The “new normal” is a term that often causes discomfort. It signals unwelcome change and adjustment that disrupts the cozy status quo. For pay TV providers, the future seems dim at first glance. Global pay TV revenues are projected to take a nosedive to US$150 billion by 2025, according to a new report from Digital TV Research.

As pay TV faces a new normal, it’s important to strategize to overcome the challenges ahead.

The adoption rate of OTT video platforms is growing globally and has built pressure on traditional pay-TV operators to create interactive content libraries, provide on-demand video, and update their portfolio with HD and 4K content.

The first step in pay TV’s transformation is incorporating OTT products under the umbrella of the pay TV brand. In most cases, the OTT product is used primarily for promotional purposes to boost a traditional TV service and brand. Many telcos chose this strategy to drive uptake and usage of mobile data plans or broadband (Ex: DNA Oyj).

In reality, around two-thirds of partnerships with television as the primary service channel do not involve bundling the OTT service subscription into the operators’ tariff schemes. This is particularly understandable in the case of pay-TV operators, who will be naturally cautious about undercutting and cannibalization of their own TV offerings.

Besides cannibalization, which other obstacles are standing in front of pay TVs?

1. Bundling Offers that Make the Consumer Service Mix

OTT services are not typically bundled into pay TV or operator plans. The addition of third-party OTT video to the consumer service mix is a fairly recent development, and providers on both sides of the spectrum are still experimenting with business models and exploring packaging strategies.

2. Growing Revenues with Small Margins

Video is going to be a competitive differentiator for many brands in times when broadband and telecommunications are becoming a commodity. However, the growing complexities from adding third-party OTT services to video offerings puts downward pressure on video service margins. The main benefit is that increased usage of third-party OTT services can lead to higher tier bandwidth on the internet subscription side. At the end, if video services are what customers want, economies of scale can fix those issues.

3. Executing Data-Driven Retention Strategies

Pay TV and operator brands possess tons of quality data about user behaviour. The main challenge here is that those businesses are not built on data as the pure-play OTT providers and don’t use it properly to enhance user retention.

4. Building Cross-Vertical Partnerships

What does a cross-vertical partnership look like in practice for pay TVs or operators? By looking into recent success stories, Ovum classifies operator–OTT partnership into three broad categories:

  • Marketing alliance: In this case, there is usually no commercial relationship between the two companies and no direct investment from either party. One party is simply using the other brand as a marketing tool.
  • Technical and/or service integration: There is some level of cooperation between the two companies and no or low investment. The main purpose is to increase the marketing of each product. This typically entails the integration of third party services into an operator’s mobile, broadband or pay-TV tariff plans, while in some cases OTT video services are integrated with an operator’s STB UI. An example of this type of partnership is that of Shaw Communications and Netflix.
  • Close business relationship: This typically involves a commercial agreement or revenue share. The relationship can range from an announced strategic agreement between the two parties to the creation of an independent joint-venture company.

 

While there are many obstacles to overcome, the consensus is that transformation towards the new patterns of consumption is a must for anyone in the entertainment value chain, including pay TV providers.

Case in point: Netflix. Their international expansion entails working with cable, satellite, and IPTV operators in multiple territories to deliver its streaming services to pay-TV subscribers. Their strong push seems to work and paves the way for new innovation that will inspire traditional and pay TV brands.