Harnessing TV Distribution for Canadians in the Digital Age
An Omdia research report for CRTC
Study by Informa Tech
October 2020
Introduction
In Harnessing Change: The Future of Programming Distribution in Canada , the Canadian Radio-television and Telecommunications Commission (CRTC) proposed that legislation be updated to permit it to use new adaptable and innovative approaches to regulation based on how the TV market is evolving. One short to medium term option that the CRTC outlined it could take, in advance of legislative change, is to reexamine the role and effectiveness of online broadcast distribution undertakings (BDUs).
Online BDU-like services, which are a distinct category from over-the-top (OTT) services such as Netflix, Amazon, and Disney+, are already changing the dynamics of broadcasting markets in other nations. In the US, BDU competitors now include a range of virtual providers such as DirecTV Now, Sling TV, Hulu with Live TV, and YouTube TV, which are offering online services comparable to traditional cable services. In the UK, Sky has expanded the reach of its satellite TV service by offering it online (branded as Now TV). Other services, such as Amazon Channels, Roku, and Apple TV, can be expected to further disrupt markets. However, online or “virtual” BDU (vBDU) services have not yet developed in Canada in the same way as in other markets. This is due, at least in part, to a variety of economic, legislative, and regulatory factors that may be unique to Canada.
The CRTC has commissioned Omdia, an independent research firm and global leader in market assessments, to write a research report to better understand how TV distribution has evolved in other countries and how those countries are adjusting to online distribution and to offer an analysis of factors that might also impact the evolution of online TV and video distribution in Canada.
Summary
In 2020, broadband video distribution is entering its third decade as a significant business. If the 2000s were the formative years for premium online video, with many false starts and failed business models, the 2010s represented its adolescence, when the industry started to mature and exhibit some impressive successes, mostly at the early-adopter level. Now, in the 2020s, OTT video is rapidly becoming a worldwide mass-market industry, dominated by global players such as Netflix and Amazon and supported by multisubscription self-bundling households. The rise of OTT video has been facilitated by its ability, on a global scale, to fuse content, broadcast, and distribution business models.
Evolution and Growth of TV-video
Most markets have historically followed a similar pattern of TV-video evolution. First came free TV, followed by cable-led pay TVFootnote 1, which subsequently competed against satellite TV. This remained the dominant scenario for decades before broadband delivery led to the present situation in which the subscription TV concept has emerged, characterized by severe challenges to the traditional pay-TV model, the rise of OTT video, low-cost vMVPD (particularly in the US), and a general market unbundling. The next stage of market development, still in its relative infancy, is the battle for content reaggregation, which sees digital giants such as Apple TV fighting against traditional TV players that are investing in next-generation platforms that can host multiple services. The latter are learning fast that the big pay-TV bundle is a diminishing concept, and they are exploring ways to make the skinny and à la carte models work.
OTT video’s growth has been played out against a backdrop of stagnation in traditional TV, as seen in declining linear-TV viewing numbers and sluggish growth in pay-TV subscriptions. However, the interrelationship between OTT video and TV is far from one-sided: OTT video has certainly caused a great deal of disruption to TV, but the correlation between swift growth in OTT video subscriptions and much slower growth (or, in some markets, decline) in pay-TV subscriptions is not direct.
The COVID-19 pandemic, while first and foremost a terrible human tragedy for those affected, also has important consequences for the TV and video sector. In the short term, traditional TV viewing figures have been boosted by a homebound public looking for news to inform them and entertainment to distract them. But more significant is the severe recessionary economic impact that the pandemic brings with it. We know from previous economic downturns that these situations tend to fuel change rather than herald a return to previous trends. Omdia’s expectation, therefore, is that COVID-19 will in no way alleviate the challenges faced by traditional TV players and, if anything, will accelerate the changes that we foresee.
TV and video consumption
There are important differences in market characteristics across the world that are driving a diverse range of TV and video consumption patterns. In Canada, for example, the limited availability of free terrestrial TV means that cord-cutters who cancel their pay-TV subscription commonly move straight to a broadband video-only scenario. This is unlike in much of the rest of the world, where cord-cutters tend to adopt a free TV service, often topped up with an OTT video subscription. Another difference from country to country lies in the composition of channel offerings: outside of North America, particularly in Europe, there are high-profile proprietary channels (e.g., Sky’s own suite of channels in the UK). Pay-TV providers in North America, however, are mostly distributing the same channels.
In most countries the majority of households buy a combination of pay TV and OTT video, and more often than not, pay-TV households will buy multiple OTT video subscriptions. Outside of Canada, Omdia has not found any market where the combined cord-cutter (former pay-TV subscribers) and cord-never (households that have never bought pay TV) OTT video-buying household segment forms a significant proportion. Rather, there is a polarization between free-TV households and combined pay-TV and OTT video households.
Competition
A decade ago, before OTT video had really taken off in any meaningful way, most markets were characterized by a rising proportion of pay-TV households, while the rest of the market was made up of households that relied solely on free TV. Today, pay-TV households have typically become pay-TV and OTT-video households, while some free-TV households have evolved to become free-TV and OTT-video-buying households. Meanwhile, the pay-TV-only household as a segment is in decline, while the free-TV-only segment is slowly increasing. In short, pay-TV households require OTT video services to supplement their entertainment appetites. But the opposite is also true: without a market of pay-TV households to sell to, OTT video subscription becomes an unsustainable business model.
It is also crucial to note that there is a great deal of overlap between the companies that operate OTT video services and those that offer traditional TV services. To begin with, most pay-TV operators and broadcasters now have their own internet-delivered platforms and services. Certainly, for most of the 2010s, streaming services from pay-TV operators tended to be multi-screen (“TV everywhere”) services that could only be accessed by authenticated pay-TV subscribers, a model implemented largely because of concerns about the cannibalization of flagship services. But from the mid-2010s, under the strain of the disruptive impact of Netflix, many pay-TV multi-screen services were extended to standalone OTT video access.
Today, operating a standalone OTT video service alongside traditional pay-TV services has become an industry standard for pay-TV operators almost everywhere. Beyond the dominating online natives Netflix and Amazon, OTT video has, to a large extent, become part of the pay-TV industry. OTT video services are operated by traditional TV players; they coexist with pay TV and help support an extended version of the traditional TV industry. Viewed in this manner, OTT video becomes essentially a form of pay-TV continuity.
Market disruption
In addition, anxiety about OTT video’s capacity to disrupt pay TV is, in the main, really only a concern about the threat that is posed by two companies: Netflix and Amazon. And here too, in most markets, pay-TV operators can successfully put in place strategies to contain this threat. As stated above, OTT video desperately requires pay-TV households. For this reason, Netflix has partnered with numerous pay-TV operators to have its service placed on operator TV platforms and set-top boxes (STBs), sometimes through bundles, at other times through integration of Netflix payments into operator carrier billing.
Now, at the turn of the 2020s, next-generation major US OTT video services are emerging including Disney+, HBO Max, and Peacock. Coming from the traditional media and entertainment world, direct-to-consumer (D2C) services are explicitly created for internet delivery, designed for a global mass market, and aimed to compete in a market dominated by Netflix. However, despite being described as D2C services, Disney+ and HBO Max will depend to a great extent on continuing partnerships with existing pay-TV and telco partners, both at home and internationally.
At home, Disney+ is available as a D2C service over the internet, but a great many of its early signups have been customers that get free access via their Verizon broadband subscriptions. In France, Disney+ will be available as an OTT D2C service, but most French customers are likely to buy the service via Disney’s local partner Canal Plus; in other key European markets such as the UK and Germany, access to Disney+ will be at least partly through Disney’s longtime partner Sky. In the US, HBO Max will be bundled through a range of existing AT&T services. Internationally, the expectation is the international rollout will be played out through HBO’s local pay-TV affiliates.
This is also true in Canada. Here, when viewed in isolation, there is a clear shift underway with households migrating from pay TV to OTT video, which is coinciding with a stagnating/declining pay-TV market and ever-increasing growth in OTT video. But this is an overly simplistic view that fails to consider causation and overlap between TV and OTT video. Many Canadians are not dropping out of pay-TV subscriptions but are adding OTT video on top of an existing service. Beyond Netflix and Amazon, the main players in Canadian OTT video, such as Bell’s Crave TV and Vidéotron’s Club illico, come from traditional pay-TV companies. The key challenge faced by Canadian pay-TV operators is how to better compete with foreign OTT video players (i.e., Netflix and Amazon). The launch of next-generation D2C services is expected to be characterized by continuity—Disney and HBO working with local partners as opposed to withdrawing from long-standing partnerships. This will likely remain the scenario looking ahead, as the ongoing rise of OTT video and BDUs’ inability to stop cord-cutting weaken the negotiating leverage of local affiliates.
Market fragmentation
At the same time, Omdia recognizes that the Canadian TV and video market is undergoing a transition, characterized by a great deal of disruption and fragmentation. The fragmented nature of the OTT video sector, however, seems to create an opportunity for traditional cable-TV and IPTV operators to carve out a key role as trusted aggregators, leveraging their currently held advantage of extensive broadband customer bases. By creating an environment where they can partner with streaming services to create an all-in-one, easily navigable destination via a single platform or app, they could potentially host all levels of subscribers, including the much sought-after younger, cord-never, mobile-first generation.
Although traditional TV players need to react to the new operating environment, this reaction should not be entirely defensive. Traditional TV still has the edge in areas such as news and sports, and these advantages need to be built upon and better exploited. The rise of sports specialists such as DAZN and some forays into sports by Amazon look, on the surface, to threaten traditional services. But with pay TV holding tight to broadcasting rights for the foreseeable future, there is little real risk of major additional disruption from OTT video. This particularly remains the case with Netflix, which is seemingly totally uninterested in sports.
A relatively slow decline is thus expected for pay TV in Canada, despite the rise of OTT video services; a more negative scenario for pay TV is avoided largely because of the complementary role played by streaming services to pay TV and the fact that free TV networks in Canada are typically accessed via pay-TV services, discouraging cord-cutting.
The potential for vBDU services in Canada
Omdia has been tasked by the CRTC to look at the market potential of virtual BDU (vBDU) services in the Canadian markets, and to assess whether regulatory change to enable such services might have a positive impact on the Canadian TV industry and for Canadian consumers. A vBDU is a video service that essentially replicates traditional BDU services but is instead distributed via the internet. The vBDU offering should be considered as comparable to a BDU, with access to a range of free and premium TV channels, often via set channel packages, and with additional on-demand content available within the same service.
Such vBDU services have not yet developed in Canada in the same way as in other markets, at least in part because of a variety of economic, legislative, and regulatory factors that may be unique to Canada. The key issue under investigation is whether the wider introduction and promotion of vBDU services in Canada would extend the lifetime of the Canadian BDU system, which is under threat as audiences increasingly opt for online alternatives. Another question, linked to this, is whether vBDU services could be a positive force toward the goal of ensuring there is a continued and wide distribution of Canadian content and Canadian TV channels and whether such vBDUs would be adopted by Canadians as an integral part of current video self-bundles.
Impact studies
Omdia has prepared three basic vBDU impact studies, examining high-, medium-, and low-impact scenarios for the potential impact of vBDU on current and future market trends. In the first (high-impact) scenario, all major Canadian operators are assumed to launch vBDU services and, through broad and aggressive promotion, vBDU services become mass-market products. The scenario does, however, assume there will be a price to pay, with vBDU uptake having some cannibalizing impact on traditional BDU services. In this situation, which is essentially the best-case scenario, vBDU growth will still not fully compensate for the projected decline in traditional BDU subscriptions over time. So the success of this most positive scenario depends on the foresight of BDU operators to back the concept of vBDU services, despite the prospect of there being some cannibalization of their existing services.
In the medium-impact scenario, fears of cannibalization are assumed to be the key driver behind operator vBDU strategies, and as a result, most vBDU services are launched as poor substitutes to existing pay-TV services. In this case, the impact of the new services would be limited to cord-cutters—a much smaller number of consumers, who were expected to make the transition from pay TV to online video regardless of the introduction of vBDU services.
Finally, in the low-impact scenario, operators are expected to be openly hostile to vBDU services, and as a result, the vBDU market developed in Canada would be at a very low scale.
Across all three scenarios, there are recognized benefits from the wider introduction of vBDU services in Canada. Most obviously, vBDUs are expected to act to compensate for a degree of consumer losses from traditional BDU services and, thereby, provide to varying levels the desired continuity of free TV distribution in Canada. However, the extent and significance of this desired outcome will largely depend on the willingness of operators to fully engage with the vBDU concept.
Conclusion
Omdia, therefore, concludes that the introduction of vBDUs would likely result in some benefits for the Canadian TV and video sector. However, even our most positive scenario still assumes that the BDU segment will remain in slow decline for the foreseeable future. We do not envisage vBDU rollout, in any scenario, will significantly impede the growth of OTT video services. However, the implementation of vBDU services would have the beneficial effect of future-proofing the BDU sector in preparation for a market that will be increasingly dominated by online delivery.
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