Entertainment- Disrupted by the Internet

Summary

The viewing of content delivered over the internet- over the top (OTT) services- accelerated during the lockdowns of 2020. In the future, revenues from OTT are likely to exceed those of pay-TV in India. This is disrupting all major segments of the entertainment sector- pay-TV, movie theatres, and print media. All firms will have to reinvent themselves to safeguard their future. The consumer is spoilt for choice and will have the final say.

The USA- the originator of OTT

Netflix, the pioneer of OTT services, began as a DVD by mail service and added streaming media in 2007. Its first original content was the series House of Cards which became a hit in 2013 when all the episodes of the first season were released simultaneously. This propelled Netflix to higher subscribers and led to increasing investment in original programming. Competitors such as Hulu, Amazon, and HBO soon entered resulting in a boom in OTT offerings and subscribers. OTT subscriptions reached around 182 mn in 2020 and are expected to hit 197 mn by 2022.

The largest OTT players in the USA in 2020 are summarised below:

1. Netflix: The frontrunner in the streaming wars has about 204 mn paid subscribers worldwide, with 75 mn in the USA. It is spending $15 bn per year on original content.
2. Amazon Prime Video: Has 56 mn subscribers in the USA who can also access other channels through Amazon Prime.
3. Hulu: It has 38 mn subscribers in the USA. It also offers live TV and sports. Hulu was acquired by Disney in 2019.
4. HBO Max: It is owned by AT&T’s Warner and has about 13 mn subscribers. It has a vast content library of series and movies.
5. Disney+: Launched in Nov 2019, it has amassed 86 mn subscribers worldwide by 2020 end. It forecasts 240 mn paid subscribers by 2024. Disney has an unmatched catalog of films and series, including Star Wars, 21st Century Fox, and Marvel. It plans to spend about $14-16 bn annually on original content across its streaming services.

 

 

 

 

 

 

 

Most film studios (eg Warner, Universal, and Paramount) have stated that future releases will be made simultaneously on streaming services and cinemas.

The rapid rise of OTT has impacted the pay-TV subscriber base. From a peak of 100.5 mn in 2013, pay-TV households in the USA declined to 78 mn in 2020 and are expected to further reduce to 63 mn by 2024. The major pay-TV firms are pursuing alternative growth avenues. Comcast and AT&T are offering broadband internet services on their cable networks. AT&T, which owns HBO and Warner Bros, is expanding its HBO Max streaming service. Comcast also offers telecom services and owns NBC Universal and Sky. These moves have enabled them to grow their overall business in spite of declining pay-TV subscribers.

With the growing availability of OTT services and the rising cost of movie tickets, fewer consumers have been going to movie theatres.  The USA had about 5800 theatres with about 41,000 screens in 2020. AMC Theatres, the largest multiplex chain in the USA, along with others like Regal, and  Cinemark were forced to close their theatres during the pandemic and face serious financial difficulties. All theatre chains may not survive as conditions normalize. In the future, there may be fewer screens, fewer theatres, different ownership, and innovative new uses- live gaming, live sports, blockbuster experiences.

The newspaper publishing industry has seen declining subscribers and revenues over the last few years. Many newspapers have closed down, were sold, or merged. This decline, caused by the growth of online offerings, is likely to continue. Apart from cost reduction, a focus on high-quality content, growth in online subscriptions, and possibly, licensing fees from digital platforms like Google and Facebook, are the levers for profitability. Major news publishers like NY Times, Wall Street Journal, and Washington Post have successfully reinvented themselves to grow in the digital age.

• NY Times is a case study of such a transformation. It was in a crisis a decade ago when it first introduced a paywall for its online news. It focussed on high-quality content doubling its roster of journalists to about 1700 and pursued digital subscribers. In 2020, digital subscribers reached 6.7 mn out of a total of 7.5 mn. Digital revenue (growing at 35% annually) has exceeded print revenue even as advertising revenue and print subscribers continued to decline. It introduced new apps like Cooking and Crossword which have contributed to fresh subscriptions. The company has posted record business results for 2020 and has become a successful digitally-focused subscription-driven enterprise.

 

The rise of OTT services has disrupted the past pillars of the entertainment sector: pay-TV, movie theatres, and print but also created new opportunities and options.

China- the growth of OTT 

With about 900 mn internet users, and consumers using multiple devices to access the internet, China has amongst the highest growth rates (about 20% pa) for OTT in the world.  OTT revenues have already exceeded those of pay-TV while the number of subscribers is expected to exceed by 2022.

The OTT market has three main players: Tencent Video (89 mn subscribers in 2019), Baidu-iQiyi (100mn), and Youku- Alibaba (85 mn). They are spending heavily on content – collectively about $ 7bn in 2018 of which a third was for original programming- far more than pay-TV players. They are also offering live sports.  All three firms continue to invest heavily to capture market share and grow the OTT business.

Pay-TV revenues in China are facing a gradual decline. Even though subscribers are expected to grow (from 337 mn in 2018 to 355 mn in 2023), this is offset by falling average revenue per user (ARPU).

In films, China has become the second-largest market in the world, after the USA, with over 12,000 theatres, around 75,000 screens, and a 1.7 bn movie audience. Historical war dramas, science fiction, and action films have attracted audiences to movie theatres. While 2019 saw record but flat revenues, occupancy rates in theatres have hit a 5 year low of 11% and movie going in smaller towns has stagnated. Around 25% of consumers prefer to watch films online while 32% are open to both- online and theatre. Online films have seen rapid growth along with improving quality. Movie theatres may soon face an inflection point as more consumers switch to online viewing.

Sales and revenues of newspapers and magazines in China have been declining by about 5% p.a.

Thus, in China too, OTT services are growing rapidly and putting pressure on the other segments of entertainment- pay-TV, movie theatres, and newspapers.

Entertainment  in India

The Entertainment industry in India has grown at about 10% pa in recent years. However, the highest growth rate has been of digital/OTT as shown in the Table below (Source IBEG).

Entertainment Market Size $Bn (By Segment)

 

OTT services started in India around a decade ago. Since then, the online video audience has grown to 325 mn in 2019 and is projected to cross 500 mn in 2022. This growth is enabled by a base of about 650 mn internet users in 2020 rising to over 735 mn by 2021 coupled with the lowest cost mobile data services in the world at Rs 3.3 per GB. However, paid OTT subscribers are estimated at just 29 mn in 2020 and projected to reach 45 mn by 2025. Most users access OTT services that are free or are bundled with their mobile plans. OTT revenues are growing at over 25% p.a. and are projected to exceed pay-TV revenues in the next 3-4 years.

Advertising revenue has so far been dominated by TV and print. Digital advertising has grown rapidly in recent years and was second only to pay-TV in FY20. It is expected to exceed TV advertising in FY21.

OTT is thus poised to become the leading segment in the entertainment industry. New applications like corporate e-learning, kids’ education & entertainment, fitness, and sports will further expand the spread and revenues of OTT services. OTT  is currently dominated by Disney+ Hotstar, Amazon Prime Video, and Netflix. However, there are several production house-backed local OTT players, such as SonyLIV, Voot, Zee5, ErosNow, and ALTBalaji, which are competing with these global players.

Pay-TV has been the leader in the entertainment industry. It had 160 mn subscribers in 2019. This is likely to increase to 184 mn by 2024. However, with reducing ARPU, revenues are likely to decline gradually. Movie theatres and Print (Newspapers) too are expected to show flat to declining revenues.

Outlook and Implications in India

With OTT services growing rapidly, all players in this sector are faced with challenges. They have to explore different options for survival and profitable growth as summarised below.

• OTT Service providers: From just two OTT firms in 2012 to over 40 players now, the field is hyper-competitive. While the market is growing at over 25% p.a., content is king. The leading firms are spending increasing amounts on content. With around 500 mn consumers by 2022 across multiple language zones and city tiers, a diversified content portfolio and differentiated pricing plans are essential to gain market share. OTT providers also need to adopt digital technology (e.g. AI and ML) in all phases of the OTT subscriber’s lifecycle- customer profiling, personalized search, and offering the right content at the right time. The plans of three leading OTT firms are summarised below:
  1. Disney+ Hotstar: A partnership with Jio, which reaches 410 mn consumers, has helped drive rapid growth amongst prepaid users. It has a rich slate of sports content, including IPL, access to Star TVs’ content library, and international titles from Disney.
  2. Amazon Prime Video(APV): It has partnered with Airtel to bring a mobile-only plan for prepaid Indian users. It is investing in content across 10 languages e.g. Tandav and bringing its international content into India.
  3. Netflix: In keeping with its global strategy, it is free of advertising in India. It is spending heavily on local content – its first original for India was Sacred Games. It spent Rs 3000 Cr on original content in 2019-20 and plans to double it next year. Its mobile-only plans have expanded viewership in India.
• Cable/Satellite TV operators: They can consider offering online services themselves (as done by Tata Sky) or in partnerships with other media firms. They can also focus on specialized content targeting specific applications/segments in local languages e.g. education, cookery, etc. Cable operators can offer broadband internet services to their customers.
• Film Theatres: India, with 6327 single screens and 3200 multiplex screens in 2019, is still an underserved market. Single screen theatres have been closing down in recent years and many may not survive the current lockdown. Multiplexes may still continue to grow in underpenetrated cities. The audiences for movies will depend on new releases. Increasingly, new movies are likely to be released simultaneously across platforms- physical and digital. As OTT viewership increases, multiplex firms like PVR and INOX, and individual theatres will have to redefine their role as experience centers- for exclusive movies, special effects, family outings, live gaming, live sports, etc. Their future will depend on consumers continuing to visit the cinema for a distinctive experience not possible on a small screen.
• Film/Content Producers: They have options to create content for multiple platforms- especially OTT which is typically viewed on mobile phones – and across numerous languages, applications, and genres. They can also start their own online channels as done by Sony, Zee, and Eros.
• Print: Firms need to accelerate their move towards apps and news websites, building on quality content and reputation for reliable information. International publications like NY Times, Wall Street Journal, and Financial Times have already made this transition and built a digital subscriber base. Domestic papers like Economic Times and Business Today are moving towards online subscriptions. They can also earn fees from Google and Facebook as done in France and Australia.
• Telcos: As providers of internet connectivity- terrestrial (fiber or cable) or wireless (4G/5G)- they face a huge upsurge in demand driven by video content.  Data prices in India are currently the lowest in the world (Rs 200 per month for 60 GB data).  Increasingly, Telcos (Airtel, Reliance Jio, and Vi) are bundling OTT services with their mobile prepaid plans. Further, consumers can subscribe to OTT offerings of their choice.

Conclusion

The rapid growth of OTT services is disrupting all major segments of the entertainment sector: pay-TV, movie theatres, and print.  As OTT viewership expands, all players in the sector are faced with difficult decisions and challenges in a highly competitive setting. How each of them responds will determine the winners of tomorrow. The consumer will be spoilt for choice- with a wide spectrum of content available on mobiles, tablets, laptops, TVs, and in theatres- and will call the shots.