How Australia’s TV networks could build a single BVOD service to take on Netflix, and why they should

Last week, PwC's Ben Shepherd posited that Australia's free-to-air television networks needed to stop faffing about with their own broadcast-video-on-demand (BVOD) services, and instead come together with one offering if they truly want to compete with international giants. Not everyone was convinced though, so here, he answers your questions on the how and why, and explains the approach that has worked so far won't fly in the future.

The response to my piece last week urging Australia’s commercial free-to-air TV networks to organise around a consolidated on-demand destination was definitely cause for some debate.

Mumbrella was kind enough to request to run the piece, and across both Mumbrella and LinkedIn it had over 55 comments.

Across these there were a bunch of questions people had around the piece, questions I wanted to address to hopefully spur further conversation.

Before I address these, I want to be clear about my on-demand video usage. I definitely feel my household falls into the high-use category. We have Netflix, Stan, Amazon Prime, Kayo, NBA League Pass, and Bloomberg, and have access to all the BVOD services (we primarily use iView for kids programming, and I catch up on Modern Family on 7Plus). I watch a lot of NBA on Instagram as well, the kids use Kids YouTube too to watch Lego videos. We have FTA TV via Telstra TV and no Foxtel.

The article focused on Netflix as a real disruptive force to Australia’s TV incumbents because Netflix as a single entity is basically bigger than all the other participants in the OTT space combined, and is the force driving wide consumption change across all kinds of households and incomes. Netflix is something you do. It is bigger than its programs. It’s a brand in its own right. It’s a magnet for talent and consumers. Netflix reaches 11.26m Australians (Roy Morgan) over the age of 14.If these people watch Netflix 30 hours a month in place of TV they used to watch, it will dissolve 4.05bn hours of consumption from TV – around 12% of that being advertisements (486.4m hours).

That is a huge loss. And that is why it’s such a large issue.

So to the main questions raised:

–         Did you forget Stan?

No, I didn’t forget Stan. As mentioned above I am a Stan subscriber. Stan I don’t believe is a material issue for the free-to-air networks, nor enough of a protector for its owner Nine Entertainment Co.

Reasons for this are:

  1. A single territory of operations means it’s a one-country player competing in a global marketplace for rights and programming. In that respect it is in a similar predicament to the FTAs and Foxtel in that it’s more of a broadcaster of others’ content, rather than a destination or content creator.
  2. Currently it appears to have high reliance on both Disney and Showtime content. Both Disney and CBS have aspirations of local streaming operations – so what happens if this content is pulled?
  3. Stan has 2.6m users according to Roy Morgan, making it between 20-25% of the size of Netflix. I liken Stan to a competitor to Netflix like Twitter is a competitor to Facebook. Playing a similar game, but in different leagues. The next 12-24 months will be interesting for Stan. Can it maintain itself as a wholly owned unit of NEC? Will it bring in an equity partner – either a local competitor or an international one? Will this partner bring with it content? Could it merge with a regional entity and try and push its technology and licencing approach into Asia?

–         Who else around the world has tried something like this?

One argument was around how credible my assertion was and whether anyone in the world had co-operated to this level. Britbox in the UK is an example of this, but an emerging one. Hulu is the other – which saw NBC, Fox and Disney work together to create a streaming platform, which began over a decade ago.

–         Does Hulu really matter in the streaming market?

This was another point – is Hulu a legitimate competitor to Netflix? Yes and no. It is similar, albeit larger, in relative size in the US to Netflix that Stan is in Australia to Netflix (albeit very different products). Hulu in the US has 25m subscribers (Deadline) – which at the ad-supported base price of USD$6 would generate 1.8bn in revenue – and is generating an incremental $1.5bn in advertising sales per year (at an impressive $60 per user per annum extraction). So I would say there are some strong parallels between what Hulu has managed to do in the US and the revenue it is generating (min. $3.3bn PA, likely $4-4.5bn), and I would argue the business is meaningful.

–         This approach doesn’t make sense commercially – how do you ensure value is fairly distributed?

Simply, revenue would be distributed based on the content being consumed and where attention goes. If the participants don’t see the value in sharing data and audience insight, this could be kept protected, and content could be sold by each network’s teams/platforms only. It would allow the viewer to access everything on the one platform and each network could enjoy the benefits that come with this. It would also allow a shared platform for development, marketing and maintenance, and a more realistic likelihood of creating a platform that is closer technically to Netflix than the current available services. Initial ownership allocation wouldn’t be without its challenges, but the approach of Hulu in the US could be used as an example.

–         What’s the problem? BVOD is growing at 40% here in Australia. This isn’t an issue.

Yes this is true, however it’s growing off a base close to $0, and the delays from the networks locally have meant that they are likely a decade behind where they should be. We should have had the same depth of content in 2009 and the same ad sales grunt behind it. We didn’t. So let’s not get too carried away with the current growth being some sort of signal of a job well done. The greater issue for me is people have shown they do not love having to maintain multiple services for their entertainment or even utility needs. Within music people wouldn’t tolerate having to maintain four services so they could access the artists they wanted. Within social networks/professional networks/online video, we have generally seen people want an all-in platform that covers everything, and we are seeing it now with Uber/Uber Eats. The insistence on individual platforms where a user may access one program I feel is a limiter to growth and counter to the general approach of most successful internet-enabled companies. Aggregate them all and I think the growth will supercharge as they move from a place to watch a program to an entertainment platform.

–         People are watching lots of BVOD, why change it?

People are definitely watching more BVOD, but whether or not this is incremental in terms of audience or engagement to linear TV is unclear. However, the BVOD numbers at present are very reliant on a handful of programs. For the week commencing 8 April 2019, 15% of total BVOD viewing minutes were spent on the 10 top individual programs/episodes (Source: OzTAM VPM). For the year prior, same period, only 7.5% of BVOD viewing time for the week was taken up with the top 10 programs (Source: OzTAM VPM). For the week commencing 1 April, Married at First Sight’s top four episodes alone accounted for almost 10% of total minutes consumed.

–         This reliance on key programs draws parallels to the arena/stadium concert promotion industry – a notoriously risky and creator skewed economy

It’s common within large-scale concerts for the promoter to take all the risk financially, and receive close to none of the upside if a tour succeeds. For instance, large Pop Star X will generally receive guaranteed 80-90% of the revenue minus production and venue expenses of a national tour, based on that tour selling out the venues it plays in. Example – if Pop Star X is playing five concerts at a combined capacity of 90,000 at an ex GST ticket price of $100, the gross will be $9m. 80% of this will be $7.2m. Expenses (travel, production, venue) will be backed out of this (let’s assume these are 50%). So the guarantee for the act will be $3.6m. The promoter will only see a payday if sales exceed 80%, and generally the split of this upside will be 80-90% artist, 10-20% promoter. For some big acts, this split can be 95/5 or even higher. In short, the artist always gets paid, and the promoter risks massive losses and minor gains. The reason: artists consider the role of the promoter as more of a utility/admin partner rather than a group that can bring them new audiences. Hence the artist wants every cent in the dollar they can get as they are the ones with the audience relationship and gravitas.

For instance – you never say “I went to a great Chugg concert”, but you will say “I went and saw Interpol and they were great”. My concern is the same economics could happen in BVOD for the domestic incumbents unless they can demonstrate the value they create for producers. Otherwise they will find themselves with large guarantees for content commitments, but very small upside if it succeeds.

–         How legitimate is this thinking anyway? The idea this could happen isn’t realistic.

The counter to this has been people telling me the thinking is so obvious why did it take me this long to state it? My response to both of these is – yes, in the eyes of the consumer I do think this makes sense and is overdue. I think in the eyes of the networks it’s probably too soon and collaboration isn’t really something they’ve felt is a way to do business historically. The likely reality is the approach that has worked so far won’t work in the future – the content supply chain has radically been disrupted and the viewer has gone from having to follow a programming schedule and watching only on live big-screen TV or risk missing their favourite show, to having basically every piece of professionally created TV content at their disposal wherever they want it (at home, in the bathroom, in the air) at all times.

Ben Shepherd is a director at PwC. This post first appeared on LinkedIn, and has been reposted here with permission. 


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