OTT Picks Up Pace in New Zealand

Two in every five New Zealanders now subscribe to an OTT service, according to a recent report from Roy Morgan Research, and one in every ten already subscribes to two or more OTT services.

That's an impressive penetration rate for a region that has faced significant international connectivity challenges. Because of its location, New Zealand didn't have many connectivity options to the rest of the world. As a result, broadband providers have had to pay significantly higher transit costs for the delivery of traffic from other parts of the world, primarily the US. According to one operator we spoke to a few years ago, that could be as much as 200 times the cost of transit compared to well connected parts of the US. Local caching of content became an obvious strategy, and it appears to have helped drive the adoption of Internet video services, and created a good platform for local OTT adoption.

For a country with a population less than 5 million, developing and monetizing services can be a challenge. By contrast, the US has 64 times New Zealand's population, and even Canada's 35 million citizens work out to seven times the population of New Zealand.

As you would imagine, Netflix Inc. (Nasdaq: NFLX) is the market leader, with just over a million subscribers at the end of last year. This number was up 56%, from 684,000 from the previous year.

Telecom operator Spark's streaming service Lightbox ranked second with 630,000 subscribers, but had more than doubled its subscriber base in the last 12 months, from a base of 285,000 at the end of December 2015. Given the spate of original content that Netflix will be pushing in coming months, it's questionable that Lightbox can catch up -- but at its current rate, it is growing considerably faster.

Other OTT players include Australian streaming services provider Quickflix, and Neon, a division of local satellite operator Sky. Sky New Zealand is no longer affiliated with News Corp's Sky, though it was an important stakeholder until recently. However, it does still partner with Sky for technology and services. Neon appears similar to the NowTV service in the UK, including the partnership with HBO.

Between the two, Neon and Quickflix reached 127,000 subscribers in the December 2016 quarter.

All told, 1.4 million subscribers have signed up for one of these four services, up from 900,000 at the end of 2015. But Roy Morgan's research also found that households are doubling up their OTT subscriptions, primarily Netflix and Lightbox. At the end of 2015, only 108,000 subscribers had both Netflix and Lightbox, but this more than tripled to 337,000 by the end of 2016. Today, more than one in every four OTT subscribers have two or more OTT services, up from about 16% last year.

Netflix, Lightbox Driving OTT Growth in New Zealand

Source: Roy Morgan Research, 2017

Overall, 500,000 New Zealanders added an OTT service last year, and penetration has doubled from 10% in the first half of 2015 to 20% at the end of 2016. That's rapid growth, and there's space to grow -- though according to Roy Morgan analysts, much of the growth is coming from existing users adding second services.

That's an interesting trend and raises questions about cost being a major cord-cutting driver. Even if multiple OTT subscriptions are still cheaper than a full-fat pay-TV service, if cost is a major driver then users would be less likely to layer on multiple bills. This doubling-up is even further along in the US, where various estimates peg OTT penetration at about 50-60% of households (note: not individual consumers), with about half of those signing up for multiple services.

In fact, cost probably is an issue, but cord-cutting's appeal is likely to also include a combination of other factors, such as customer satisfaction, device flexibility, no contracts etc. I also wonder if there is a degree of consumer resentment that has built up over the years of steadily increasing pay-TV rates, where consumers are unwilling to pay their pay-TV provider more, but more open to paying the same amount to someone else.

— Aditya Kishore, Practice Leader, Video Transformation, Telco Transformation