Telcos are scrambling to offset loss in revenue from traditional communication services and are aggressively pursuing opportunities in online video. They have yet to recognize that where audiences go, advertisement dollars will follow, and are backing the wrong horse…
It is no secret that the revenue-generating opportunity in video is considerable. In 2017, the 50 largest telco operator groups generated an estimated $89.3 billion in video revenue, up 8% from $82.7 billion in 2016. Between them, they also account for more than 300 million video subscriptions. Yet these same telcos only account for about 20.4% of the average pay TV market share, according to the IHS Markit whitepaper Video as a Core Service for Telcos from 2018.
The commoditization of traditional telco communication services means operators are scrambling for ways to offset this loss in revenue, and they are all looking to take advantage of the video opportunity.
Content is king
The key to tap into the video opportunity effectively is content. There are three main strategies telcos are currently pursuing when trying to secure content for their video services;
Creating original content. Offering content that is exclusive and unique is very effective in attracting and retaining customers and allows the operators to differentiate themselves from the competition. However, the skillset and relationships required to produce quality video content is vastly different from the traditional skillsets in a telco operator and requires significant investment to execute successfully.
Acquiring content directly from content producers. Licensing premium content directly from content producers can also help carriers stand out from the competition and create brand differentiation. But again, this approach is very expensive, and the loss of content rights can lead to customer churn.
Content aggregation. Rather than creating or buying expensive content directly, many operators choose aggregation models, where they work with different content providers to offer quality video services bundled with their broadband or mobile services. While this approach has a lower initial investment and allows the operators a faster path to market, the potential upside is lower as operators typically get a revenue share from the subscription fees when customers opt in via their platform only, when in reality customers often already have accounts to these popular services and choose to retain their existing accounts and plans.
Competition is massive. Telcos are not the only players targeting this growing market. Over-the-top (OTT) content providers, whose content is distributed over the telco networks, are targeting the same customers with their content, and competing for the same revenue. Video is their core business, their organizations built from the ground up to create and deliver premium and exclusive content, and as such they have an advantage over telcos in their ability to create compelling video services at speed.
Are they backing the wrong horse?
Viewing behaviors are changing dramatically, especially amongst millennials.
Audiences are moving away from traditional TV to online video. According to Nielsen – reporting on US TV viewing habits – 18-24 year were watching 44% less television per day in 2017 than they were in 2012, and over 73% of the same age group use online streaming services.
Where the audiences go, the advertisement revenue follows. This year, mobile will surpass TV ad spending by more than $6 billion in the US alone, and by 2020 the channel will represent 43% of all ad spending in the US – a greater percentage than all traditional media combined.
YouTube takes up a large percentage of most telcos’ network capacity serving video and earned an estimated $3.96 million in advertisement revenue in 2018 – revenue none of the operators will see a penny from.
The real revenue opportunity for telco operators lies in collaboration with OTT services that are producing attractive, premium content, licensing exclusive live and local and regional content, and whose business model also includes tapping into the growing mobile ad spending.
Advertisers want to be able to deliver their message to specific audiences, and the more you know about your audience the more advertisers are willing to spend to advertise.
Telco operators have a deep understanding of the demographics and behavior of their customers. This data compliments the viewing and video data the OTT already has and will enrich the customer data offered to advertisers to help drive advertisement revenue higher.
By backing the right OTT services through aggressive bundling with marketing and distribution support in exchange for a share of the ad revenue, operators can take advantage of the premium, exclusive content produced and acquired by the OTT to create brand differentiation and reduce churn, cut content cost, and open a new revenue stream overnight.
Kjetil Rohde Jakobsen is global director of expansion at iflix