Florence Le Borgne
Head of the TV & Digital Content Practice, IDATE DigiWorld
Generally speaking, the arrival of Netflix in a new market results in increased programming costs for its competitors.
Using North America as an example, this trend is expected to continue and grow in the coming years, which will question the profitability of such investments.
There are generally three types of pay video-on-demand (VOD) services:
• TVOD (Transactional Video-On-Demand) services, which include:
• EST (Electronic Sell-Through), also known as DTO or 'Download To Own', is like the traditional sale of physical videograms, but in digital form.
• DTR (Download To Rent) is like the traditional rental of videograms, but in digital form.
• SVOD (Subscription Video-On-Demand) services, which are based on the dominant pricing model used for linear pay-TV: subscriptions
It is common for the same service to offer several pricing models.
Business models and service positioning
The transactional video-on-demand model is based on revenue sharing between the service provider and the rights holders. Contracts between these two parties can be exclusive, but rarely so. The catalogues of transactional video-on-demand services are usually very large (from 10,000 to hundreds of thousands). Although most TVOD services are non-specialised, consumption is mainly focused on movies.
The business model of SVOD is similar to that of pay-TV. Content rights are purchased at fixed price, regardless of actual consumption. The rights may be exclusive for a given period of time and territory. SVOD catalogues have tended to be available for unlimited consumption so far, including many non-exclusive and older titles (over 5 years old). Although most SVOD offerings are non-specialised, fiction series tend to be promoted and consumed the most. Original and exclusive new content is increasingly used for differentiation. There are currently two contrasting marketing strategies used: strategies based on a volume/cost ratio; and differentiation strategies based on premium or special interest positioning.
The VOD sector as a whole is witnessing strong growth in Europe, driven by a large increase in the number of services emerging in most countries. Between February 2012 and December 2015, the number of services available in the EU increased by a factor of 5.7 on average.
Although the market share in value terms is still dominated by DTR in Europe (56.5% of the total VOD market), this market segment has been the slowest growing segment over the last five years (+215% on average in EU countries between 2010 and 2015). Revenues from subscription services are experiencing stronger growth: a growth rate of 1,824% over the same period. They generated nearly one-third of VOD revenues in Europe in 2015, whereas they only accounted for 7.6% in 2010.
The true start of the SVOD market in a particular country is often whenever Netflix launches there. Note that Netflix is often the main beneficiary of the rapid growth in subscribers that its launch creates. The arrival of the North American giant does, however, trigger a response from the main players in FTA television and pay-TV. It is the combination of all these elements that contributes to better awareness of these services among the general public and facilitates their adoption.
The growth and success of video-on-demand services can be very different depending on the market. There are various internal factors:
• the propensity for local consumers to pay for access to content;
• the price differential with local pay-TV offerings;
• the prevalence of piracy of audiovisual and cinematic content;
Find out more about the various internal factors
Various issues specific to the structure of on-demand services and players' strategies also play a role:
• the relevance of the marketing positioning of the services;
• the existence of partnerships with distributors who already have a subscriber/equipment base;
• the effectiveness of recommendation systems, which help increase consumption and provide a better user experience;
More information about these issues
Profitability conditions and the challenge facing Europe
The issue of achieving profitability with transactional services is not as critical as for subscription services. Because most transactional service costs are variable costs, proportional to consumption, these services are not expensive to create and only become so when the content is actually consumed.
Therefore, there are no real obstacles to creating new services and the costs of entry into the market are low. This explains the abundance of existing services and the great diversity of players in this segment.
The economy for SVOD services is more delicate: as well as technical and marketing costs, content acquisition costs can be regarded as fixed costs because the content is purchased at a fixed price, regardless of consumption. To that can be added costs related to development or acquisition of a recommendation tool. Subscription services therefore have significant costs even before they have started to recruit subscribers.
If the European industry cannot create some European champions of their own to compete with the US giants, many European players may disappear as the market rationalises.
For the publication of the 16th edition of the DigiWorld Yearbook (pre-order now), IDATE is organizing a conference based on the detailed analysis of the current situations and some forecasts by IDATE experts on the major digital sectors, the discussion will deal with the great trends and challenges that will disrupt the digital markets by 2025.