Screen time: Online video and the future of distribution

Streaming video has become a familiar sight on computer screens across the US. From employees in their office cubicles watching news on to commuters on the train catching up on “The Bachelor” on their WatchABC mobile phone apps, environments that were once videofree are now home to viewers.

Established players in the video value chain – production studios, TV networks, pay-TV distributors, brand advertisers, and so forth – have been closely monitoring these behaviors from the start. Yet, with the vast majority of their income linked to the television (not the computer) and online viewing not really encroaching on “TV time,” most of these players have felt only marginal impact on their core business, if any. But things are changing.

Internet video moves into traditional TV territory

Despite online video’s growing presence, a divide has existed between traditional television viewing – via satellite and cable in family rooms and dens – and online viewing – Internet-based in offices or “on the go.” Thanks to two technology trends, this is changing, since the Internet makes its way more solidly into spaces inside the home that used to be the domain of traditional television.

Advertising spend each year to reach TV viewers in the US

The first gamechanging trend has to do with tablets. The use of these devices is rising exponentially with no sign of a slowdown.At the beginning of 2010, tablets were all but nonexistent. In the United States, where the streaming video market has developed commercially the most, over 30 percent of consumers now have access to a tablet computer. This matters because a majority use their tablets to watch video at home: usually on the couch with a traditional TV in sight. No longer desk-bound, the computer screen has moved into the living room and now competes with the TV for eyeballs and attention. And as display quality and user interfaces get better and prices continue to decline, the tablet will only become a more pervasive and formidable competitor to the television screen.Each year in the US, brand advertisers currently spend upwards of USD 60 billion to reach television viewers. Even a small but steady eyeball shift away from the TV screen could put those dollars at risk, potentially depriving networks and distributors of revenue and disrupting the foundation of the industry’s current value chain. The second driver of online video in the living room is the growing popularity of devices like AppleTV and the Xbox, which help bring diverse Internet video content right onto the living room TV screen. This “over the top” (OTT) delivery – which occurs when a provider sends its content over the network of a different operator – creates new kinds of competition for distribution rights and licensing. It also gives rise to new opportunities for capturing consumers’ time and money. Industry analysts are closely tracking the impact (for now, quite small) on subscription levels, average pricing levels, and premium options. Since 2009, the share of people watching OTT video on their televisions in the US has doubled – 38 percent in 2012 (Exhibit 1). Among OTT watchers, viewing volume tripled between 2009 and 2012 to an average of 28 minutes per day – enough to fill a typical network time slot.

Seven types of video users

So who exactly are these OTT consumers watching almost 30 minutes a day of Internet video on their television screens? The 38 percent of people in the US who watch video this way represent a very diverse group of viewers. McKinsey’s research has identified seven distinct usage segments (Exhibit 2), based on a wide range of attitudes and viewing behaviors across platforms (e.g., TV, DVR, and PC) (Exhibit 3) and content types (e.g., episodic TV versus movies versus sports versus news). Broadly speaking, the population is about onethird “Conventionalists,” an older, low-tech group that watches a high volume of traditional, linear TV in the old-fashioned, conventional manner. Another are “Screen Avoiders,” a diverse demographic that spends very little time watching video on any device. The remaining third represents the media viewing future and is spread across a number of important marketing segments.

“Big Bundlers” spend the most money for their pay-TV services and typically have expanded channel packages or premium movie channels. While these users pay for OTT subscription services like Netflix at about the same rate as the population as a whole, they appear to treat them like one more part of a big bundle and actually use these services very lightly.

“Sports Nuts,” whose regular television viewing is nearly 40 percent sports (over four times the rest of the population), are mostly male users. They are currently very light users of any OTT video, since current sports offerings are limited in both breadth and in quality.

“YouTubers” view more video on a computer display than they do on a television screen. As expected, these users skew significantly younger and include many current students. However, their satisfaction scores with their video services are on par with other segments, raising questions as to whether and how their video habits will evolve with age and work experience.

“Movie Nighters” turn to OTT video almost entirely for feature films. This segment appears to treat services such as Netflix as a direct replacement for video rentals or paid on-demand offerings rather than as another TV network with recurring series. As more and more of the commercial OTT video services lean toward episodic, series-driven content, the outlook for this segment is less certain. “OTT Addicts” use OTT video services extensively – more so than they do regular television. These users view both movies and television series, often “binging” or having “marathon” viewing sessions. Though the number of users who have abandoned their pay-TV services is quite small, it includes a large share of these OTT Addicts.

The differences between these segments highlight the challenges companies will face in successfully developing and marketing products and services to each of these groups, then retaining them as paying customers.

Segment-driven distribution

Given the diversity of the OTT viewing population, a one-size-fits-all approach to product design, marketing, pricing, and loyalty is out of the question. A winning approach will be mindful of all segments – not just the biggest one or the one that clocks the most OTT minutes – and cater to their specific preferences and usage patterns.

Focus on current high-value customers, but don’t ignore potential. Although OTT Addicts make up only 8 percent of the population, they consume almost 65 percent of all OTT video volume on TV. The next generation of winning distributors will need to satisfy this important segment but also make sure they don’t lose sight of the rest of their potential audience at the expense of this prominent group. Maintaining a strong share of the Big Bundlers segment and their profit potential will be essential to maximizing the OTT value chain.

Prioritize allocation of retention resources. Pay-TV distributors could prioritize certain segments in their retention programs and better understand the service aspects that will help anchor high-value customers beyond an initial promotion period. What keeps one segment loyal might not be what entices another to hold on to a particular service. Changes to pricing or the addition of program genres will certainly have very different effects across, for example, the Sports Nuts, OTT Addicts, and Big Bundlers segments, and these segments represent varying value, so OTT players should prioritize and tailor accordingly.

Leverage customer insights to enhance negotiations. Rights owners can use what they learn from cross-platform audience segmentation to more effectively negotiate with OTT providers. All players across the value chain will need to look at all of their key customer metrics – audience, ARPU, retention, churn, customer satisfaction, service channel usage, and so forth – through a customer segment lens to understand the true opportunities and risks as their customers’ video behavior continues to evolve.

With the rise of tablets and OTT devices, online video is no longer relegated to spaces outside of the home. As online video moves onto the couch and into traditional television’s territory, established players in the video value chain are taking notice. Understanding the nuanced usage behaviors of these online user segments is critical for players throughout the video distribution value chain. As the world of video viewing evolves – and as questions about cord cutting and cord shaving continue to be raised by analysts and investors – companies will need to develop winning strategies for producing, licensing, and distributing OTT video content. It is critical to act now to build video services informed by these consumer segments and usage patterns.