytics: According to an early 2014 survey conducted by American Customer Satisfaction Index (ACSI), pay TV providers scored among the lowest in customer satisfaction of all 43 industries studied. Analytics could be key to improving these scores. For example, device performance analytics could help predict which customer premises equipment is most likely to fail and when. Analytics could also be used to continuously monitor the health of set-top boxes and DVRs and determine the likelihood of performance degradation.
While customers have so far been slow to accept strategies adopted by TV providers to counter the popularity of OVD services, the following approaches are worthy of investment:
Deployment of new-age DVRs: A large majority of pay TV subscribers in the U.S. still use legacy set-top boxes with limited storage and poor UI features. Cloud and hybrid DVRs are becoming increasingly popular among TV subscribers, as they provide a host of new features compared with a traditional set-top box, such as the ability to increase video storage space; record multiple live streams simultaneously; unify the experience across mobile devices and TVs; have videos delivered to multiple set-tops and other IP-connected devices in subscriber homes; and integrate multiple services on a single platform (e.g., home automation notifications while watching a movie on TV).
TV everywhere: While all major U.S. pay TV providers have launched their “TV everywhere” services, which allow customers to view content from Internet-enabled devices, the inclusion of additional content in these services could increase their popularity and attract new customers. Comcast’s X1 app is a prime example of how these services have grown from mere content aggregators, to offerings that bundle services such as home automation control and voice mail notification, thereby enhancing the value proposition to the end user.
Improving monetization by dynamic ad insertion: Dynamic ad insertion refers to the insertion of personalized advertisements in on-demand and TV everywhere titles. The resulting ad revenue could be a significant revenue source for pay TV providers, as long as they can overcome issues such as customer acceptance of ads for premium on-demand content and effective measurement of ads for time-shifted content.
Rent/buy-on-demand titles: Use of video on demand (VOD) content by pay TV providers is slowly gaining popularity with consumers. According to a late 2014 Digitalsmiths report, almost 70% of subscribers did not rent video-on-demand titles from their pay TV catalog, compared with 73% a year earlier. Transactional VOD is a competitive space, with players such as Amazon Instant, Redbox Kiosks and iTunes providing a wide array of video selection. Pay TV providers need to improve their video content selection and increase service adoption to attract more viewers. Free on-demand marathons by Comcast and Verizon — which garnered a strong consumer response — could also be an effective way to improve customer awareness.
Pay TV providers need to rethink strategies that could be detrimental to their bottom lines over the long run.
Launching similar on-demand services: Services such as Streampix (Comcast) and Redbox Instant (Verizon) were launched to compete head-on with OVD services. Priced below popular subscription OVD services such as Netflix and Hulu, they managed to garner initial market interest but were discontinued in late 2014 due to a lack of customer awareness and limited content choices.
Partnering with OVD services: Recently, U.S. pay TV providers such as Dish TV, CableOne, MediaCom and Suddenlink — along with some regional players — have integrated their video offerings with Netflix. This could eventually result in reduced pay TV subscriptions for these service providers and more broadband usage. Even though broadband subscriptions are soaring, pay TV average revenue per user (ARPU) is roughly twice that of broadband ARPU. However, the aforementioned partnerships between OVD services and U.S. pay TV providers do not come with integrated customer billing. Hence, their revenue sharing models would be quite different from the traditional models that exist between pay TV providers and broadcasting networks. Such a move is more beneficial to Netflix since it can address the needs of customers with set-top boxes apart from the wide array of devices that it supports. Such a move could also adversely affect the total revenue of the service provider going forward.