Earlier this year, I presented at OTTcon. This was the first major conference about OTT (video) ever, and was attended by a few hundred people and many industry players. Coming into this conference, I was under the distinct impression that OTT is a significant disruption to traditional service provider business and that it would have a significant and negative long-term impact on that marketplace. The common wizdom is that service providers who have the most to lose will be the least motivated to support OTT, and will therefore be the last to embrace it, if ever, will ultimately face the disruptive impact most of all, possibly losing their video distribution business over time.
But—I came out of the conference with the opposite conclusion! It’s not that OTT won’t be disruptive – it will, but not “as” disruptive as one might expect. And most of the market players will probably remain in place and not be sidelined by OTT. If it were truly disruptive, it would harm the existing service providers more than I expect it actually will.
Why? Because I think the current service providers themselves will ultimately be the ones that enable OTT content, thus avoiding a major disruption – whether they know it right now or not! In fact, right now, they’re doing very little, and most OTT is being enabled by others. So why do I think they’ll wake up in time? Read on to find out.
Some background
In case you’re wondering, OTT means “over the top” and it refers to all traffic that flows “on top” of broadband access, typically provided by someone else. For the service provider who provides the access to the Internet, this is just “data”, but for the consumer, this is “video”. While there are many other types of OTT content, this conference was only about video. When I’ll use of the term and “OTT” here, I’m referring only to over-the-top video content.
The most well known OTT is YouTube. Any video one watches on YouTube consumes the bandwidth of the service provider connecting the user to the Internet, and that service provider usually sees no incremental revenue from this. However, there are many other OTT content providers and aggregators besides YouTube. Netflix, for instance, streams video OTT directly to its subscriber, as does BBC with their iPlayer, Amazon Video On Demand, Hulu, Vudu, CinemaNow, Apple TV, and many more. Some of these have subscription services, pay-per-view, or free (e.g. YouTube). Each is supported on a different set of end-devices ranging from TVs themselves, leading gaming platforms, BluRay/DVD players, media centers (e.g. Boxee and Kodak HD Theater), the iPad, the iPhone, and dedicated streaming boxes. The common denominator is that for the broadband access provider, they are purely “over-the-top”.
To understand the point I’m making here about whether the technology is disruptive or not, you first must understand the term “disruptive technology” coined by Clayton Christensen and made famous in his important book, The Innovator’s Dilemma. As Christensen explains, for a variety of reasons, existing companies in the market ignore the disruptive technology until it is too late.
It is this definition that I am using when I say that OTT will not be as disruptive as expected. The main reason is that rather than ignoring OTT, the existing players will become the main enablers of it. This is true for most broadband access providers despite their long-term vested interest in current forms of video distribution and revenues associated with them. Many cable TV providers, satellite TV providers, and telcos providing IPTV have a vested interest in paid content – yet despite this, they will become key enablers of OTT, and thus avoid being completely marginalized by its potentially disruptive effects.
OTT looks like a classic Disruptive Technology
On one hand OTT has many of the parameters of a disruptive technology:
- Not good enough – Perhaps in its current state, it isn’t good enough to actually compete with traditional pay TV. In many homes, OTT can suffer in terms of quality compared to the well established forms of TV distribution that are managed and assured. Since the OTT provider has no control for the access, there may be a lot of buffering or poor quality in the viewing.
- Lower revenue – Unlimited monthly subscription to all content available online from Netflix costs less than $10/month. This sort of price range makes OTT unattractive for established players who make a bulk of their revenue from paid access to content or advertising—neither of which are well supported by OTT.
- Competes with their core business – OTT takes attention, time, and money away from the current forms of TV delivered by the current service providers. So why would a cable TV provider offer these services, if they compete with their own, higher-earning services?
- Poised to evolve to be “good enough” – As with most disruptive technologies, OTT might ultimately evolve to become good enough to compete for mainstream market—eventually overrunning traditional channel-switched TV.
Add to this that OTT HD video has high demands from broadband, and therefore, costs the broadband access provider a lot to deliver, especially over wireless technologies.
So why won’t it be as disruptive as it seems?
For a few reasons:
- Consumer demand: Recent research shows consumers actually aren’t moving to OTT content in order to “cut the cord” to cable and reduce costs, but rather to get access to more entertainment and information available on the Internet—from YouTube, Hulu, BBC iPlayer, Pandora, NetFlix, and many more. Furthermore, most consumers do not want a new device specifically for doing this. They would rather see these capabilities in one of the devices already connected to their home theater or TV – the TV itself, the receiver, the DVD player, the gaming platform, or the set-top box (STB). Adding an additional dedicated device just for streaming from the net is an early adopter’s game – unless none of the other consumer electronics can do it well. So basically, consumers want the expanded experience of interactive video and Internet video content, but without unnecessary complexity of more boxes/cables/connections…
- Satellite TV providers have a clear interest in supporting OTT: They don’t have a direct cost associated with giving an expanded experience to the consumer, since it’s not on top of their infrastructure that the OTT video will be consumed—it runs on top of a wireline or cable infrastructure usually purchased separately by the consumer. So they will be motivated to cater to consumer demand by adding OTT video capabilities directly to their STBs. Indeed, they will probably be the most aggressive about it, as it gives them a short-term advantage over those who are more disrupted by OTT traffic.
- IPTV players often own less paid video content assets, and therefore, will want to cater to the consumer demand. Since their set top boxes are mostly newer, and can often be upgraded in place, they will begin to offer OTT access for their subscribers even without replacing set top boxes – and they will.
- Cable TV providers will likely react to the threat by their direct satellite TV and IPTV competitors, and match the same features/functions. So once satellite and IPTV providers introduce OTT video capabilities, the cable TV providers competing with them will be compelled to follow suit. This will indeed look disruptive to the cable TV provider. However, it will also look like a sustaining innovation – to neutralize their competitors’ advantage. So they’ll just do it.
So this explains why, within the next 2-3 years, I predict all TV providers will have OTT video access capabilities built into their STBs. If this is the case, it doesn’t look so disruptive after all. Since rather than ignoring the threat, they will become the key enabler of it. The current pay TV providers will remain the provider of TV – including OTT TV/video, all facilitated by their own STBs. By and large, these developments would be suitable for most households, and therefore, while there will be other means to access OTT, the current pay TV providers will be the predominant way to access OTT as well as other TV content.
The only key problem with this prediction is that service providers are not the most nimble. It might take them longer than consumer electronics companies or Internet players to get used to the idea of providing access to OTT video directly from their STBs. In the next 12-24 months, many different consumer electronics manufacturers and Internet players will try to aggressively add OTT capabilities to their devices.
This is a full-on war, and time here is of the essence. All players are trying to get OTT video to the consumers – each in their own way. This is what the consumers want, and someone will give them what they want – probably everybody.
So, where is this going?
At the end of the day, I do think that the service providers have a pretty good chance to be the vehicle by which OTT content is provided. Think about it – most of us probably don’t switch TV channels on the “TV”, but rather on the pay-TV provided STB. Wouldn’t we want to use that same STB also for the OTT we want to access? Not everybody has a gaming platform, but even those who do, don’t often use it for TV.
In recent months since that conference, things have just heated up. Google TV is about to enter as a formidable OTT play (in addition to their YouTube). Netflix is now distributed on all gaming platforms and BluRay players and has a client for the iPad that outputs to the connected TV – making the iPad a media streamer for TV content. And many Internet-connected TVs are also on the market.
Slowly, yet surely, service providers are finally beginning to come out with OTT-enabled STBs. Back in April, The Hollywood Reporter reported that Verizon will bring YouTube, Facebook and Net radio to the TV with their FiOS service. What this means is that other providers, such as wireline, cable, and satellite service providers, will shortly follow with basic feature matching – and it will be a “sustaining innovation” rather than a “disruptive innovation”.
Pay TV service providers might need to step up the pace, however. As a recent study shows, time might be running out. It’s now time to give consumers the experience they want, and the faster this happens, the less likely most customers will leave.
Who do you think will win the OTT war?
In particular, who do you think will be the dominant device in the home that will bring OTT video to the screen and why?
In my view the interesting questions is not who/how will consumers get OTT, eventually it will be part of everything, but rather who would be wise enough to make money out of it, or if you want to ask this differently how will service providers/network operators retain their ‘smart pipes’ vision…
Related or not – Will the FCC allow Google and Verizon to sell premium internet services and kill net neutrality?
I agree with Aviv, the name of the game here is Net Neutrality. If the FCC will deny “favoring” of certain content over the internet instead of other content, then this is a different world to compete in. However, I do believe that the wireline broadband will remain as is, simply because it’s been like that for so long and people will have a hard time to adapt to paying for a “premium internet” all of a sudden.
In the wireless arena, however, is an entirely different ballgame. Google basically said it directly – we want to differentiate net neutrality on wireline and wireless. The future is wireless, it is still a very young technology for accessing high-speed internet, and there are multiple competitors – an average american can choose between ~5 wireless carriers instead of just 2 or even just 1 broadband provider (Mostly comcast).
I suspect that like many other things, Apple will come out with a killer new product in the next few weeks that will “reboot” the industry. At 99$, the next Apple TV (rumored to be called iTV once again like it was originally planned) will probably be an always online, always streaming device that can do much more than just watching video. No one can truly predict what it will do, but I wouldn’t be surprised if the next 1 billion dollars data center that Apple is in the process of completing is somehow related to it.
Links:
http://www.eweek.com/c/a/Enterprise-Networking/Google-Verizon-Net-Neutrality-Plan-Brings-Anguished-Accusations-455986/
http://www.eff.org/deeplinks/2010/08/google-verizon-netneutrality
http://www.engadget.com/2010/05/28/the-next-apple-tv-revealed-cloud-storage-and-iphone-os-on-tap/
http://www.engadget.com/2010/08/11/upcoming-apple-tv-loses-1080p-playback-gains-apps/
Sky TV, the Satelite Pay TV Service in the UK are already providing an iPhone/iPad app to watch all the Sports channels for £6 per month, so yes in the UK at least the Pay TV Service providers are already stepping up their game.
OTT is here to stay and it will grow as people want and expect consumption on demand. My children already don’t know any difference with the ability to pause live TV and watch any of their programs on demand (so long I recorded it!) or going to BBC iPlayer. I remember when we had just 3 TV channels to choose from, and it would stop broadcasting around midnight… distant memories 😀
New TVs are coming out that support OTT, so I don’t think even a set-top box will be required for OTT as TVs will provide direct support. Therefore long-term, the primary device for family consumption will be the TV. TVs are big screen these days and people expect OTT Video to be able to be played on their big TV. Short-term it will be more for personal consumption due to technological constraints to pipe 1080p to a 50″ TV over slow broadband speeds (in the UK for now at least). Personal consumption will take place on slate PCs, such as the iPad and even on smartphones, as these devices mean you are not tethered to your PC on your desk.
With regards to net neutrality, in the UK at least, Broadband providers are already shaping traffic especially during peak hours for example to ensure streaming services have priority over P2P services. Does that mean we have a two-tier internet, which is the main issue with net neutrality? Even if the FCC don’t allow it, the Internet Service Providers are already doing it in some shape or form.
Another great article. I do like your blog 😀
Good blog on an important topic. But OTT video is just one part of the OTT phenomenon. Skype and VoIP providers like Vonage in the USA have it for voice. But, video is really important for CSPs to monetize or manage because of the large amount of network traffic it consumes. That will be even more true as more OTT video goes HD and 3D. Getting OTT viewer measurement and customer insights information from the device and networks are an important area to the industry as well.
Tal, great blog.
On one hand the service providers are in the best position to deliver OTT, but as you say, they need to move quickly. I don’t think their lack of nimbleness should be an excuse anymore. It’s been 15 years since the Telecom Act and at least 10 since the dawn of IP. In the interval service providers have turned over much of their legacy workforce and management. They should be responding differently by now.
Anyway, there is one other factor in favor of service providers being the primary deliverer of all services. OTT content and entertainment is not the only change on the horizon. Home Networking, the connected home–whatever you want to call it–plus Smart Grid technologies will may cause consumers to favor their networking service provider. Just a thought.
First, I’d like to thank you all for reading and commenting and the encouraging feedback!
Aviv, there are various approaches to addressing “smart pipes” vision. I don’t like that phrase, even though it’s commonly used, because I cannot think of “pipes” as “smart”. One of them is described quite nicely in this article by Kevin Walsh, and it relates to QoS/SLA – and it can work. There are several other interesting models – but those have not been really rolled out – and they should be. I do agree with Kevin that these would be acceptable – also to regulators. Also note that regulation varies wildly by geography, but I believe this is possible in all geographies.
Oded, thanks for all the updated links. I tracked all that. I doubt the FCC will intervene, and I think consumers would be interested in it – in much the way described by in the article I just referred to. They will not be paying for “premium Internet” – they’ll pay for premium OTT TV/Video. There IS a difference. But that’s not the only reason to do it, nor is it the only way to monetize the services.
Brian, thanks for reminding us all that not everybody lives in the USA 🙂 In the near term, and even long term, the landscape will vary by geography. The new TVs do have OTT capabilities – but those are often limited and set up by the manufacturer – so they have some intrinsic limitations. For instance, they might support Netflix and YouTube, but not in HD nor Hulu (for example, this LG net-connected TV I just installed for my father). I do think a box will be required, since a lot of the Pay TV content / programming is going to be available only with a digital receiver and conditional access technology. I seriously believe this does not conflict with net neutrality, which, as you mention, is far from a fact of life.
Stephen, I refer here ONLY to OTT video. Coming into the conference, I too had the view that OTT refers to things other than video – anything that flows over the top. The conference participants only knew “video”, so I took that terminology for this post and focused my discussion on that. Video is one of the key things for the Pay TV providers have to loose. The broadband access provider also lose the margins on the cost of serving the OTT content they see no value from. They don’t make any money from their weather application, online news, or email accounts, no do they? Btw, I was involved in the standardization of IPTV at the IPTV Interoperability Forum (ATIS IIF) and we instrumented everything for granular usage data collection using IPDR (in the standards), yet nobody waited for those standards and implemented proprietary IPTV. I still believe that both cable (using Tru2Way STBs instrumented with IPDR) and IPTV have pretty granular usage data collection mechanisms. However, it’s not enough to attract consumers or drive the service-provider provided STB to become the centerpiece for OTT consumption – they’ll need to really get those capabilities to consumer’s and make it get the traction.
Tim, thanks. Services providers might not have an excuse anymore, but they still aren’t nimble. We both know that. While I agree that service providers have plenty of opportunities in the “connected home” and “smart grid”, most are fumbling those opportunities as well. I see these as independent battles. OTT video is a compelling end-user experience – much more desired than some “back-end-function” such as “getting the damn home to work together”. So I think this battle is much more timely and the time is “now”.
Thanks again for all the terrific feedback!
Tal – excellent review of the state of OTT video.
A huge amount of OTT is driven by simpler access to time-shifted regular TV content as demonstrated in the UK by BBC i-player and the other mainstream content providers (ITV, C4 etc)making their programmes available to a new and often younger audience than they would otherwise hit.
My kids are much more likely to be watching OTT than regular TV while us adults haven’t yet drifted far away from the Sky+ box – though starting to become aware that is very likely to happen. Once more open devices (iPad leading the way) become more widely adopted we’ll be there too.
The YouTube phenomenon is extraordinarily successful as a channel for personal/direct publication – and does absolutely does compete with mainstream content vendors for eyeball time. I’d guess much more so than Skype hits the mainstream telcos.
Stephen Fleece noted in comment above the potential increase in bandwidth demand when OTT goes HD and 3D – I have to agree but note Tal’s previous blog on 3DTV adoption questions.
Tony, over the past few weeks, my family experienced a lot of OTT video from primarily two sources: Netflix and Vudu. Netflix has a huge selection and the net-connected LG TV is seamlessly connected over WiFi to the content. Quality is okay – especially for the kids. They’ve stopped watching channeled programming…
Vudu streams amazing 1080p video. More expensive than renting BluRay disk, but infinitely more convenient.
So in many homes in the US (not all), bandwidth is not an issue – even for OTT HD 1080p video. Now, if everyone would be doing this, that might be a different story.
What a crazy world. 15 years ago, we at Diva Systems (and others – http://bit.ly/bssUf3) dreamed of what growing share of the growing “Home Entertainment” Pie Video-on-Demand would capture. Projections for growing household aggregate spend, with exploding VoD share, abounded. With low set-top costs and increasingly low-cost, high-quality streaming of an increasingly infinite content library, the world was our oyster.
But something strange happened. Supporting the right piping into the right type of carrier walled garden was prohibitive enough without the obvious resistance of content providers. But while 1990’s “Hollywood” was not the most receptive to streaming media services, the content providers were the least of our worries.
Each service provider had its own idea of what business model was right for them. We both had grand notions of being alternately the pipe, the programmer, and the pretty face of a new world of Home Entertainment. They sell, we license. They bill, we rate. They brand, we market. They package, we produce. They answer the phone, we support. They install, we fix. Or not. And so forth through a variety of shades, each one unique per partner agreement.
What will happen? Which player will win? I think, as Amdocs consistently shows (see the EIU report), the right question is which PLAYERS will win. The right business model supported by the right ecosystem of partners, technologies, and pipes will happen. Who knows who will win, but if a market marked by dynamic disruption continues, there is one clear winner – the Consumer who is getting their much larger Pie for a much smaller-than-expected Penny.
In response to a comment by Cato posted on TelcoProfessionals:
First of all, I focus my post exclusively on OTT video, and even omit the word “video” when using the term OTT, as implied by the conference OTTcon participants.
Therefore, I’m not ignoring the rest of the OTT – it’s just that this post isn’t related to them. Why will SPs be the last to embrace it? Well, for a fact, they are. Think about it. OTT video is already supported by every other player – studios and content distributors, TV manufacturers, BluRay/DVD manufacturers, dedicated streamer boxes (Boxee, Roku, Apple TV), gaming platforms, etc. Who doesn’t have good support for OTT? 90%+ of Pay TV providers whose STBs most people use. As some have noted in response, Sky already offers OTT content. I have also learned that some major cable operators will be offering OTT soon (reinforcing what I’ve suggested). But they are late movers in this game – because it appears very disruptive to them and they are not the fastest movers anyhow.
Regarding the rest of the OTT – it’s not that they would be last to offer, they might certainly try – but in many cases, they have no specific advantage over, possibly, more nimble competitors outside their realm.
Brian, great points – well worth reading. It’s obvious the consumer will win – as I said, they’ll be getting what they want (this time around) – and I don’t think only one player or set of players will give it to them – all will. The question then would be, who will become most successful and profitable at doing so.
Thx for the comments.
I recently saw a report by Wells Fargo analyst Marci Ryvicker explaining why over-the-top video will not replace Pay TV. Worth reading the 6 fundamental obstacles she has identified in this post covering the analysis.
You can also see my comment regarding her post there. I agree, overall, but think that a few of these obstacles are temporary, and operators need to take more action in order to avert the outcome. And as I suggested here, many will.
At last, a US Satelite provider beginning to provide over the top direct to their STB – DirecTV is first. Now Dish needs to follow and then TWC/Comcast/Cox/AT&T/Verizon. Quickly, please.
More support for this from the Cable Show, Time Warner Cable (NYSE: TWC) Chief Programming Officer Melinda Witmer suggests this will happen, check it out.