The rapidly growing use of Internet streaming is creating a dilemma for network operators, particularly those with a pay-TV service of their own. Should you offer an OTT service, or try and convince customers to stay with their existing pay TV package?
It's a tricky balance -- push OTT too hard, and you risk downgrading higher-margin customers to "skinny," lower-priced TV bundles. But refuse to offer and aggressively market OTT services and you risk losing the subscribers you have to another OTT provider altogether.
As the industry cliché goes, it's better to cannibalize your own service than have someone else do it for you. Also, as Steve Sklar, vice president of video strategy at operator CenturyLink Inc. (NYSE: CTL) points out, just because the skinny bundle starts at a particular price point doesn't mean that's all customers will sign up for. Just as with regular pay-TV services, operators have the opportunity to upsell additional services to customers and raise revenues, provided they are priced and packaged attractively.
Telco Transformation picked Sklar's brain on this balancing act operators have to perform, launching OTT services that are essentially competing with their own pay-TV offers.
Telco Transformation: What's the right strategy for an operator when looking at the rollout of an OTT service versus deploying traditional pay-TV services?
Steve Sklar: I think we're in the midst of a fairly large transition, in terms of how video is delivered and consumed. There is a clear move to video consumption online, and via mobile services. To be a traditional cable provider, you have to cater to these needs of your customer base. You have to provide at minimum, some streaming services.
And we are seeing a large, very large, take-up of streaming Internet-based video services. The expectation is that consumption will move to streaming. If you are a new provider, do you really want to make an investment -- in a greenfield scenario -- in old infrastructure? If you've already got it -- like us, or cable operators, satellite operators -- then fine. But if you're new, you're better off building off of ABR [Adaptive Bit Rate streaming protocols]. That gives you a longer runway on getting returns via the platform.
Then there's a lot of different strategies with OTT. OTT has a plethora … you could just do SVoD. Or you could just do Netflix -- integrate the Netflix app into your offer, and just resell it. Or do that with Amazon, or someone else. Or you could do a pay-TV package [i.e., a skinny bundle]. Many would argue that's a critical requirement today. You could also resell satellite services, like DirecTV or DISH.
But if you have scale, you could do your own -- which gives you more flexibility and control. So a lot of it depends on what product you think is important to win.
TT: And what is that for you?
SS: We think linear TV is critical -- but also web content. So it's how you put all that together in a way that works.
Also, we have to give customers more choices. So offering a new streaming product, that offers more choice. A skinny bundle -- if that's what they want, they can have that. But we also have Prism [CenturyLink's IPTV product] -- if you want that, you can have that.
And there are some traditional customers who are intimidated by it [skinny bundles and streaming services], so they do want that. Also, we are reselling DirecTV in many markets. And if a customer wants that [the DirecTV brand and content packages] then they can have that.
But some do like to have a Roku-type box and get streaming services, so we have to cater to that as well. We think they will love our skinny bundle.
TT: How do you market/position the skinny bundle without cannibalizing the pay-TV service?
SS: Our view is to give the customer choices through CenturyLink. They should find what they want with us. We're learning everyday -- we're trialing services, we haven't launched [the skinny bundle] yet. We will go through various phases and try to identify who the best customers are to target for each service. And then we present the best proposition to the right customer.
We would expect streaming services targets will skew younger, be more tech-savvy, online-centric in their media behaviors. So our marketing tactics for the skinny bundle will be heavily digital -- the way we go about marketing that service will be a little different [from the traditional Prism marketing.]
But we have really good Prism customers and we're certainly not looking to market OTT to them. It's a big focus for us, but Prism is only available to a percentage of our homes. That's what OTT gives us -- it allows us to offer CenturyLink bundled offers across our entire footprint -- and it will be a CenturyLink branded service.
TT: How do you see this space evolving?
SS: Over the last year or two, it's been an area where you've had new offerings come up but they've been limited. I think you'll see content owners embrace OTT in the sense that all options in pay-TV will become more available on OTT. There are a lot of entrants in this space but I think there's some question of how many want to stay in this space -- here I'm talking about the virtual MVP [multichannel video provider] not other flavors of OTT -- there's hundreds.
The new provider will have to perform. Can you attract an audience, just to survive? There's more competition everyday and some content channels will find it more difficult to compete. And it's the same for service providers -- if you can't keep investing in your offering, then you will find it difficult to sustain your business.
If you're a cable operator, you can keep adding streaming services, keep moving towards services customers are increasingly looking for. But for smaller players, they will find it hard to keep doing this -- they will need to partner or find some other way to compete. So I think we'll see more partnerships. And also more of a move towards OTT, more devices -- we have to satisfy the customers' desire for all of this.
— Aditya Kishore, Practice Leader, Video Transformation, Telco Transformation