Earlier this year, I presented at OTTcon. This was the first major conference about OTT (video) ever, and was attended by a few hundred people and many industry players. Coming into this conference, I was under the distinct impression that OTT is a significant disruption to traditional service provider business and that it would have a significant and negative long-term impact on that marketplace. The common wizdom is that service providers who have the most to lose will be the least motivated to support OTT, and will therefore be the last to embrace it, if ever, will ultimately face the disruptive impact most of all, possibly losing their video distribution business over time.
But—I came out of the conference with the opposite conclusion! It’s not that OTT won’t be disruptive – it will, but not “as” disruptive as one might expect. And most of the market players will probably remain in place and not be sidelined by OTT. If it were truly disruptive, it would harm the existing service providers more than I expect it actually will.
Why? Because I think the current service providers themselves will ultimately be the ones that enable OTT content, thus avoiding a major disruption – whether they know it right now or not! In fact, right now, they’re doing very little, and most OTT is being enabled by others. So why do I think they’ll wake up in time? Read on to find out.
In case you’re wondering, OTT means “over the top” and it refers to all traffic that flows “on top” of broadband access, typically provided by someone else. For the service provider who provides the access to the Internet, this is just “data”, but for the consumer, this is “video”. While there are many other types of OTT content, this conference was only about video. When I’ll use of the term and “OTT” here, I’m referring only to over-the-top video content.
The most well known OTT is YouTube. Any video one watches on YouTube consumes the bandwidth of the service provider connecting the user to the Internet, and that service provider usually sees no incremental revenue from this. However, there are many other OTT content providers and aggregators besides YouTube. Netflix, for instance, streams video OTT directly to its subscriber, as does BBC with their iPlayer, Amazon Video On Demand, Hulu, Vudu, CinemaNow, Apple TV, and many more. Some of these have subscription services, pay-per-view, or free (e.g. YouTube). Each is supported on a different set of end-devices ranging from TVs themselves, leading gaming platforms, BluRay/DVD players, media centers (e.g. Boxee and Kodak HD Theater), the iPad, the iPhone, and dedicated streaming boxes. The common denominator is that for the broadband access provider, they are purely “over-the-top”.
To understand the point I’m making here about whether the technology is disruptive or not, you first must understand the term “disruptive technology” coined by Clayton Christensen and made famous in his important book, The Innovator’s Dilemma. As Christensen explains, for a variety of reasons, existing companies in the market ignore the disruptive technology until it is too late.
It is this definition that I am using when I say that OTT will not be as disruptive as expected. The main reason is that rather than ignoring OTT, the existing players will become the main enablers of it. This is true for most broadband access providers despite their long-term vested interest in current forms of video distribution and revenues associated with them. Many cable TV providers, satellite TV providers, and telcos providing IPTV have a vested interest in paid content – yet despite this, they will become key enablers of OTT, and thus avoid being completely marginalized by its potentially disruptive effects.
OTT looks like a classic Disruptive Technology
On one hand OTT has many of the parameters of a disruptive technology:
- Not good enough – Perhaps in its current state, it isn’t good enough to actually compete with traditional pay TV. In many homes, OTT can suffer in terms of quality compared to the well established forms of TV distribution that are managed and assured. Since the OTT provider has no control for the access, there may be a lot of buffering or poor quality in the viewing.
- Lower revenue – Unlimited monthly subscription to all content available online from Netflix costs less than $10/month. This sort of price range makes OTT unattractive for established players who make a bulk of their revenue from paid access to content or advertising—neither of which are well supported by OTT.
- Competes with their core business – OTT takes attention, time, and money away from the current forms of TV delivered by the current service providers. So why would a cable TV provider offer these services, if they compete with their own, higher-earning services?
- Poised to evolve to be “good enough” – As with most disruptive technologies, OTT might ultimately evolve to become good enough to compete for mainstream market—eventually overrunning traditional channel-switched TV.
Add to this that OTT HD video has high demands from broadband, and therefore, costs the broadband access provider a lot to deliver, especially over wireless technologies.
So why won’t it be as disruptive as it seems?
For a few reasons:
- Consumer demand: Recent research shows consumers actually aren’t moving to OTT content in order to “cut the cord” to cable and reduce costs, but rather to get access to more entertainment and information available on the Internet—from YouTube, Hulu, BBC iPlayer, Pandora, NetFlix, and many more. Furthermore, most consumers do not want a new device specifically for doing this. They would rather see these capabilities in one of the devices already connected to their home theater or TV – the TV itself, the receiver, the DVD player, the gaming platform, or the set-top box (STB). Adding an additional dedicated device just for streaming from the net is an early adopter’s game – unless none of the other consumer electronics can do it well. So basically, consumers want the expanded experience of interactive video and Internet video content, but without unnecessary complexity of more boxes/cables/connections…
- Satellite TV providers have a clear interest in supporting OTT: They don’t have a direct cost associated with giving an expanded experience to the consumer, since it’s not on top of their infrastructure that the OTT video will be consumed—it runs on top of a wireline or cable infrastructure usually purchased separately by the consumer. So they will be motivated to cater to consumer demand by adding OTT video capabilities directly to their STBs. Indeed, they will probably be the most aggressive about it, as it gives them a short-term advantage over those who are more disrupted by OTT traffic.
- IPTV players often own less paid video content assets, and therefore, will want to cater to the consumer demand. Since their set top boxes are mostly newer, and can often be upgraded in place, they will begin to offer OTT access for their subscribers even without replacing set top boxes – and they will.
- Cable TV providers will likely react to the threat by their direct satellite TV and IPTV competitors, and match the same features/functions. So once satellite and IPTV providers introduce OTT video capabilities, the cable TV providers competing with them will be compelled to follow suit. This will indeed look disruptive to the cable TV provider. However, it will also look like a sustaining innovation – to neutralize their competitors’ advantage. So they’ll just do it.
So this explains why, within the next 2-3 years, I predict all TV providers will have OTT video access capabilities built into their STBs. If this is the case, it doesn’t look so disruptive after all. Since rather than ignoring the threat, they will become the key enabler of it. The current pay TV providers will remain the provider of TV – including OTT TV/video, all facilitated by their own STBs. By and large, these developments would be suitable for most households, and therefore, while there will be other means to access OTT, the current pay TV providers will be the predominant way to access OTT as well as other TV content.
The only key problem with this prediction is that service providers are not the most nimble. It might take them longer than consumer electronics companies or Internet players to get used to the idea of providing access to OTT video directly from their STBs. In the next 12-24 months, many different consumer electronics manufacturers and Internet players will try to aggressively add OTT capabilities to their devices.
This is a full-on war, and time here is of the essence. All players are trying to get OTT video to the consumers – each in their own way. This is what the consumers want, and someone will give them what they want – probably everybody.
So, where is this going?
At the end of the day, I do think that the service providers have a pretty good chance to be the vehicle by which OTT content is provided. Think about it – most of us probably don’t switch TV channels on the “TV”, but rather on the pay-TV provided STB. Wouldn’t we want to use that same STB also for the OTT we want to access? Not everybody has a gaming platform, but even those who do, don’t often use it for TV.
In recent months since that conference, things have just heated up. Google TV is about to enter as a formidable OTT play (in addition to their YouTube). Netflix is now distributed on all gaming platforms and BluRay players and has a client for the iPad that outputs to the connected TV – making the iPad a media streamer for TV content. And many Internet-connected TVs are also on the market.
Slowly, yet surely, service providers are finally beginning to come out with OTT-enabled STBs. Back in April, The Hollywood Reporter reported that Verizon will bring YouTube, Facebook and Net radio to the TV with their FiOS service. What this means is that other providers, such as wireline, cable, and satellite service providers, will shortly follow with basic feature matching – and it will be a “sustaining innovation” rather than a “disruptive innovation”.
Pay TV service providers might need to step up the pace, however. As a recent study shows, time might be running out. It’s now time to give consumers the experience they want, and the faster this happens, the less likely most customers will leave.
Who do you think will win the OTT war?
In particular, who do you think will be the dominant device in the home that will bring OTT video to the screen and why?