With ‘Streaming Wars’ Upon Us, Are OTT and Network Service Providers Fighting Over the Right Budget

“War is a racket. The few profit, the many pay.” - Noam Chomsky

Analysts have flooded the market with reports and perspectives foretelling the arrival of the streaming wars. Serving as the industry’s own “winter is coming” mantra -- à la Game of Thrones -- the streaming wars were portrayed as a great competition for discrete household content budgets. 

Now that “winter is upon us,” however, it may turn out that they are fighting the wrong war. By focusing on demand for content on a stand-alone basis -- in essence the Netflix/Hulu model -- the SVoD industry is running the risk of missing the real problem: 

People are not buying content on its own merit alone...a shrinking entertainment budget is prompting a large number of consumers to make decisions based on how it is bundled with wireless, broadband access and other services.

Game of Thrones references aside, last fall did see the arrival of two major new players to the Over-The-Top (OTT) lineup (Disney+, Apple TV+). With only a few major brands left to launch in early 2020 (NBCU’s Peacock, HBO Max) it seems clear that we will see a tipping point this year.

Nate Fisher, Managing Editor, BizTechReports

Analysts Predict Strong Revenue Growth for OTT... 

If the analysts at MarketsandMarkets are right, the next few years will be good for most OTT providers. They expect to see overall OTT demand to reach $158.84 billion by 2024 -- more than doubling the $67.8 billion it generated just in 2018. Allied Market Research is even more bullish, projecting OTT revenues to reach $332.52 billion by 2025.

The streaming service model makes enough sense that the networks service providers (NSPs) -- who feared being relegated to dumb pipe providers just a few years ago -- are now re-entering the market with their own OTT offerings. 

The streaming model is not, however, in danger of totally displacing more traditional Pay TV services. According to the latest numbers from Statista, average revenue per user (ARPU) for streaming services in 2019 reached $22.92. This is not even close to the $76.40 in Pay TV ARPU that Comcast -- as an example cited in Multichannel News -- generated in 2014 from 21.69 subscribers. And even though the cable provider lost 5 million subscribers by 2019 -- down to 21.64 million -- it is generating a whopping ARPU of  $84.70.   

What these numbers show -- particularly as we move into the height of saturation for streaming services -- is that none of these offerings are going anywhere anytime soon. Moreover, this streaming war is not going to unfold the way we expect it to either.

Disrupt Who?

The initial idea behind the streaming wars was that the rise of numerous OTT services would disrupt the traditional Pay TV market. Over time it was suggested that we would see the consolidation of a few players and return to an era of video bundling between service providers and direct-to-consumer offerings. However, what the numbers above actually show is that there is going to be a far more equal divide between conventional and OTT consumers.

This is where the true danger lies for the health of the entire industry. 

American households have been spending less on content and services per month over the last several years, with current average monthly outlays at around $73.00. Only $8.00 of that budget is being allocated to streaming services according to the good folks at Parks Associates. This number has stayed flat over the last 3 years. This cannot be good for a crowded OTT market.

If the projections about household spend from the analyst community hold, then winners and losers in the streaming market will quickly begin to shake out...unless video service providers find their way into other segments of consumers’ wallets. 

Players like Disney+ (with Verizon), Amazon Video (with Prime), and Apple TV+ (with Apple hardware) are already making early moves to address this dynamic by bundling their video options with other consumer line items and services. 

It will be interesting to see how the next few years of this war unfold as operational spend and the demand to see returns on investment comes into direct conflict with consumer behavior and wallet share. While streaming services and service providers may be currently focused on their competition, they may want to revisit their thinking and keep an eye on integrating their value propositions into other important consumer needs and desires.