ARPU is more than just a leading KPI for the pay-TV industry; it is its lifeblood, funding innovation, infrastructure, operation, and the creation of content. Operators have been feeling the pinch between rising licensing fees for channels and the amount that consumers will ultimately pay for a pay-TV service. In an environment of online pay-TV services and skinny bundles, many operators are looking to premium pay-TV features as a way to continue to gain improvements in ARPU.
Almost two-thirds of U.S. pay-TV households receive a premium subscription option from their current pay-TV provider. Among the U.S. households that do subscribe to a premium option, 44 percent subscribe to two or more services. Adoption of premium service features is lower among European broadband households and the services taken differ from the U.S. market as well. New competitors, consumer habits, and technologies are changing the arena for premium pay-TV services, affecting the outlook for future uptake and for the ARPU that these services generate.
Pay-per-view was one of pay TV’s earliest premium services, and it still plays an important role for consumers and operators despite the addition of other new premium options. PPV remains the primary method for many global satellite operators to provide movies to customers. Though broadband connections to the satellite operator’s set-top box provide greater selection and functionality for video-on-demand (VOD), some consumers continue to use PPV out of habit. Fixed-line operators that have added on-demand capabilities indicate that some consumers, particularly older consumers, continue to use PPV, calling to order access to an event though more convenient ways of ordering are available. For homes without fixed broadband connections or with limited connectivity, PPV is still a critical option for accessing movie content, including data-intensive formats such as HD, 3D, or 4K/Ultra HD.
The shift to OTT is having an impact on pay TV’s PPV outlook. Sports leagues and major events are increasingly looking to self-distribution to consumers via OTT. The WWE has transitioned its business to include its WWE Network OTT service, providing a stream of revenue throughout the year and making the company less reliant on pay-TV PPV to drive revenues.
At the same time, the new trend in livestreaming (via Periscope, Facebook Live, or other apps) could be a boon to PPV. Livestreaming during major events could heighten interest in major events and allow users to watch behind-the-scenes live content, ultimately driving more consumers to watch.
Video on-demand (VOD)
Changes in viewing habits and the introduction of OTT VOD alternatives have worked both for and against operator-provided VOD. The increased consumer preference for time-shifted viewing as well as Netflix use has whetted consumer appetite for VOD. Operator VOD benefits from its placement early in the movie release window, providing consumers with access to recent, popular film content. At the same time, OTT subscription video-on-demand (SVOD) offerings are offered at a much lower cost for consumers on a per-video basis. The net result is that aggregate operator VOD consumption has remained fairly stable in the U.S. market over the past few years, despite alternatives from OTT providers.
Operators appear to be taking two approaches to OTT SVOD services—adding their own services or partnering with OTT players to supplement their pay-TV or broadband offerings. Sky, Telekom Austria, Dish Network, and AT&T are a few of the operators that have either launched or stated plans to launch their own OTT services, with VOD playing a prominent role. In contrast, DT (Deutsche Telekom) and Altice USA (via its Cablevision acquisition) are examples of operators partnering with OTT SVOD services.
High Definition (HD) and 4K
Consumers have come to expect HD services, making it table stakes in pay TV despite the additional network capacity required to deliver a compelling set of HD linear channels. Yet, HD video services have provided an important lift to pay-TV revenues. In addition to providing a premium tier within the channel package, operators often collect higher CPE rental fees for HD set-top boxes. Carrying multiple set-top boxes of differing resolutions does produce greater inventory costs and support complexity; however, HD boxes frequently include a rich set of features that can facilitate new premium services.
4K services are only beginning to emerge in global markets, primarily among satellite operators. Cable operators are beginning to roll our 4K set-top boxes, allowing them to address demand for 4K. Canada’s Rogers Communications has stated plans to provide NHL hockey games and Toronto Blue Jay baseball games in 4K.
As a premium service, little has changed in the DVR/PVR space over the past several years. DVR service features are typically included as part of a CPE rental fee as an upgrade option for the subscriber’s set-top box. Operators can provide upgrades for whole-home DVR, which allows users in other parts of the home to access content through a second set-top box or other device that provides proper conditional access authentication. Operators can also carry premium DVR CPE devices, an approach taken by Com Hem, Suddenlink Communications, Virgin Media, and others via their partnerships with TiVo. Content rights agreements have hindered multiscreen access or remote storage of DVR-recorded content. So, beyond replacing the set-top box or adding access via additional set-top boxes, operators have been limited in their ability to generate new revenues in the DVR/PVR arena.
However, the advent of cloud DVR (also known as the cDVR, network DVR, or nDVR) has expanded the potential opportunities for premium DVR services. Cloud DVR systems allow operators to provide the same recording, storage, and playback functionality for a monthly fee without the need for DVR features within operator CPE. One of the highly anticipated revenue opportunities for cloud DVR is advertising. Any time viewers watch content within three days of the original broadcast (C3), the network is credited with, and advertisers are charged for, that ad. C7 measures activity over a seven-day window. Since cloud DVR provides operators with control over the delivered stream, operators or networks can potentially resell ad slots for recorded programming by inserting new ads following these ad windows, thus generating incremental revenues.
Fully 37 percent of U.S. pay-TV subscribers receive a premium movie channel as part of their pay-TV subscription. The adoption rate is higher among U.S. IPTV customers, with almost half receiving a premium movie channel.
Subscriptions to these premium channels are primarily driven by content. Access to popular films or films of particular genres drives uptake of many movie-oriented channels. However, demand for original series or exclusive access to popular series has become an increasingly important element in subscriber uptake. In the North American market, HBO has acquired access to some of the most popular film titles and has created a stable of popular original series including The Sopranos and Game of Thrones. As a result, HBO remains one of the most highly adopted premium channels in the U.S. market.
HBO’s success has served as a model for the OTT video services industry, and major services now fund creation of original content as a key differentiator. At the same time, premium movie channels themselves have invaded the OTT space with their own OTT video service offerings. Premium channels have been careful to develop their services and pricing in a way that does not undercut their pay-TV provider relationships but still allows the premium channels to capture new customers that may not subscribe to pay TV.
The net-net for the TV industry is that premium service features are feeling the impact of the OTT and connected viewing world just like the base TV package. While some of the impact makes the job harder for pay-TV providers, new opportunities are also available for operators that can take advantage of the change.