Troubling Trend: Content Licensing Costs So High, OTT Services Struggling To Become Profitable

With all the non-stop mentions of how popular OTT services are, the one thing no one seems to be talking about is how any of these OTT providers are actually going to make money and become profitable. For years many said the key to the success of any OTT business was simply to get enough scale and subscribers to cover the costs of licensing and distributing content. But even as we have seen with Netflix, scale doesn’t get you to profitability when the cost to license/create content is so high and the price you can charge the consumer each month is so low.

Netflix’s subscription rates haven’t grown as fast as they need them to and the company can’t raise prices each year the way pay TV providers do. When content costs go up in the pay TV world, they pass those costs on to the consumer with higher rates. But when content costs go up for Netflix, Amazon, Hulu, Sling TV, PlayStation Vue etc. they end up eating those additional costs and rarely raise their monthly rates to consumers. Viewers have become accustomed to OTT packages in the $6-10 range for VOD and it’s a sweet spot as we have witnessed. Each time Netflix has raised rates, they have lost subs.

With more competition entering the market, content licensing costs have skyrocketed as more OTT platforms have been bidding up prices. As of last quarter, Netflix has streaming content obligations that total over $13B and their licensing costs have grown by more than 50% from 2010-2015 while their revenue has only grown 26% compounded annually. While breath and depth of catalog use to be how Netflix promoted their offering in the market, now they have so many competitors that original content is the only way to differentiate the service. Netflix is spending nearly $5B in content licensing/creation costs in 2016 alone and extrapolating out the numbers simply doesn’t work in Netflix’s favor. The company could literally run out of cash before the number of subscribers can support the business.

And it’s not just video. Spotify’s revenue grew 81% last year, but royalty fees jumped 85% to nearly $2B, taking up 84% of Spotify’s revenue. CBS said they lost money on their content licensing deal with the NFL last year for eight Thursday night games and that was for pay TV, not online. And internally, people at Twitter who don’t want to go on record confirm that they will lose money on their deal with the NFL as well. Content licensing costs aren’t just a Netflix problem, or one tied to VOD content, it’s a system wide problem across music, movies, broadcast TV, for VOD and live linear. That’s why no stand alone company can ever afford to offer a live linear services and has to be owned by an ISP, carrier, MSO or large company in the ecosystem like Google, Sony, Apple, Microsoft etc. Sling TV would not survive if it werent’ owned by Dish. And DirecTV Now is a service that could not afford to be in the market if AT&T didn’t own it. These OTT service are loss leaders for others products and services these companies are selling, or enable them to generate revenue from other services tied to it, like Amazon has with their Prime service. But even then, it’s no guarantee that OTT will make these companies more money in other ways. Hence why so few of them are willing to break out any actual numbers on their OTT ofering or the impact it has on their other lines of the business.

In 2015 Microsoft disclosed how they stopped all plans for live TV service to the Xbox as they said the content licensing costs were so high, they could never create a profitable business from it, at the price point consumers would pay. Hulu’s monthly fee of $12 a month with “almost” no commercials isn’t enough to offset the cost of licensing content, as the company isn’t profitable. Talking to those who saw the term sheet when Hulu was being shopped around last year they say Hulu has had over $1B of cumulative losses since 2008. And then we have guys like Yahoo who lost $42M in 2015 on licensing and original content creation and there are plenty of one-off examples like that to go around.

In any other segment of the industry, we typically judge the success or failure of a company based on their profit and loss statement. Yet when it comes to these OTT services, many want to judge their “success” based on the number of subs they have, without looking at profitability. Why are so many giving these OTT services a pass? And even if we do look at the number of subs, if we strip out Netflix and Hulu, none of the other major OTT services even have 2M subs, with many well under 1M. CBS All Access and Showtime each have 1M subs, as they reported in the summer. HBO Now had over 1M subs a couple of months back. Sling TV and PlayStation Vue won’t put out numbers, but are without a doubt have under 2M subs, with my bet being that both are under 1M. DirecTV Now is new in the market, but the company’s own internal projections are for 1-2M subs by the end of 2017. Hulu reported 12M subs, six months ago, which was up from 9M at the same time period, yet their growth slowed from 2014-2015 when it was growing 50% at the time.

The trickle down effect of what is happening, to everyone in the video food chain, is that Netflix and many of the other OTT service are bidding up prices for content that is so high, that even some cable channels and even studios think they won’t be able to compete. So while we have a lot of choices right now as consumers, the business of licensing content has to change if any of these companies want to make it long-term. The current way of licensing content and the costs that go with it don’t support a profitable business models. As a result, many of these OTT services are going to be impacted and will probably get re-packaged through an aggregator like Amazon, which we are already seeing take place. At some point, profit and loss of the OTT business will matter, for all of these companies.

Verizon Ventures Invests in Beamr to Further the Company’s Market Penetration

beamr-logo-color-horizontal-hiresEarlier this year I reported about Beamr’s acquisition of Vanguard Video, the video encoding technology company best known for supplying the HEVC codec SDK that Netflix is using for all their 4k, Dolby Vision, and HDR-10 content. At the same time, they announced raising a funding round of $15M led by Disruptive Growth, with participation from their existing VC’s Eric Schmidt’s Innovation Endeavors fund and Marker, LLC. With today’s announcement of Verizon Ventures adding $4M to the company, it seems the company’s momentum is set to expand faster.

Beamr tells me the additional funds are being earmarked for market expansion to capitalize on the opportunities they see in the telco, cable, and satellite sectors. Which is in addition to their existing video optimization business and the H.264 and H.265/HEVC encoder SDK business, which I can assume is healthy given Verizon’s investment.

For those not familiar with Beamr, they are an interesting company, who has grown from being a niche technology provider in the area of video optimization to a video encoding and processing technology vendor. New entrants in the video optimization space seemed to pop up every other month a few years back, yet we’ve since seen most exit the market or change directions since that time. With the acquisition of Vanguard Video and the advancement of their perceptual quality measure technology, the company appears to be adapting quickly to the needs of the market. Netflix, IBM, Imagine Communications, Microsoft, Dolby and dozens of other companies in the space leverage their technology.

As new entertainment experiences are being introduced such as VR, 360 and UHD 4K with HDR, there is a clear need for more advanced video encoding solutions. Which in concert with the consolidation that has hit the encoder market this year, such as the acquisition of Envivio by Ericsson and Elemental by Amazon, I see an opportunity for nimble technology disruptors to grab market share based on their technology and ability to adapt to the needs of the market.

In the piece I wrote earlier this year about Beamr, I suggested it’s becoming more difficult for some companies to do business with certain vendors. For example, does a cable company want to buy encoders from an Amazon-owned company? Potentially not. By combining Beamr’s perceptual optimization technology with their highly lauded H.264 and H.265/HEVC codecs, they are in a good position to capitalize on the industry consolidation and technology inflection point as we transition from H.264 to HEVC (over many years) and from hardware to software based solutions.

Though network investment will continue, capacities are always going to be under pressure. The ratio of data per pixel used for encoding video will need to decrease, even while the video quality remains at the same level. Perhaps this is why Verizon invested in Beamr. Verizon has highly capable video engineering teams, and they have built a world-class network. Yet the one area that no operator can address independently is video encoding due to the highly specialized and academic skill sets and knowledge required to further develop video encoding technology. Beamr has a team of 60 engineers focused solely on codec development, which I have to believe was not lost on Verizon.

When you look at the accelerating trends of video consumption – and consider new formats like VR and 360, it doesn’t surprise me that Verizon thru their investment arm Verizon Ventures, invested in Beamr. As the market has shifted to software, and some current encoder solutions dont’ provide the needs of the market, I can see Beamr rapidly becoming a dominate encoding vendor.

December Holiday Streaming Media Meetup – Tuesday Dec. 13th, New Location

554821_327218634021249_880501208_nThe next streaming media meetup in NYC will take place on Tuesday, December 13th, starting at 6pm at Tavern 29. We’re going to end the year with a great meetup and free drinks and networking thanks to sponsors 3Q SDN, Bitmovin, Level 3 and Highwinds. Tavern 29 is located at on 29th street and Park. We will be on the second floor and they do ask for ID at the door. There is no RSVP list, just show up, bring a friend and spread the word!

These meetups are a great way to network with others tied to the online video ecosystem. We get a great mix of attendees from companies including AOL, NFL, Showtime, Omnicom, NBC, NBA, Time, HBO, Viacom, CBS, Twitter, WPP, Google, Nielsen, Facebook, FOX, R/GA, Twitch, Riot Games, American Express, Comcast, wall street money managers, government agencies, VR production companies and vendors from all facets of the video ecosystem.

I’ll keep organizing these every month so if you want to be notified via email when the next one is taking place, send me an email and I’ll add you to the list.

AT&T’s DirecTV Now Streaming Service Limited, No Game Changer

directv_now-0AT&T’s new streaming service DirecTV Now has been hyped by the company as a “game changer” but after getting most of the details during today’s launch, as I expected, the service has quite a few limitations. For starters, the $35 pricing AT&T has been raving about is a “limited time offer – for which an end date has not yet been announced“. So how long that price will be good for is unknown. The company also said that the streaming service will see pricing increases down the line, as content licensing costs increase, which is the same we all experience with cable TV. AT&T’s press release says, “future reasonable programming price increases applicable to all packages.”

When the service launches on Wednesday, there will be a limit of two simultaneous streams per account, so the service isn’t a good option for those who want to stream from more than two sources at once in the same household. Roku support will come in 2017, but there is no mention at all of support on Xbox One or PS4 in the works, which combined, has sold more devices than any other piece of hardware connected to the TV. So that’s a big missing piece. There is no 4K support, which is fine, that wasn’t expected, but AT&T still hasn’t said what the max bitrate the video is encoded for, so it’s hard to know what the quality is going to be.

And if you are looking for a complete channel lineup, AT&T didn’t send one out with the press materials and as of now, hasn’t provided a list. I guess we’ll all see on Wednesday which channels come in which package, (there is no CBS or Showtime) but it’s odd they talked so much about how good the channel lineup is, but then didn’t provide any details. Also, where local affiliates are involved, many users will only have access to on-demand replays of primetime shows, unless you are in a major city where the network owns the local programming.

Pricing and Packages:

  • Live a Little – more than 60 channels for $35/month
  • Just Right – more than 80 channels for $50/month
  • Go Big – more than 100 channels for $$60/month
  • Gotta Have it – more than 120 channels for $70/month

HBO and Cinemax can be added for $5 each per month, which is a good price and shows that AT&T is clearly subsidising some of the cost. Pre-paying for 3 months in advance package will get you an Apple TV for free, and pre-paying for 1 month will get you a free Amazon Fire TV Stick with Alexa Voice Remote.

AT&T needs to start somewhere with their new service, but for all the hype they have been giving it over the past nine months, the launch to the market seems half-baked. There is no channel lineup listed as of yet, no cloud DVR features, no Roku/Xbox/PS4/Smart TV support, no details on video quality, promotional pricing with no known end date, no premium sports, and no integration with NFL Sunday Ticket. And yet AT&T’s press release calls this a “Revolution”.

If AT&T was looking to do something to make their service stand out when compared to competing services PlayStation Vue and Sling TV, they didn’t do it. DirecTV Now feels more like a beta version that I’m sure will improve over time, but at what cost to the consumer is unknown.

Also see: AT&T Reserving Capacity To Support About 1M Simultaneous DirecTV Now Subscribers

Thursday Webinar: OTT Best Practices: Strategies that Drive Subscriber Acquisition & Retention

Thursday at 1pm ET, I’ll be moderating a StreamingMedia.com webinar on the topic of “OTT Best Practices: Strategies that Drive Subscriber Acquisition and Retention“. In the dynamic OTT market, fluctuations in subscriber metrics can make or break your business. To smooth acquisition and retention, leading OTT providers are finding success by combining flexible billing with advanced analytics. In this informative webinar, you’ll discover the proven strategies smart OTT providers are using to accelerate healthy subscriber growth.

Join the subscription management experts from Recurly on Thursday, November 17, 2016 at 10am PT / 1pm ET to learn how to:

  • Identify the most profitable bundles – pricing, promotion and channels – for your business with real-time analytics and actionable insights
  • Minimize churn – especially involuntary churn – with decline management and dunning strategies
  • Optimize revenue with continual testing, hypertargeting and advanced performance metrics

REGISTER NOW to join us for this FREE live web event.