Networks

By Steve Nason

The U.S. OTT video services market continues to evolve, with a continued explosion of new, large services from big brands joining an already crowded market and consumers adding multiple services beyond the Big 3 players: Netflix, Amazon, and Hulu.

Several overarching trends that have shaped the OTT video service market over the past year or so have affected providers across the entire ecosystem. These trends include unprecedented consumer consumption, the growing divide between OTT and pay-TV, and the evolution of content windowing.

OTT consumption has increased across a variety of business models. While subscriptionbased services (SVODs) such as Netflix are the primary method of consuming OTT video, consumers use a wide variety of methods to access and consume content including free adbased services, TV Everywhere apps available via a pay-TV service, and pirated content. Additionally, “freemium” services that offer a tier of free content with the option to upgrade to a subscription tier for exclusive content, video content purchased previously via a marketplace or store such iTunes and Google Play Store and transactional services (TVODs) which offer the purchase or rental of single titles and episodes. (Figure 1)

Parks Associates research reveals that more than half of households report using a subscription-based OTT service in the past 30 days, more than double the rate of other service business models. The launch of high-profile mega services just before and during COVID19 such as Disney+, Apple TV+, HBO Max, and Peacock, have helped keep usage high. OTT viewers also continue to gravitate to free adsupported services that are either standalone or part of hybrid “freemium” services. Adsupported services are extremely appealing during COVID-19 as no-cost video options with access to a deep and broad catalog of content in a “lean-back” environment. Fasttracking of new theatrical titles to VOD platforms such as Trolls World Tour, Frozen 2, and Onward towards the beginning of the pandemic also accelerated use of transactional OTT services.

As the pandemic moved into fall 2020, some leveling off of OTT video consumption was seen as past 30-day use of subscription services was flat and ad-based OTT dropped five percentage points in Q3 2020 compared to Q1 2020. This result is not all that surprising as this follows typical consumer behavior. When video consumers were faced with the unprecedented nature of the beginning stages of COVID-19, they reacted by subscribing to and accessing many OTT video services. However, as the crisis continued, consumers have had ample opportunity to properly evaluate which service offerings to keep and which ones to cancel. This prolonged period of exposure to a variety of service offerings across OTT video has led to a certain plateauing and slight decline in consumption that likely will continue in the near-term.

The unprecedented OTT video service consumption brought on by the COVID-19 pandemic is the trend that has touched all corners of the ecosystem and spurred all other trends in the space that has catapulted streaming video into its next phase. The pieces were in place prior to the pandemic for OTT video to take this major leap already. However, the COVID-19 crisis added the accelerant to the fire that has pushed trends that were expected to take many years to fully form and progressed them significantly in a short 12-month period.

Disney+ and Apple TV+, which launched in November 2019, quickly gained market share in the highly competitive subscription OTT space.

Both were further boosted by unprecedented consumption during the pandemic. As of Q3 2020, both services moved up quickly in the SVOD hierarchy with Disney+ reaching more than three in 10 U.S. broadband households and Apple TV+ reaching one in 10.

Newer entrants such as HBO Max and Peacock, which fully launched in mid-2020, saw immediate significant uptake in the market. Though most likely overestimated due to confusion among the different HBO-related streaming brands, HBO Max still quickly rose up the ranks of biggest subscription-based services. Peacock, a hybrid ad-based/ subscription service, saw initial uptake of its paid subscription Peacock Premium tiers place it among other major SVOD offerings. CBS All Access continued to see substantial growth with nearly one in 10 subscribing to the service in Q3 2020, positioning itself well for a further ascent up the SVOD hierarchy as it transitioned into Paramount+ in Spring 2021.

On the other side of the customer journey from uptake and consumption is the related issue that plagues all service providers in the OTT space no matter their business model, size, stature, and resources: customer churn. As demonstrated in the churn rate for SVODs that Parks Associates regularly tracks, however, there is some good news.

Churn, which is an annual figure calculated as the rate of subscribers cancelling an OTT service in the past 12 months as a percentage of the current subscriber base, has dropped significantly year-over-year. Among all subscription OTT services, the rate is down to 38% in Q3 2020 from 46% a year ago. Virtual MVPDs, a subset of OTT subscription services that offer bundles of live channels, also saw a significant YOY drop in churn from 84 to 49%.

These types of services are particularly susceptible to high churn due to higher price points and more uniform content offerings across providers than standalone SVOD services. As a result, any decreases in the churn rate are a welcome sight for these services especially with such significant decreases as seen recently. However, despite the good news, OTT service providers of all business models have to continually be proactive in effectively engaging and retaining customers in order to effectively combat churn.

Retention strategies must include an appealing content offering, comprehensive user experience, and a price point that is properly aligned with the perceived value of the service, else providers risk losing users and the recurring monthly revenue, ad impressions, and transactional revenue that are the lifeblood providers.

OTT service providers have a lot of potential customer retention tools at their disposal to effectively engage and keep their customers. As demonstrated from Parks Associates data in Q3 2020, roughly one in 5 U.S. broadband households who canceled an OTT service in the past 12 months cited retention strategies such as the ability to put a subscription on hold, a lower price for a service tier with less programming, and a subscription price hold as key incentives that would have kept them from canceling. Other retention options that would compel consumers to retain a service include: a free upgrade to a higher tier, better customer support, and the ability to stream the service concurrently on more connected devices.

Some key subscription-based service providers have employed strategies they hope will continually engage and retain their respective customer bases. WarnerMedia announced it will offer a lower-priced adsupported tier of its marquee SVOD service HBO Max in June 2021. This tier will include advertising on select content and will not include some key programming assets such as the new 2021 Warner Brothers movies available on the higher-priced ad-free tier.

WarnerMedia hopes that this new lowerpriced tier will be a significant customer acquisition and retention driver for those more price-sensitive video consumers who do not mind ads as part of the viewing experience. In addition, the tier will allow HBO Max subscribers the flexibility to toggle between the ad-free and ad-supported tier depending on their needs and value expectations, thus allowing WarnerMedia to have a better chance of retaining customers within its walled service garden.

Disney, on the other hand, has been very successful in using service bundling as a key retention strategy. The “Disney bundle” of Disney+, Hulu, and ESPN+ has allowed the media giant to acquire, engage, and retain customers very effectively by providing three services that cater to different distinct audience targets. The breadth and depth of content across the bundle provides Disney the ability to engage and retain different members of a household on a continuous basis, thus reducing the probability of that household churning away from any of the three services.

The significant jumps in the subscriber bases of all three services, with Disney+ recently surpassing 100 million global subscribers as an example, is proof positive that the service bundle strategy has been very effective for Disney in not only retaining its customer base but growing it significantly. x