New OTT offerings pose threat to BDUs, opportunity for producers

A proliferation of new streaming TV competition in Canada is set to benefit content producers even as it causes problems for the country’s broadcasters and TV service providers through fragmented audiences and higher content costs — though it doesn’t yet signal an existential crisis for linear TV, experts said. A recent flurry of announcements regarding the launch of new streaming services was greeted negatively by some financial analysts, with Greg MacDonald, an analyst at Macquarie Capital Markets, calling it the “beginning of the end of” Canadian broadcasters. In July, United Kingdom-based Perform Group’s sport-focused over-the-top (OTT) streaming service Dazn became available in Canada. CBS Corp. then announced last week that it was expanding its All Access streaming service into Canada, the same week Walt Disney Co. said it was pulling from its distribution deal with Netflix Inc. and setting up its own streaming services to deliver content to consumers directly, though that won’t affect Netflix Canada. MacDonald said broadcasters will “continue to see either cost increases to create their own content/pay up more for rights, revenue pressure as audience fragments, or both,” adding Shaw Communications Inc. did well when it sold its media division last year to Corus Entertainment Inc. “Over the long term the desire of content owners to go direct to customers will also affect the distribution model,” MacDonald said. However, he noted that the “decline of the Canadian Broadcast model will take time,” though he added that “it will very clearly decline over time.” RBC Capital Markets analyst Drew McReynolds described the recent developments in a note this week as a “watershed” moment for OTT, as he expects cord cutting to continue in Canada “unabated.” McReynolds said over time, there could be more competition and reduced supply for premium U.S. programming for Canadian broadcasters, increased audience fragmentation resulting in lower linear ratings, substitution of smaller and less popular “linear channels with integrated OTT services within next generation television platforms,” financial pressure due to the increasing cost of U.S. programming and adoption of new ad technology to compete with data sets of some OTT services. “Obviously it’s more competition for the and obviously this will make it a bit easier for some cord-cutters who want to get rid of their cable package and just use streaming services, but I don’t think they’ll have as big an impact as Netflix had,” Ken Engelhart, former Rogers Communications Inc. regulatory chief, said in a phone interview, noting that “most” Netflix users also subscribe to cable. Engelhart, who is now a senior advisor at consulting company StrategyCorp., said the new streaming additions will indeed mean more expensive content, with some content being unavailable because the new streaming services will have obtained the Canadian rights to some programming. However, he said the decline of BDU penetration over the “last many years” is “very small” and he therefore doesn’t see this as a game-changer, though the longer term trend is toward online and away from cable distribution. “I would call it, a very slow-moving disaster,” Engelhart added. This week, Boon Dog Professional Services Inc. released new research on the trend of cord cutting, or Canadians who have ditched their cable package. Following second quarter earnings reports by the country’s TV service providers, the research and consulting firm out of Ottawa noted that the companies lost a combined 22 per cent fewer subscribers during the first two quarters as compared to the same quarters last year. The findings are in line with those compiled by the Wire Report for 2016, when losses had already flat-lined. “The impact that these services have had, Netflix in particular, is far less than you would think,” independent broadcasting consultant Peter Miller said in a phone interview. “The vast majority of Netflix subscribers have not cut the cord,” adding there are two trends that are muting the near term impact of the new influx of streaming services. The first is that the people who are eliminating their cable packages are largely those who are not watching a lot of TV in the first place and who don’t buy the highest priced packages. That leads into the second trend, where the people who do remain are the consumers who are not sensitive to price, so TV providers can charge more even though they have a smaller subscriber base, Miller said. For Gordon Hendren, president of Charlton Strategic Research Inc., “we haven’t reached the apex” because the “majority of content” is still consumed on conventional cable and satellite. Hendren added that in studying new services, such as those introduced by BCE Inc. (Alt TV) and Telus Corp. (Pik TV), “what we’ve learned … is if it was positioned and packaged and priced properly, those who are non-subscribers are interested,” he said. “The consumption of video content continues to grow, so it’s an expanding market,” Hendren added. “It’s just that people have many different ways that they choose to consume it. The options are multiplying.” In an emailed statement, Mike Cosentino, senior vice-president of content and programming at Bell Media, said that “as new competition emerges, we are confident that we will meet these challenges from a position of strength, vision, and leadership.” He said that where there's more competition for premium content, there is also more supply than ever before, adding that the company has " relationships with every major Hollywood studio.” Cosentino added: "There has never been more competition than there is today and we recognize the challenges and the opportunities ahead. Today, we compete in the ad supported, subscription, and OTT spaces, in long-form, and most recently, short-form video, with unparalleled brands and content." Independent broadcast consultant Kelly Lynne Ashton said that while they’re a game changer, it’s difficult to gauge how big of a threat the new services are posing, which will depend on consumer behaviour. “With so many different services, I find it hard to believe that the average consumer will be buying multiple OTT subscriptions,” Ashton said in a phone interview. “They may want to just not deal with the added bother of these other subscription services and stick with their cable.” But there may also be a potential benefit for TV providers, because they also generally sell internet service. Former CRTC vice-chairman and interim chair Michel Arpin noted in an email that the new streaming services will push the need for greater upload and download speeds. And there may be other, more clear winners in this. Independent studios in Canada will demand higher licensing fees now that there will be more competition in the country and more platforms looking for content. “With change comes opportunity,” Hendren said. “The services being offered are going to be hungry for content. So I think the market for content producers has never been better.” DHX Media Ltd. is one such potential beneficiary. In an August note, Canaccord Genuity analyst Aravinda Galappatthige said Disney dropping Netflix “potentially elevates the role of independent producers” like DHX and major subscription video-on-demand (SVOD) platforms while it “opens the door for potentially larger licensing deals both in terms of original content as well as library sales.” Galappatthige added that DHX, in particular, could reap the benefits of owning the largest independent kids TV library. In an emailed statement, DHX CEO Dana Landry said the growth of streaming platforms is a “positive not only for our shows but for Canadian content in general, as it creates more potential opportunities to deliver programming to consumers, both domestically and internationally,” adding the company is excited about the future “as more choice spurs the need for more content.” Hendren added that those international export opportunities actually expand the market, though he warned that the protectionist market is also eroding because those barriers don’t apply to OTT services. In that respect, some have expressed concerns about what this will mean for Canadian content. “The bad news is I see no interest in Ottawa — we didn’t see it under the Harper government and I’m not seeing it under the Trudeau government — to actually do anything about this,” Miller said. Miller was referring to the previous and the current government’s disinterest in taxing the foreign over-the-top (OTT) players like Netflix, which have no financial obligations toward the production of Canadian content as do domestic broadcasters. “We create no barrier to entry. If you’re already in the U.S., all you have to do is acquire the rights in Canada and you’re in – there are no regulatory hurdles, there are no additional taxes, and you have an immediate competitive edge,” Miller said. “We all know Netflix is the global leader, so the ones that follow are likely to have incrementally less impact. But on an accumulated basis, it will start to make a difference.” While Netflix buys and in ways funds and commissions Canadian content, Miller said that’s hard to quantify because they don’t publicize that data and there’s still no certainty as to the permanence of that investment. But Engelhart said there are other things to consider. For one, there may be more incentive to create new Canadian content now that American content will theoretically be more expensive. For another, domestic broadcast distributors will be forced to innovate. And still, a cheaper Canadian dollar and “attractive” production facilities means a lot of U.S. content will still be produced here. In addition, the CRTC made an exception for CanCon contributions when it released its decision in 2015 to waive those obligations for hybrid video-on-demand services, such as Bell’s Crave TV. But Engelhart still noted that “at some point that unlevel playing field will start to bite a bit” as more streaming services with no such obligations begin flooding the market. As for the near term, “there’s a lot of life in the old cable package yet and not everyone is going to cut the cord in the next five years,” Engelhart added. “I’m somewhat emboldened by the prediction, when you look at the share prices of cable companies in North America, even the pure-play cable companies — they are doing quite well.” — With reporting by Ahmad Hathout at ahathout@thewirereport.ca and editing by Anja Karadeglija at akarad@thewirereport.ca

New OTT offerings pose threat to BDUs, opportunity for producers

Broadcast | August 17, 2017

Unlock all the Canadian telecom, broadcasting and digital media news you need.

FREE TRIAL

SUBSCRIBE

Inside The Wire Report

Information

Hill Times Publishing

Get in Touch With Us

New OTT offerings pose threat to BDUs, opportunity for producers

Broadcast | August 17, 2017

Unlock all the Canadian telecom, broadcasting and digital media news you need.

FREE TRIAL

SUBSCRIBE

Related Stories

Telus’ arguments for incumbent access to wholesale regime not supported by competitors

Bell won’t participate in subsidized broadband projects if wholesale access for Big Three continues, signs agreement with CNOC

Rogers’ purchase of Bell’s MLSE stake not being challenged by Competition Bureau ‘at this time’

Telecom industry players look to Senate for greater copper theft prevention

Reuse & Permissions

Inside The Wire Report

Information

Hill Times Publishing

Get in Touch With Us