De-commoditizing OTT: how to drive service stickiness and differentiation in a heated media environment? (2/3)
This article is part of a three-part series on OTT. The insights are expanded upon chronologically through the three following strategy principles:
- Shape a differentiated content universe
- Develop a coherent adjacent offering (current article; with an exclusive contribution by Yannick Manuel Ramcke in the final section)
- Strive to design habit-forming products (soon to be published)
Again considering the economics of an OTT service, we said that user acquisition is the engine of the machine. But it can be argued that retention is even more critical — its fuel.
Technically, better retention leads to:
- Higher CLV via lower churn
- Lower marketing needs for win-back/re-subscriptions
- Higher marketing budget for new subscribers driven by the two points above (i.e. higher CLV enables higher marketing expenses amortized over a longer period of time, with a bigger proportional budget for new vs. re-subscribers)
Overall, user retention can be defined as the direct output of usage frequency multiplied by usage value.
A good illustration in the subscription economy is the Software-as-a-Service (SaaS) industry and the so-called customer success functional area. Customer success managers do not handle client accounts from an administrative point of view (e.g. billing), but rather they ensure that the range of features used is sufficiently wide (value) and frequent to maximise the chances of keeping customers on board.
To have frequency, you have to generate value anyway. But not all value systematically guarantees frequency.
For an OTT service, there are two main areas of action to optimise service retention: (i) the offering and (ii) the product design around it.
If we first look at the offering, there are, in turn, two main retention mechanisms that can be observed from the market: expanding from the core by building a content bundle (i) and adding adjacent media services accessible from the same service or subscription (service bundle — ii).
The art of the well-made bundle
The principle of bundling is not new in the media industry. It basically consists of offering different content verticals accessible from the same service or subscription (e.g. entertainment + sports + documentaries). As this article does not focus on distribution issues, we refer here mainly to on-platform, hard bundles (e.g. Paramount+’s bundling into Walmart’s membership programme is a distribution rather than a product initiative).
Let’s look at Disney+ and Star. By integrating the Star catalogue, which mainly includes titles from 21st Century Fox that Disney acquired in 2019, Disney+ can count on several branded verticals each performing a different role for the economics of the platform. In this case, Disney’s premium IPs serve as acquisition-driving properties, and Star’s content hub plays on increasing frequency and usage value (retention).
The merger of HBO and Discovery streaming services — due to be completed and launched in the summer of 2023 — reflects the same vision of expanding boundaries so that, when users are done with their episode of House of the Dragon, they get ‘cross-sold’ other content in the same product territory.
Of course, architecting a bundle can be complex and requires careful reading of audience and usage data. But when done well, it mostly pays off.
To refer to the previous article, it can be stated that Disney+ has a differentiated content universe, with specific content worlds (Marvel, Star Wars). This implies that Disney has figured out that Marvel and Star Wars can be bundled together to build up the same content universe because, if the audiences are not 100% similar (especially on the extreme side of each fan community), there is still a large overlap of people who are interested in both worlds.
The same goes for the Star catalogue, which contains tier 2 franchises such as Alien, Predator, and Planet of the Apes. However, Disney has not yet bundled its sports-specific streaming offering (ESPN+), hypothetically because its audience is more heterogenous (this has also a lot to do with the technical specificities of live streaming and sports rights’ limited territorial availability, but this is a different topic).
It is also important to note that bundling can also boost acquisition. For instance, it is fair to assume that Star Wars and Marvel super fans will subscribe no matter what, whether a bundled or modular offering. For casual fans, however, it is precisely the volume and possibility to move across these different worlds that represents a subscription argument. A single content universe may not be sufficient to obtain their willingness to pay.
Diversification of media habits calls for diversification of media services
The second angle is the addition of adjacent services (service bundle), which may involve a broader range of media types and activities than passive, laid back media consumption.
Apple offers Apple One, which comprises TV+, gaming-related offering Arcade, Fitness+, News+, and Music. For its part, Amazon bundles its video offering Prime Video with its e-commerce user benefits programme Amazon Prime. This approach naturally appeals to properties that are not exclusively active in traditional media such as Apple and Amazon, and benefit from large-scale entertainment ecosystems of which video and audio consumption is only one driver.
An interesting media-specific case is sports streamer DAZN, which announced earlier this year its ambition to take its business to the next level by adding new features and services beyond ‘pay-to-access’ (e.g. micro-betting, e-commerce) in order to increase service usage and, ultimately, ARPU. Many similarities can be made with publishers diversifying into content commerce (e.g. marketplace).
This trend is supported by the assumption that users today perform a broad range of media tasks — even some at the same time — and that bundling services across increasingly fluid media behaviours (e.g. watching, interacting, playing, creating, owning, monetising) would be a natural extension for video streamers. In other words, extending the boundaries of the service to capture value — as opposed to lose value — from users’ diversifying habits, covering more steps in the user journey.
The path to differentiation by using content as a kind of loss leader can be tempting and makes sense on paper. In particular, one can draw a parallel with the higher total revenues of media companies diversified across multiple verticals such as Disney (22bn for Q2 2022) or Comcast (30bn) over pure media businesses such as Netflix (8 bn) or Paramount (8 bn). Disney Parks, Experiences and Products division monetises the IPs created and exploited in the media division via a completely different business model — in this case, content is more marketing than product.
It is important to note that these media conglomerates have a heritage of hyperdiversification. They therefore hold a significant competitive advantage over pure streamers who are only now realising that their content can be a powerful strategic asset in building a larger, broader business.
For these legacy media businesses, diversifying is primarily about fighting against the downside risks mentioned in the first article than a pure growth strategy. A diversified media business can indeed shift its ultimate success metric from subscriber growth to actual profit, playing more on value than on volume.
How much of a stretch is too much of a stretch?
Overall, the aspiration to diversify makes strategic sense from a retention and ARPU point of view, but the gap between strategy and execution can be difficult to close. Mostly, diversifying successfully often means diversifying coherently.
In line with the need to define a clear, differentiating brand identity based on a streamer’s very own assets (e.g. content IP rights) and capabilities (e.g. excellence in broadcasting live sports content), the integration of adjacencies — stress testing brand elasticity — must be done with the same degree of coherence. Just because you can does not mean you should.
According to Strategy&, it is essential for a company with growth prospects to distinguish between the areas in which it has a right to play (being there and fighting in the market with uncertain results), and the areas in which it has a right to win (those in which it is uniquely great at).
(…) we argued that companies can only be successful at adapting to change if they remain true to their identity — and grow from their strengths.
As a case study with — again — industry-wide relevance, it remains to be seen if Netflix will truly profit from expanding into gaming (Netflix Games aims to expand its range of game titles from 24 to 50 by the end of the year). One year after its launch, the streaming giant is not there yet. According to Apptopia, only 1.7m people have yet engaged with Netflix Games — fewer than 1% of the streamer’s 221m subscribers.
Reed Hastings, founder and co-CEO of Netflix, seems to have a lucid view of the stringent conditions for success: ‘We have to be differentially great at it. There’s no point of just being in it’.
This quest for ‘next-gen OTT’ transformation appears to be a winding road indeed, pushing media companies away from their core business. This is evidenced by the need for them to pursue M&A and inorganic growth in order to initiate this transformation (e.g. Netflix and Ubisoft, DAZN and Texel).
Whether organic or inorganic transformation, the key question is: how much of a stretch is too much of a stretch?
An exclusive view: Yannick Manuel Ramcke (Head of OTT, OneFootball)
The unprecedented scale (i.e. almost every TV household), ARPU (i.e. indirect/ opaque pricing instead of direct, a-la-carte pricing), and retention (i.e. long-term contractual and physical lock-in with set-top boxes) made traditional pay-TV an enormously profitable business model. But the secular decline of pay-TV bundles and the rise of OTT (as a business model, not the technology) have eroded profit margins.
In this context, re-establishing unit economics will be crucial, and I expect the positive impact of re-bundling on scale (i.e. number of subscribers) and retention (i.e. portfolio approach to mitigate seasonality in content schedule and increase engagement to combat churn) to outweigh diluted ARPU (i.e. sum of a-la-carte pricing). Plus, there are almost zero incremental costs to serve a bundle, which means that any uplift in ARPU is highly profitable (90%+ margin).
Regarding adjacent services, it’s all about attaching additive revenue streams to a pre-existing customer relationship. As the digital marketplace is as competitive as ever before — where everyone fights over limited resources from end consumers (i.e. mind and wallet share) — building a digital direct-to-consumer business from scratch is almost cost-prohibitive, especially given content and subscriber acquisition costs. Thus, I’m positive about legacy companies (e.g. telcos) that have significant competitive advantages over new market entrants: established cash flows, well-known and trusted brands, valuable IPs, and (most importantly) direct access to a built-in user base.
Such direct access to consumers can either be leveraged for new in-house verticals (e.g. OneFootball building an OTT vertical on top of its 100m-strong user base), or sold to third-party service providers (e.g. telcos giving access to OTT video services to their customer base).
End-customer ownership may well be the most valuable thing in the market.
Read the rest of the OTT series: De-commoditizing OTT: how to drive service stickiness and differentiation in a heated media environment?
- Shape a differentiated content universe
- Develop a coherent adjacent offering (current article)
- Strive to design habit-forming products (soon to be published)
