IHS: 3rd-party Netflix benefits pay-TV operators

Integrating Netflix into traditional pay-TV has had a net positive impact on operator KPIs, according to a survey of service providers conducted by IHS. The SVoD offering has generally been found to benefit operators’ business, while co-existing well with more-traditional parts of the bundle.

In a Client Report – Netflix on pay TV: A marriage of convenience – exclusively revealed to Advanced Television, Ted Hall, Research Director, notes, however, there is concern that consumption of some pay-TV services—among them, premium movie packages, TVoD and operator’s own-branded SVoD offerings (if they have them) —could be impacted by growing usage of Netflix or other third-party SVoD services, which in turn would negatively impact operators’ ARPU and revenues.

“In contrast to the model for selling channels and VoD to their customers, operators make very little direct revenue from carriage of Netflix: They typically receive a share of the ongoing subscription fees only for customers that sign up via the operator’s set-top box – most Netflix users either already have an account or sign up via a more user-friendly device, such as a PC/laptop or tablet,” advises Hall.

Netflix also plays only a limited role as an upsell driver for indirect revenue generation—10 of the 25 operators that have active partnerships in place (mainly those working with TiVo) provide access to the service only via their most advanced set-top boxes, featured in higher-tier bundles or carrying additional monthly service fees.

According to Hall, there is a growing acceptance that pressure on some core elements of the pay TV offering is an unavoidable consequence of the rise of pure OTT services. The rationale for providing access to Netflix / third-party OTT is therefore mainly based on keeping customers on-platform, increasing customer satisfaction and reducing churn. It will also provide a source of 4K UHDTV content.

Operators that invest in their own content will typically remain wary of bringing Netflix on to their platforms, as declining usage of / subscriptions to channels and services they own and operate would clearly be more damaging for them than for operators providing access to them on a third-party basis.

Hall notes that since Virgin Media became the first pay-TV provider to strike a partnership with Netflix back in October 2013, a growing number of operators have followed suit -as of February 2016, a total of 26 deals (25 still active), by IHS’s count, had been struck. Many more are likely to follow, with Netflix executing its global expansion plan in one fell swoop by rolling out to 130 new territories in January 2016. The popularity of this partnership model is evidence that Netflix is increasingly being viewed as simply another content partner—comparable to premium network HBO—and that, instead of treating it as a threat to traditional pay-TV, operators believe they should remove barriers to it and provide their customers with access to the streaming service.

With many operator-Netflix deals having now been place for some time, IHS sought updates from operators and vendors involved in the partnerships and gathered data to assess the validity of the pay-TV rationale for embracing Netflix as part of the modern bundle. The results generally supported the view that third-party SVoD positively impacts KPIs and complements traditional channels and VoD offerings. However, caution remains over how this dynamic could change as Netflix becomes more popular, with some operators wary that it has the potential to negatively impact core pay-TV services and, in turn, ARPU and revenues.

Based on insight from executives involved in operator-Netflix partnerships, and IHS’s analysis of operator-reported KPIs and its own in-house data and insight, there is evidence to suggest that these agreements are fulfilling pay-TV providers’ strategic goals – or at least not hurting their performance.

The operators IHS spoke with were keen to tout the positive impact their implementations of Netflix had on customer satisfaction ratings, though they did not provide supporting data. Such measures provide indicators of improved customer loyalty, though few of the operators with Netflix partnerships in place report churn figures, making assessments of how this translates difficult. Of those that do, Com Hem and TalkTalk have reported reduced churn in recent quarters, while Dish Network’s has increased, a trend the operator attributes to various factors, including competition, inconsistent customer service, price increases and cord cutting. A lack of consumer broadband is also likely a factor.

According to Hall, Netflix has the potential to exert some downward pressure on pay-TV ARPU and revenues, but he suggests that the streaming service is just one of several factors doing so, alongside competition from rival traditional pay-TV providers and increasing levels of bundling and discounting.

Hall advises that in order to counteract these factors, operators will need to continue investing in new features and services that can justify either incremental price increases – services such as basic TV Everywhere, for instance -or additional fees for more direct monetisation. Those in the latter category include premium multiscreen (offering increased functionality and/or content), 4K UHDTV and advanced cloud- or multimedia-home-gateway-based platforms. This kind of advanced functionality, like that to be offered by Sky with its forthcoming Sky Q platform, will help operators to maintain the appeal of traditional pay-TV, as streaming alternatives from the likes of Netflix, channel providers such as HBO, and the operators themselves gain further traction.

IHS broadly expects operators to continue to successfully boost ARPU over time, with upward trends forecast in the US and the big five European markets.

“Though maintaining ARPU growth is of course important, keeping customers will be one of the main priorities. Providing access to Netflix and other third-party SVoD services should help serve this goal. It could also help, to some degree, to attract new subscribers -traditional pay-TV is likely to remain the home of premium sport, and consumers wanting the best experience of this will be need to sign up to cable, satellite or IPTV services to get it. Access to SVoD services alongside this premium content will be an important selling point” concludes Hall.

Global: Operator-Netflix partnerships

Date announced Operator Country Operator type Q3 2013 September Virgin Media UK Cable October Com Hem Sweden Cable October Waoo Denmark Telco/ISP Q2 2014 April Atlantic Broadband US Cable April Grande Communications US Cable April RCN Corp US Cable May Suddenlink US Cable April RCN Corp US Cable June GCI US Cable June Midcontinent US Cable Q3 2014 July Cable ONE US Cable September Proximus Belgium Telco/ISP September Bouygues France Telco/ISP Q4 2014 October Orange France Telco/ISP October Numericable SFR* France Telco/ISP October Deutsche Telekom Germany Telco/ISP October BT UK Telco/ISP December Dish US DTH Q1 2015 January TalkTalk UK Telco/ISP Q3 2015 July Elisa Finland Cable July Totalplay Mexico Telco/ISP July Telecom Italia Italy Telco/ISP September Vodafone Spain Telco/ISP / cable Q4 2015 October KPN Netherlands Telco/ISP October Vodafone Portugal Telco/ISP December Bell Canada Telco/ISP Q1 2016 January Vodafone Ireland Telco/ISP

*Deal with SFR struck prior to acquisition by Numericable – partnership terminated under Numericable ownership

Source: IHS © 2016 IHS