TV industry facing ‘significant pressure’ from OTT, unbundling: report

The growth of existing over-the-top (OTT) streaming services and the potential emergence of new ones, as well as a transition to an à la carte television distribution system, could place “significant pressure on the broadcast business model” in Canada, a new report from Cannacord Genuity says. The fact that cord-cutting hasn’t yet reached “material levels” in Canada has “nourished the notion that OTT is additive to the regular TV services rather than cannibalistic,” wrote Aravinda Galappatthige and Haesu Lee in the report, released Tuesday. “However, we believe that the emerging changes in this landscape will aggressively test this idea.” Those changes include the growth of Netflix Inc., possible entries by other foreign OTT players and new Canadian services, as well as the emergence of an à la carte system, they noted. A pick-and-pay system has been endorsed by the CRTC, and the government in the last throne speech. The authors said they expect the broadcast business to transition “towards potentially a mid-single-digit decline rate, perhaps three to five years from now,” from an annual growth rate in earnings before interest, taxes, depreciation and amortization (EBITDA) of 2.5 to 4.5 per cent. In a research note, Canaccord Genuity telecom analyst Dvai Ghose said he agreed with the report’s contention that “OTT substitution is accelerating and is now becoming material,” adding that an à la carte system could increase cord shaving by subscribers. He said Shaw Communication Inc. is “by far the most exposed” to these changes, as estimates show cable television will account for 33 per cent of its consolidated revenue, satellite TV accounts for 15 per cent, and specialty programming for 10 per cent in the current quarter, meaning that “58 % of revenue may be impacted by OTT and a la carte mandates.” He added that the company is “particularly susceptible” since “Shaw Cable and Satellite do not offer much a la carte at this time” and ShawMedia does not broadcast sports. Shaw declined comment for this story. Ghose said that BCE Inc. is also exposed, but “far less” than Shaw, with an estimated 16 per cent of revenue at risk. He noted that Bell already offers à la carte in Quebec and its flagship properties are its TSN/RDS sports channels, though its loss of hockey rights to Rogers means Bell Media channels could “face pressure when its contracts with cable TV, IPTV and satellite TV operators come up for renewal.” Rogers Communications Inc.’s “media business is dominated by sports and the Shopping Channel, which seem less susceptible to OTT and it seems the most proactive with regards to its own OTT service.” He added that Quebecor Inc. should be less affected than its competitors, since OTT is less of a threat in the province and Videotron “pioneered a la carte TV choices,” while Manitoba Telecom Services Inc., Telus Corp. and Bell Aliant will see “very little impact.” The report by Galappatthige and Lee noted that Rogers is likely to launch its own OTT service, adding that based “on our discussions with industry executives, we believe it is a question of ‘when’ rather than ‘if.’ ” The report said that the launch of such a service would be a “significant catalyst in the emerging OTT phenomenon in Canada and the rise in non-traditional TV viewing.” “We understand from industry sources that Rogers has spent over $150M in assembling its library for an OTT service and we suspect given the budget, marketing infrastructure and the extent of touch point it has, it is in a good position to build a sizeable sub base,” the authors wrote. The report added that an OTT service launched by a TV provider could include sports programming, noting that Rogers would have an advantage following its acquisition of NHL rights. One potential model for what that could look like is British telecom British Sky Broadcasting Group PLC's NowTV, which offers access to movies for nine pounds ($16.43 Cdn) a month and the option to add its Sky Sports service for 10 pounds a day, it said. The report also noted that the emergence of OTT services has meant there are more buyers and more competition for programming and a “new, meaningful, high margin revenue stream for the content owners.” — With reporting by Anja Karadeglija at akarad@thewirereport.ca and editing by Derek Abma at dabma@thewirereport.ca

TV industry facing ‘significant pressure’ from OTT, unbundling: report

News | June 4, 2014

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