De-commoditizing OTT: how to drive service stickiness and differentiation in a heated media environment? (3/3)
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
- Strive to design habit-forming products (current article; with an exclusive contribution by Nir Eyal in the final section)
Beyond content, the other major OTT retention lever is that of product design or, mostly, user experience (UX).
As mentioned in the first part, OTT services are increasingly being relegated to the role of publishers, while third-party aggregators are gaining more and more influence in the value chain. Aggregators control demand and strive to commoditize supply. So, while being prominent and discoverable within aggregators is becoming paramount for any content publishers to optimise reach, it is all the more critical for them to incentivise content usage on their proprietary platforms.
Usage on proprietary platforms optimizes brand prominence and guarantees data ownership, as well as control over the UX. Consequently, it avoids being found and used exclusively as a channel on a telco’s Electronic Programme Guide (EPG), or as a basic thumbnail on Samsung TV’s home screen.
Ultimately, usage on proprietary platforms gives streamers the opportunity to use their UX as a hook.
The rise to dominance of active over passive media
Overall, it is fair to say that OTT has revolutionized content distribution. In terms of UX, however, it may have opened up a whole new field of possibilities, but it has not yet transcended anything. A report by Accenture emphasizes how relatively non-interactive the average UX on OTT services is, inspired by the traditional TV linear experience (e.g. Electronic Programme Guide) or based on basic VOD thumbnails.
Some will argue that the core function of an OTT service is and will remain to consume video content and, especially when used on a connected TV, there is little need for innovation (the KISS principle: Keep it Simple, Stupid).
But this conservative position fails to see the bigger picture.
As noted earlier in the series, user time is split across a broad range of media activities (e.g. watching videos, listening to music, playing video games, browsing through social media, sending chat messages to friends, swiping Tinder profiles). At the end of the day, all media services fight for the same user attention. In 2019, Reed Hastings famously said that Netflix was competing more with Fortnite than with HBO.
Although the above-mentioned media businesses have existed for decades, the digital economy has led to a strong convergence in their distribution model, revenue streams, user experience and technology stack. This shift from indirect to direct competition has heated up the wider media environment, well beyond the streaming wars.
In this context, about half of US gamers said that playing video games has taken time away from more passive entertainment activities, including video streaming. This shift in power from passive to active entertainment is reinforced by the burgeoning of the Metaverse, which builds on gaming to what some believe will become the ultimate medium for self-expression. But we are not there yet.
What we can observe factually at the moment is that the experiences offered around video streaming remain largely non-interactive and non-customizable, revealing large gaps versus gaming and social media platforms. This may explain why the latter are much more effective at creating usage habits.
Habit-forming product design is best explained by the ‘Hook Model’ developed by Nir Eyal.
Silicon Valley’s powerful habit-forming mechanism: variable rewards
In short, Nir Eyal’s ‘Hook Model’ describes how the most successful firms in Silicon Valley are able to generate unprecedented engagement and daily usage rates, as is the case with the major social media platforms. The underlying model consists of four phases: trigger, action, variable rewards, and investment.
Triggers are what give users the energy to perform an action. First-time triggers are mainly external, such as an online advertisement (Paid), a friend’s recommendation (Shared), or an organic post in an aggregator newsfeed (Earned).
Action refers mainly to conversion in more digital marketing jargon (e.g. from seeing an online ad for a subscription service — trigger — to the act of subscribing — action).
More relevant for this article is the concept of variable rewards. As mentioned before, retention is mainly based on two axes: usage frequency and usage value. In the ‘Hook Model’, usage value is expressed through rewards — psychologically, the boost to the dopamine level in the brain — obtained by users for performing the underlying action (e.g. clicking, subscribing, liking, sharing, etc).
The type of rewards defines usage value, while the variability of the reward system drives usage frequency.
Regarding the latter, services that are designed to provide rewards varying with each use (e.g. a slot machine or, more media-specific, the generation of new content with each new scroll through a newsfeed, or the FIFA Ultimate Team game mode which is based on packs of unknown players and cosmetics) tend to generate tremendously higher activation rates than those with finite, predictable rewards.
What’s more, the ‘Hook Model’ distinguishes three types of rewards — variable or not — that can be awarded to users:
- Rewards of the tribe is the search for social rewards fueled by connectedness with other people
- Rewards of the hunt is the search for material resources and information
- Rewards of the self is the search for intrinsic rewards of mastery, competence, and completion
It is interesting to note that, of the three types of rewards presented above, only the second (rewards of the hunt) is ‘covered’ by the average UX proposed by OTT services at the moment. As developed below in Nir Eyal’s exclusive contribution, the variable reward system of OTT platforms is mainly embedded in the content itself, via the uncertainty and thrill of the shows. This does not affect the stickiness of the service itself, making the mechanism less powerful and, more importantly, less scalable.
See for yourself: how many times a day do you check your email inbox or Instagram feed vs. the home screen of your Netflix mobile app?
For the first one (rewards of the tribe), very few OTT services offer a social interface; at best watch parties or in-stream chat, but this is still emerging. Twitch remains the only established use case, despite the growth of solutions on the market such as LiveLike or SCEENIC.
Concerning the third (rewards of the self), it can be stated that, via their creations, OTT services allow a certain self-fulfillment through the intrinsic pleasure and inspiration distilled, and a certain sense of control and productivity via the creation and maintenance of watchlists, for instance.
But on the whole, self-expression remains very limited.
Personal investment in the product to increase ‘switching costs’
The final component of the ‘Hook Model’ is investment. If rewards represent sources of value for users, this fourth step refers to users that, use after use, store value on the platform. Value storage makes a media service stickier by increasing the switching costs from one product to another.
While users use Instagram as a logbook that stores more value with each new publication or follower (for most accounts, it represents years of investment), or entrusts all their personal data to Google Cloud or Apple iCloud, they deposit little value on their OTT services. Value storage mostly happens when users constitute their watchlist, as well as through the usage-based personalization of the interface. However, usage-based personalization is not likely to be highly valued by users from an emotional point of view, as it is not something they have built themselves (unlike, for example, IKEA furniture).
It is also relevant to note that the gradual adoption of the blockchain as a processing system could call into question the strategic principle of value storage. Via decentralized applications (‘dapps’), users can now retain ownership of their individual data which they can — in this technological environment at least — use at will to feed and personalize the various services operated.
However, the above model is still a long way from taking hold in the market.
Ultimately, the ‘Hook Model’ works as a feedback loop. External triggers, actions, rewards, and investment all form inputs to encourage users to repeat the pattern. As the pattern is repeated, triggers change from external to internal, for example the emotional association between specific moments or feelings and specific actions (e.g. after dinner = watch Netflix, boredom = scroll through Instagram).
This explains how a product can drive usage and retention in a highly scalable way. Internal triggers are embodied in users’ emotions and daily routine, and do not respond to ad campaigns or to the virality — even organic — of a social media post.
A competitive gap that impacts both sides of the value chain
So far, streamers have relied primarily on content to create habits, including experimenting beyond the binge release model (all episodes of a series available on opening) with weekly (e.g. Disney+’s Obi-wan Kenobi) or two-part (e.g. Netflix’s Stranger Things Season 4) episode release modes. This makes sense, but is inevitably much less profitable and scalable than product-based habit formation.
And, once again, relying on individual titles has no effect on the stickiness of the service itself.
All things considered, it can be stated that gaming and social media platforms not only have an edge on the supply side (commoditized supply via user-generated content and player actions), but also on the demand side on the basis of product stickiness. A simple gap analysis shows that the product design of most OTT services has indeed a sub-optimal reward system (both in terms of variability and type, including unfulfilled rewards of the tribe and rewards of the self), and an almost non-existent value storage system.
This costs them dearly in churn/CLV and CAC.
Identity plus coherent adjacencies plus habit-forming product
Over this series, we explored three strategic principles to enable OTT video streaming services to de-commoditize.
To optimize subscriber inflows, the first principle explores the need for OTT services to fully embrace their role as publishers in the value chain, notably around a clearly distinguishable content universe. This ensures transferability between title brands and service brand, raising its profile in the market.
To reduce subscriber outflows, the second principle is the relevance of extending the core offering with adjacencies (whether content or services) in order to capture — and not lose — value from users’ fluid media behaviors. Coherency across identity, assets, and capabilities remains essential for successful diversification.
Finally, the third principle presents the gaps between ‘active’ media services and OTT from a product design perspective. Through the ‘Hook model’, it has been seen that it is critical that OTT services beef up their reward and value storage systems in order to drive product stickiness in a scalable, economically efficient way.
Regaining control of their demand curve
Overall, by enhancing identity, adjacencies, and product design, OTT services can revalue their profile in the value chain and regain control of their demand curve, both horizontally (vis-à-vis direct competitors and consumers on the retail side) and vertically (vis-à-vis aggregators on the wholesale side).
Failing this, they run the long-term risk of becoming a simple raw feed integrated into third-party platforms, depriving them of value creation and capture. On the retail side, an undifferentiated value proposition and high user outflows will take OTT economics from difficult to simply unviable.
To achieve this value chain upgrade, the roadmap of initiatives and challenges seems very extensive. But it indeed appears that there is no alternative for the OTT model to flourish in the future.
An exclusive view: Nir Eyal (bestselling author, investor, consultant, and lecturer at Stanford Graduate School of Business)
It’s fair to say that pure OTT platforms provide three of the four stages of the ‘Hook Model’, and really fall on the fourth stage.
Like social platforms, they also act as a response to the internal trigger of boredom, that emotional itch we seek to scratch. To alleviate this feeling, the action stage is easier than ever, as digitally distributed products offer greater access to users. Variable rewards are built into the content; scripted or unscripted uncertainty is built into the narrative itself. This is of course the backbone of all content-driven platforms.
What is missing is the investment phase, when users invest something in the product to improve its use.
In its early days, Netflix put a lot of emphasis on its algorithms to improve content recommendation. This was a big selling point for them, a big part of what made Netflix so successful. However, in recent years, the streamer’s strategy has evolved into becoming a mass-market phenomenon, including producing and distributing shows that ‘everyone is talking about’, maximizing virality and subscription growth.
Unlike social video platforms like YouTube and TikTok, which have really perfected the Hook Model’s investment phase via their micro-targeting based UX, pure OTT services have somehow neglected the role of data investment to improve the service.
What may change over the next decade is what has begun to be called ‘synthetic content’, which refers to the use of GPT-3 and AI machine learning systems to generate content in a more automated and personalized fashion, filling in the gaps of what you might want to see based on your own tastes and interests. Professionally-generated content may no longer be produced as it is now, with big-budget actors and a fixed script. For instance, we may see more of the ‘choose your own adventure’ content formats produced in a more scalable way.
This is a potential opportunity born out of a current threat that OTT platforms today do not have a particularly developed investment phase.
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
- Strive to design habit-forming products (current article)
