De-commoditizing OTT: how to drive service stickiness and differentiation in a heated media environment? (1/3)
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 (current article)
- Develop a coherent adjacent offering
- Strive to design habit-forming products
It really feels like a hangover. While the Netflix model was destined to save television from imminent obsolescence, it no longer seems to be the ultimate, future-proof prototype, after all. This year, the streaming giant’s subscriber count began to sag (first time since 2011), as has its share price (more than 60%).
Netflix’s struggles may be just one case, but the trajectory of the streaming giant embodies the growth story of the entire video entertainment industry. The resulting widespread media coverage — ‘The Great Netflix Correction’ as per the Financial Times — is clear evidence of this.
Warner Bros. Discovery’s recent financial results and stated strategic shifts — in terms of programming (cancellation of Bat Girl), product (consolidation into a single streaming offering), and distribution (pivoting away from streaming-only releasees) — is perhaps less extrapolatable, as it needs to be seen in the context of its mega-merger, but is still revealing.
Some might see this slackening as a natural consequence of deteriorating macro-economic conditions (in June 2022, the annual inflation rate rose to over 9% in the US) — which may lead to a reduction in entertainment spending — combined with recent price increases. But the phenomenon is better analysed from the perspective of micro-economic developments in the media industry.
If cord-cutting is accelerated by consumer habits, it was initiated by the disruption — voluntary or forced — of media businesses’ distribution model towards direct-to-consumers (DTC), whether content owners (e.g. sports leagues, studios), or distributors (e.g. media companies such as ESPN or Canal+).
And, according to Wall Street, it was seemingly not the brightest idea.
On the volume side, streaming platforms are suffering from a drag on their subscriber growth curve — the main metric defining the development of their enterprise value. On the value side, linear channel bundles’ affiliate fees still offer a higher Average Revenue Per User (ARPU) than the pure OTT business.
Video streaming means conservative revenues combined with huge content spending (over USD 220bn in aggregate for 2021), as recently expressed provocatively by the CEO of Warner Bros. Discovery David Zaslav: ‘spend, spend, spend and then charge very little’. Consequently, premium OTT is a loss-making business today (e.g. USD 1.8bn for Paramount+, USD 1.7bn for Peacock). The fact that subscription appears to be plateauing (i.e. stagflation) undermines the profit outlook for tomorrow (which, in the case of Disney and Warner Bros. Discovery, has been forecasted for 2024).
OTT shaken by the scourge of platform hopping
So, what are the roots of the problem?
The inherent flexibility of OTT, for which it is rightly praised, appears now to be a double-edged sword. On the one hand, it offers a radical improvement in consumption efficiency through non-binding contracts and, from a tech point of view, a significant streamlining of infrastructure and operation costs. On the other hand, latter point has contributed to a drastic increase in the density of the competitive landscape of domestic, international, and global retail video services.
With lowering barriers to entry for smaller players and bigger players’ exponential scalability typical of the digital economy, user choice has increased tenfold, creating highly volatile, not to say elusive, consumption patterns. Serial churning or platform hopping will only get worse as the number of available services increases, and market shares decrease.
This leaves streamers with the following strategic questions:
- How to run a sustainable video streaming business in an inherently unstable environment (industry average monthly churn rate of over 5%)?
- How to drive growth in a financially viable way (cost growth), if content costs per user rise as the number of users decreases, and content spending holds or increases (e.g. plateau at USD 17bn for Netflix)?
- All in all, what are the battles to be won for streamers to secure a place in users’ relevant set of four streaming subscriptions?
In fact, the battlefields are multiple.
Firstly, the need to optimise the distribution network to strengthen presence, prominence, and discoverability within audience gatekeepers. Secondly, the diversification of pricing models to extract maximum value from a maximum number of users (i.e. price discrimination), in particular the rush to AVOD as a symptomatic (not substantive) treatment for subscriber decline.
And lastly, the intrinsic improvement of the service itself (e.g. content offering, user experience) to raise its profile in the market and, therefore, its penetration and stickiness.
While distribution seems to be the most powerful lever to ‘fix OTT’ in the long term (e.g. the prospects of widespread Web3 decentralisation to disable churn, versus the rise of super-bundles to absorb churn), what can be done, in the short term, on the service side?
This series focuses on the latter question.
Maximising inflows, minimising outflows
Like all subscription businesses, OTT is dynamic in nature. Ultimately, it is all about maximising subscriber inflows (gross adds) and minimising outflows (churns; cancellations minus win-back/ re-subscriptions) to optimise net subscriber growth (net adds).
Another critical performance metric is the maintenance of a positive quotient between Customer Lifetime Value (CLV — ARPU in relation to the average subscription period) and Customer Acquisition Costs (CAC — average expenditure required to acquire a user, particularly marketing). Industry standards consider a ratio of 3:1 to be healthy.
In view of the above, three strategy principles can be identified, each of which constitutes an article in this three-part series on OTT:
- Optimise user inflows by shaping a differentiated content universe
- Minimise user outflows by developing a coherent adjacent offering
- Beyond content, strive to design habit-forming products
As their distribution model is commoditized, what are OTTs’ true role in the value chain?
Subscriber acquisition (gross adds) remains the ultimate performance metric for a streamer; the engine in the machine. This is nothing new. The vital role of content in user acquisition — 70% to 80% of consumers say they care more about the content delivered by a particular service than the service itself — is also a constant throughout the industry timeline.
But what has changed and continues to change are the underlying market conditions.
Horizontally, heated competition with other streamers (the so-called streaming wars) naturally calls for differentiation beyond ‘just being an OTT’. Netflix is no longer the only platform with an internet-based SVOD offering; it now has competitors with the same structural assets. As a result, users moving away from traditional TV networks (‘cord-cutting’) are feeding individual streaming services at a lower average rate, as the number of such services increases.
Vertically, media aggregators such as social media platforms (e.g. YouTube) or telco operators (e.g. Sky) — who offer high-volume content without necessarily being the producer or the owner — are gaining influence in the value chain. Mainly because they ‘consolidate’, i.e. facilitate discovery and access to content across multiple channels (users’ ultimate pain point in the current landscape).
As Ben Thomson explained in a recent essay, despite being a media distributor, Netflix does not have the cost nor revenue structure of a media aggregator that mostly acts on retail transaction and user experience (e.g. Spotify). For its part, the streaming giant produces or acquires the rights to everything it distributes — in each territory. Netflix is also a distributor but, first and foremost, it operates as a publisher.
Long story short, Netflix’s current ‘a bit of everything for everyone’ content strategy can be assumed as suboptimal to acquire subscribers in today’s marketplace. This is for the simple reason that others — aggregators — do it in a much more scalable way.
Again from Ben Thompson, aggregators control the demand (their value proposition); they therefore push for commoditized content to maximise their leverage on the supply side. Publishers (e.g. Netflix) control the supply (their value proposition); they should therefore push for differentiated content to maximise their leverage on the retail and wholesale side.
Offering a differentiated, non-commoditized content offering is becoming the ultimate success factor for OTT services to drive sustainable user acquisition and compete beyond price. Whether it is, as stated, the retail price vis-à-vis users, or the wholesale price vis-à-vis aggregators.
A striking example of the risks of unfair advantage by aggregators downstream (i.e. taking advantage of commoditized supply upstream) is the quasi-monopoly on demand exercised by hardware and operating system providers such as Apple (iOS) and Google (Android) in the mobile environment. They have the power to levy unrealistically high commissions on the revenues of service providers (or, in the context of this article, publishers) who are forced to operate in these ‘walled gardens’ (the famous 30% app store tax).
So there is a real sense of urgency. But how to best differentiate content, then?
The benefits of the franchise model over the ‘spray and pray’, studio model
Let’s again take the example of Netflix. Actually, what’s a typical Netflix show?
Netflix does have high-rated, record-setting titles like Stranger Things and Squid Games, but they have little to do with each other. Above all, it has a relatively deep library of titles (nearly 6,000 title rights in the US according to JustWatch), many of which will never be brought to the fore by its recommendation engine. Netflix’s underlying strategy is what can be referenced as the studio model, as Nir Eyal defines below (we will delve into his work in the third article of this series):
Hollywood and the video gaming industry operate under what is called the studio model, whereby a deep-pocketed company provides backing and distribution to a portfolio of movies or games, uncertain which one will become the next megahit.
This ‘spray and pray’ approach worked for decades for Hollywood, and for years for Netflix, with user and content analytics making the model slightly more efficient over time. But, as stated above, OTT does not benefit from the same flywheel as the traditional Hollywood distribution model. For SVOD platforms, content is no longer the product, it is the service. At least from a contractual point of view.
Specifically with regard to the service, Netflix’s content library is so heterogeneous that it does not convey a clear sense of identity, nor contribute to shaping a clearly positioned value proposition (beyond quality standards, which are commoditized). Netflix’s originals may be remarkable, but rarely distinguishable in its association with their host platform.
In contrast, Disney+ plays hard on its hyper-premium IPs, such as Marvel and Star Wars, and seems to be privileging value over volume (about 1,600 title rights). This is well reflected in the tagline used by the platform: The home of Disney, Marvel, Pixar, Star Wars, NatGeo, and Star. As seen in my detailed article on ‘multi-epic storytelling’, Disney is shifting its franchise model from blockbuster-driven to IP-driven. In other words, Star Wars has gone from a main high-end menu (with add-ons) to a vast à la carte menu, where not all like everything, but gladly come back because they know they will find something they like. And first and foremost, they know what they will find.
For a Star Wars fan, Disney+ is a destination platform. Even without new releases, the back catalogue is a compelling enough acquisition argument for the community.
To stimulate user acquisition with a differentiated content offering, the punctual release of super productions such as Stranger Things obviously generates a short-term gain. However, without an editorial link to a broader, distinctive concept or universe, the transferability between the content brand and the service brand is limited. It can be argued that the studio model contributes only marginally to building the service identity, and thus its distinctive profile in the market (long-term gain).
For their part, franchised titles expand the collection and narrative of their respective universes and, presumably, have more ‘rewatchability’ via their emotional value to fans. On the other hand, the library value of studio titles is much more limited. A few months after its release, Dwayne Jonhson, Gal Gadot, and Ryan Reynolds’ Red Notice (production budget of over USD 200m) is already diluted in Netflix’s algorithms. This will be the same for Ryan Gosling’s The Gray Man (USD 200m production budget as well) in a couple of weeks.
In fact, the studio model is close to a digitised version of the traditional box office model, where the commercial success of a title is somehow subsidised by big marketing means. In the OTT economy, this essentially means a higher CAC and, in turn, a lower CLV/ CAC ratio. Acquisition is ‘bought’, not organically nurtured, as evidenced by the huge subscription peaks in the opening period of high-profile programming.
To sum up, it is fair to say that franchise, universe-based offerings have the merit of using titles to develop the brand and profile of the service, whereas title-based offerings almost decouple the content from the service.
The line between the two models is undeniably blurrier than the above paragraphs suggest. And to summarise the recent announcement that Disney’s 3-year-old streaming offering now has more streaming subscribers than Netflix to this strategic divergence would be equally way too simplistic. But it does give pause for thought.
In addition, it is also important to disclaim that Disney+ represents an ideal state that may seem out of reach for most streamers, given its virtually unparalleled, built-in assets. Disney does indeed own some of the most valuable intellectual property in the world, as well as a brand that is already recognised and differentiated by the consumer, particularly through the legacy of its Disney Parks, Experiences and Products business.
This does not mean, however, that it cannot show the way forward.
A distinctive content universe based on its very own assets and capabilities
While most media companies have for years been able to rely on the economic efficiency of their distribution system and the audience impact of exclusivities, the so-called streaming wars and platform hopping have reshuffled the deck, forcing them to reflect on their identity.
What are the core values of my offering? Where do I excel, what are my differentiating/superior capabilities compared to my competitors? With which audience segment am I the market leader?
Answering such questions in detail allows a clear strategic framework to be established around the service content universe. Former Disney Chairman Bog Iger’s MasterClass specifically comments on the essence of the brand he has worked to give to the House of Mouse, and the coherence in its evolution:
Consumers, faced with myriad decisions each day, are able to cut through the noise by recognizing your brand and sticking with your product. They form an opinion about you once, and as long as you don’t betray that trust, their familiarity with the brand simplifies their decision-making process.
Does every product under your brand umbrella embody these values? If not, you’ll either need to rethink your unifying set of values or (more likely) adjust your products to universally support your brand. Once your products clearly align with your brand values, you’re golden.
This means that streamers’ content pipeline should not only be based on outside-in factors (e.g. content analytics to inform on the relevance of this or that content upon prospective market attractiveness), but also inside-out (what’s the strategic fit with the essence of my brand and differentiated content universe?).
It seems that this is the path that Warner Bros. Discovery wants to take, as evidenced by the recent cancellation of several titles deemed non-coherent:
Sometimes, to choose is just to give up.
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 (current article)
- Develop a coherent adjacent offering
- Strive to design habit-forming products
