“Studios are now in a position to go direct-to-consumer with Over-the-Top services. HBO is well placed to seed the UK market,” according to Guy Bisson, director of TV at IHS Electronics & Media.
The Hollywood studios could dismantle the UK premium movie channel market by setting up their own direct-to-consumer Over-The-Top (OTT) television proposition. With as few as 1.35 million subscribers, such a service would cut out the middlemen represented by today’s pay TV providers and existing OTT services, such as Netflix.
Any direct-to-consumer service in which content producers sold direct to viewers, would destroy the existing economics of both the movie and entertainment rights market and the linear pay channel market, meaning studios would need to make back the nearly £1.4 billion they earn from the UK market from rights and carriage agreements for movie and entertainment content.
The figure of 1.35 million subscribers assumes the studios could earn a monthly income equal to the average ARPU generated by Sky today in the UK. But as a studio-led content play would not feature sports, at more realistic monthly income per customer based on the value currently attributed to movies and entertainment content in the UK, studios would need between 2.7 million and 4.3 million customers to make back the money they currently make from rights deals in the UK.
The ‘content wall’ is reinforced further by the channel portfolios of the major studios and other large content owners which generate monthly fees per customer. These fees mean that certain content owners like Discovery, Disney and Viacom are more entrenched in the UK market than content producers not owning channels like Dreamworks and HBO.
When the value of channel carriage is taken in to account, the major US studios and other large content owners would need on average between 2.8 million and 8.9 million direct customers to maintain current income, depending on the price charged.
Direct-to-consumer OTT represents a viable competitive threat to Sky’s premium channel business, but full disintermediation, that also disrupted the linear channel businesses of the studios and other content owners, would be far more difficult to sustain.
In particular, the linear channel as a model for content aggregation and the pay television provider or platform as an aggregator of channels both represent highly efficient vehicles for delivering a wide variety of content cost effectively to the consumer.
New OTT aggregators like Netflix do not represent a potential sea change in the television value chain because they replicate the channel and platform aggregation models already in place between the producers and existing pay TV providers. Under a direct-to-consumer model, new OTT players like Netflix would also be a risk.
Further, the conditions to develop a direct-to-consumer proposition do not currently exist in the UK, not least because there is no platform of scale that could deliver an audience with a propensity to purchase subscription content outside of the existing pay TV providers.
For change to occur, the market would need to be seeded by producers which had high value content and a strong brand, but which were not too heavily entrenched in the market through channel ownership. HBO represents one such potential player in the UK. We believe HBO, which has already explored direct-to-consumer OTT propositions in international markets like Sweden, could develop a direct-to-consumer proposition in the UK that would sustain its current revenues with as few as half a million customers if it was able to charge £5 a month. Taking such a leap of faith would lay the ground work for others to follow.