Why Viewer Engagement is King

By Bismarck Lepe on Sep 07 2011 at 9:00 AM

Last week's announcement that Netflix will not be renewing its contract with Starz, prompted a lot of opinion postings. Among the more notable pieces was Erick Schonfeld's TechCrunch post, in which he talks about traditional media's resistance to: streaming media, social recommendations, Apple TV and Google TV—as well as the impending death of DVR.

From our perspective, the genie has long been out of the bottle. At the end of the day, the real story is not about Netflix vs. Comcast, or DVD vs. Streaming, or even Broadcast vs. Cable. It's about consumer engagement—which is, in a sense, a finite resource. Once a consumer subtracts sleep and work time, he/she has about 300 hours per month to expend. Capturing a greater share of this time—particularly the portion consumers allocate for entertainment—is the true battleground.  

He who engages the consumers best will be declared the victor.

Some see the writing on the wall more clearly than others. To take an example—we work with several companies whose core business is movie theaters. The management at these companies is smart. They know that once it becomes easy to watch all content in home theaters, on phones and/or on tablets, fewer people will venture out to the theater. So what are they doing? They’re investing heavily to build their own Netflix-like services, as a hedge against their own businesses.

But it's not just brick-and-mortar movie theaters. It seems like everybody who is part of the media distribution value-chain is trying to figure out how they can own more of the consumer's time. Here’s what we're seeing:

1. Subscription vs. PPV vs. ad-supported
The most profitable business models that are being launched are those that apply both a subscription and advertising business model. Pay-per-view works well, but only for live events.

2. Content owners and relationship owners
The Netflix-Starz relationship is similar to the Viacom-Time Warner Cable relationship: you have the content creator and the content distributor. It's not that Netflix walked away from the relationship, it's that the aggregator wasn't willing to pay Starz what they wanted for their content. (The Viacom and Time Warner negotiations, if you recall, were a little more public.)
Because digital content is easily copied and distributed, content owners will need to move to an auction model in which distributors compete for early access to their content. This will be similar to distribution windows for theatrical releases, but without set distribution time periods.
As an aside, it’s worth noting that Netflix is relatively unknown internationally, despite enjoying strong brand recognition here in the U.S. The lesson? There remains a lot of opportunity for companies to create aggregation/distribution businesses for regional or niche audiences.

3. Distribution windows
We think that eventually distribution windows will be compressed to hours and days, and early access to the content will become extremely valuable.

4. Publishers
Everybody is getting into the business of streaming content directly to consumers—and each has a different reason for doing it.

Cable & Satellite Service Providers
Faced with cord-cutting and the rise in popularity of Web-based alternatives, service providers are rolling out their own TV Everywhere options. We view this primarily as a defensive move designed by the providers to maintain and retain their existing business while they determine the best way to deliver a la carte service in the future. Most providers are forcing their content partners to setup authentication paywalls in order to provide "perceived" value to their subscriber base.

Studios—even the ones without a broadcast channel—are trying to figure out how to use the Internet to distribute their films and shows directly to consumers. Some are standing up their own sites, some are licensing distribution deals to other aggregators and others are experimenting with platforms like Facebook to distribute their content.

The networks have been early movers in the space because they've had a direct relationship with consumers for decades. This means they can easily promote their content and online properties. Like the studios, most of the major networks get big checks from the cable and satellite service providers, so most are playing nice with the service providers. But at the same time, networks are aggressively launching new direct-to-consumer offerings that will allow them to distribute content that falls outside of their carriage fee contracts. Like with the recent Starz deal, it is inevitable that the networks and studios will ultimately have the most negotiating room.

Aggregators are popping up in all shapes and sizes. You have folks like Netflix and Hulu, but then you also see companies like Walmart and Google getting into the content aggregation business. These companies will look more like the service providers than the studios or networks, but you can also imagine a future where aggregators produce their own original content. We're already seeing Hulu and Netflix fund their own programs. Case in point: check out A Day in the Life Of...
Device Makers
Apple figured out that devices can actually drive recurring revenue with the launch of the iPod and iTunes. We think that more and more companies that make phones, tablets and televisions are going to get into the business of aggregating content in order to drive recurring revenue. At this point, the television industry is a single-digit net margin business, and creating a content aggregation business is a way for them to build profitable businesses.

5. What about bandwidth?
The question about bandwidth and the ability for consumers to access content over IP always comes up, but we believe that ubiquitous Internet access is a foregone conclusion. In the next five years, over 50% of all video will be watched on an IP-enabled device. On average, consumers will probably pay less for content, but they will end up paying more for every show they watch because it will be more targeted and relevant.

6. Fragmentation & the future of media
Here at Ooyala, everything we see and hear suggests that the worlds of media and online video will continue to become increasingly fragmented. Consumers will be able to access content on more screens, Web properties and applications. Accordingly, we believe that the companies that provide the best experience regarding their content—to keep the consumers engaged—are the ones that will be able to capture a premium on the content that can be had elsewhere.


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