What Las Vegas can teach operators about over-the-top video

Yoav Schreiber, Current AnalysisSomething funny is happening as over-the-top (OTT) video consumption progresses towards broader adoption.

It seems that with everyone worrying about OTT's potential price disintermediation, service providers have forgotten about the marketing principles that gained them their pay-TV subscribers in the first place.  Specifically, every pay-TV offering has been built upon segmented marketing initiatives that combined various channel packages, preferences, passions and price points to attract distinct subscriber segments.  Is OTT such a monolithic threat that it will wash away all of these established subscriber segments?  More concretely, shouldn't a viable defense against OTT start with the service provider's understanding of their subscriber preferences and passions?

"Know thy customer."  Yet, there are countless industry polls pointing to aggregate (and somewhat conflicting) trends which obscure what is really going on, and what to do about it.  The polls are not wrong; their utility is limited.  In a survey of 2,000 Americans, Strategy Analytics uncovers that most cord-cutters are under 40, well-educated, employed, and have annual incomes above $50,000.  An online poll from Harris Interactive points out that 22% of the 3,084 respondents have cut or shaved their Pay-TV cord.  Meanwhile, a Nielsen study of 769 individuals between 18 and 49 (commissioned by CTAM) reveals that 84% of online video watchers consume the same or more linear TV.

Armed with such trending data, it is no wonder that the majority opinion emanating from last week's TelcoTV show (especially from every well attended OTT session), was that the service provider response to OTT is a choice between being a bit pipe or a value provider, a friend or foe. 

Newspapers are black and white; reality rarely is.

Having returned from Las Vegas, I'd like to propose lessons and analogies for crafting a service provider's OTT strategy based on my observations--from beyond the conference floor.OTT and Las Vegas If one thinks of OTT as a service which offers consumers a lower-cost alternative to video consumption as well as more choices, is there anything in Vegas that provides a similar proposition?  Anything at all? How about eating and gambling?

Eating in Las Vegas casinos is a choice between two extremes. There is the value buffet on the low-end, and the celebrity chef restaurant on the high-end. Do you think the all-you-can eat venues are eating into Emeril Lagasse's profits? Both options cater to different market segments and satisfy different consumer preferences and passions. Can you make money on a buffet? Sure, with volume. Can a service provider make money off volume viewership of OTT content? One possibility is to incorporate advertising insertion capabilities into OTT streams and leverage service provider assets such as subscriber data.

Gambling in Las Vegas runs the spectrum between slot machines and higher-stakes table gaming. Not only do these gambling options cater to different market segments, but the revenue and margins of each are also drastically different, with slots being a key driver of casino revenue and profits. The gambling analogy stretches even further: The abundance of slot machines is akin to long tail content. Meanwhile, the gaming tables and VIP rooms are akin to programmer channels and premium live events. Wouldn't it be interesting if service providers could transform OTT content into a contributor to video revenue and margins?

At best, these are cursory analogies, but they are also in line with examples of industry solutions surfaced at TelcoTV. Entone highlighted its own hybrid FusionTV approach which combines linear TV with broadband media in a managed service approach; Sezmi discussed its video appliance/service which includes an HD tuner for free over-the-air content as well as a broadband input for Internet video; Toledo Telephone revealed its OTT experimentation and early successes.

Las Vegas hotel casinos succeed by optimizing their mix of slots and gaming tables, low-end and celebrity restaurants. Below are some initial (and crude) customer segmentations to help service providers optimize their offerings:

1) OTT Buffet Patrons
Slot players also make additional purchases, such as buying show tickets. Similarly, cord-cutters can be up-sold with premium data plans to enable higher quality online video experiences. Toledo Telephone has been successfully experimenting with retail OTT by offering subscribers free Samsung Blu-ray Disc Players while charging premium broadband data rates. OTT and Las VegasIn addition, service providers can extend their brand further, incorporating OTT into their online consumer portals, offering (and charging for) technical support packages, and leveraging customer data for advertising revenue.

2) Occasional Card Players
Some people will just want to play a couple of hands of blackjack or poker.  Similarly, there are some channels that people will want based on passion and preferences. Entone characterizes this pay-TV "middle class" as consumers unwilling to either fully cut the cord or fully embrace OTT. With the combined goals of reducing consumer and service provider costs, service providers can evaluate alternatives for bundling linear HD channels by incorporating over-the-air, managed services, or other offerings.

3) Foodies
Some people will seek out premium experiences and are willing to pay for it. For them, there isn't a substitute for the complete service richness of HD, access to the newest releases, live events, (i.e., sports), and premium channels. Depending on the size of this market segment, service providers can evaluate potential alternatives for investing in their own infrastructure, or through a managed provider, such as Avail-TVN or Comcast Media Center.

For sure, the OTT threat is real. But it can be a well calculated gamble to consider OTT more opportunity than threat.

Yoav Schreiber is Senior Analyst for Digital Media Infrastructure at Current Analysis, and a FierceCable contributor. Follow him on Twitter @yschreiber.