The business landscape has changed. Traditional revenues are shrinking across the entire industry as consumers are spending more time online.
Digital transformation has become more important than ever and the winners will be those that can successfully shift their businesses online. However, the biggest question companies are facing is whether to build their own online presence or rely on established players such as Amazon.
You might be thinking that I’m talking about what’s being described as “Peak OTT”, however, what we’re referring to above is about the dotcom era and the choice Toys R Us faced when deciding whether to adapt to changing times and build its own ecommerce platform or wholesale business to other companies.
This is the very same question plaguing the TV industry right now. For subscription video networks (SVODs), how much do you invest in your own direct-to-consumer offerings versus relying on established companies to grow your subscription base?
This story has played out before in the e-commerce world and networks need to seriously think about the long-term ramifications of relying too much on third-parties..
The story’s the same, but some of the characters have changed:
E-commerce is OTT.
Toys R Us is Any SVOD network (HBO, Starz, Showtime, Britbox, CBS All Access, etc).
Amazon is Amazon or any third-party OTT platform that sells add-on subscription video services (Primary examples include Amazon, Roku, and Apple but also include virtual pay TV operators such as Hulu, Sling TV, fuboTV, etc). Collectively, we’ll refer to these companies as OTT Aggregators.
“The Snake to My Mongoose… or the Mongoose to My Snake…Either Way It’s Bad”
In 2000, Toys R Us signed what was supposed to be a 10-year contract to be the exclusive vendor of toys on Amazon. One day, Amazon decided to change the rules and began to allow other toy vendors to sell on its site anyway. Toys R Us sued Amazon to end the agreement in 2004, however it took another 13 years for the company to get serious about its e-commerce brand and compete with Amazon and other online retailers. They waited until it was too late and it led to their demise.
“Some organizations recognize faster than others there are shifts in the ways customers want to be communicated with and the way customers want to purchase products,” said Toys ‘R’ Us CEO David Brandon.
“It probably took us a while.”
In 2001, Target signed a similar deal that allowed Amazon to run its e-commerce operations. After a couple of years, Target began slowly moving away from Amazon and in 2009 then Target CEO, Steve Eastman stated, “It is in Target’s best interest going forward to assume full control over the design and management of Target’s e-commerce technology platform, fulfillment and guest services operations.”
When Target finally pulled the plug on Amazon in 2011, it promised to pony up $2.5 billion per year to boost its own e-commerce site. This is something that Toys R Us was not as committed to do.
When asked about the termination of the Target and Amazon deal, Baird financial analyst Peter Benedict wrote in a research note:
“We believe that e-commerce became strategically too important for Target to outsource this business to Amazon, in particular given the increasing competition between the two companies.”
That’s right. Although when Target chose Amazon to power its e-commerce offerings it may have seemed like a good idea at first, the partners ultimately became frenemies. This same narrative is currently playing out in the TV industry.
Out of curiosity, let’s replace the aforementioned characters in Peter Benedict’s quote to make it relevant to the TV landscape today.
“We believe that OTT became strategically too important for HBO to outsource this business to Amazon, in particular given the increasing competition between the two companies.”
Can you see that quote becoming a reality one day?
If it Looks Like A Frenemy and Walks Like A Frenemy …
There’s no way to overlook the fact that Prime Channels gets your SVOD brand in front of a large portion of Amazon Prime’s 100 million subscribers. We’ve had clients even tell us that the reason they love being a part of the Prime Channels program is because the customer acquisition cost is zero dollars.
I hate to be the bearer of bad news, but what you’re gaining is subscriber, not a customer. Amazon gets the customer, their data, and the ability to market to them, not you.
A subscriber is not a subscriber
Subscribers are not equal and only counting the number of catch-all subscriptions is playing the short game. In fact, this exactly how premium networks have transacted over the past few decades.
The “Streaming Wars” is not only about subscriptions and shifting your traditional business into the digital age. It’s about the long-term and why every media and technology company is fighting over the same thing — the direct customer relationship.
This is why when you search Google for the British TV subscription service Britbox, Amazon is outbidding the company for its own service.
This is why Roku and Apple TV have joined Amazon in becoming OTT aggregators via The Roku Channel and Apple TV Channels respectively. This is why companies are buying or merging with one another. And this is why, as a consumer, it’s become totally possible to purchase a video service, such as Showtime, from at least a dozen different OTT aggregators. Showtime doesn’t even try to guide you towards signing up directly through their owned and operated service.
OTT is the New E-Commerce
Just like e-commerce, the direct-to-consumer subscription video market is also being dominated by Amazon. According to The Diffusion Group’s report The Future of Direct-to-Consumer Video Services – Analysis & Forecasts, 2018-2022, more than half of all direct-to-consumer subscription video purchases are made directly through Amazon Prime Channels.
In a focus group conducted by OTT consulting company, 43Twenty, a majority of respondents reported that they would rather purchase a subscription video service through an OTT aggregator rather than directly from the network.
When asked to elaborate, respondents cited the ease of using a single user interface via a single app and managing a single bill.
And TDG’s research backs this up. More than half of HBO direct-to-consumer subscribers used Amazon Prime Channels to purchase their service. The rate was even higher for Showtime (72%) and Starz (70%), while only about 30% use a TV network’s owned-and-operated website or app.
On average, OTT aggregators keep about 30% of your revenue, although this really varies by SVOD network… errrr how much leverage an SVOD network has.
With leverage, the more an OTT aggregator is willing to give. Without it, Amazon may call up one day demanding more money.
Increasing Direct-to-Consumer TV App Acquisition
So when consumers would rather purchase a video subscription from an OTT aggregator rather than directly from a network, how can SVOD networks compete?
What killed Toys R Us long-term is that they stopped providing customers with any reason to do business directly and they didn’t offer anything more than what I could get from Amazon.
Presuming that you’re not going to terminate all of your existing OTT aggregator partnerships (and by all means please don’t), these are some strategies you can use when creating value propositions that incentivize customers to buy from you rather than someone else, even if it’s for the same product! Yours!
Pricing & Promotion
This is the easiest value proposition to explain. You’ve got the lowest price. Case closed. How flexible you can be on your pricing will come down to how well you can minimize your operating costs and whether there are any restrictions in your existing partner agreements. Also, you may want to double check with your affiliate sales team to make sure any modifications to your direct-to-consumer pricing aren’t going to upset your new, or soon to be affiliate partners. Because frenemies have feelings too!
Below are some pricing examples from Starz, Britbox, and CBS All Access:
- Prime Channels: $8.99 per month after a 7-day free trial.
- Direct-to-Consumer: $5.00 for 3 months and then $8.99 per month after a 7-day free trial. (11% discount)
- Prime Channels: $6.99 per month after a 7-day free trial.
- Direct-to-Consumer: Same price and promotion, however BritBox offers an annual plan for $69.99 (16% discount)
CBS All Access
- Prime Channels: $5.99 per month with limited commercials or commercial-free for $9.99 per month after a 7-day free trial.
- Direct-to-Consumer: Same price and promotion, however CBS offers annual plans
- Limited Commercials: $59.99 per year (15% discount)
- Commercial Free: $99.99 per year (15% discount)
Notice how each direct-to-consumer service is offered at a price lower than its Amazon Prime Channels counterpart.
Let us ask you, how many times this week have you heard or read the phrase “Content is King”? The quote originally comes from an essay Microsoft founder Bill Gates wrote in 1996. Twenty-three years later, the TV industry has beaten it to death, because while overused, it’s absolutely true.
The advantage of exclusive content or original programming is that you can avoid competing on price. In fact, you may even be able to increase your price. Just look at Netflix.
Below is a look at how SVOD networks have been experimenting with exclusive content including Disney and WarnerMedia, who will soon launch their own direct-to-consumer services that promise to deliver original or exclusive programming.
The WarnerMedia streaming service is expected to launch in beta later this year, with an official release coming in 2020. The company said that it plans to release new episodes of existing popular shows on the new service before anywhere else.
Disney put its toe in the water by quietly developing a subscription service in Britain called DisneyLife, which offered old Disney movies and TV series, children’s e-books, games, and music. Subscriptions originally cost about $13 per month.
The lesson they learned is that without exclusive content, interest was limited. Disney soon cut the subscription price in half. DisneyLife was never introduced outside of Britain.
However, Disney will get its second crack when it launches Disney+ in the United States this November for $6.99 per month. They plan to be in nearly all major regions of the world within the next two years.
Starz has been offering subscribers of its direct-to-consumer service with early access to its original programming. For example, episodes of series including Outlander and Power have been released on the owned and operated app a day prior to airing on live TV.
The average American consumer subscribes to 3.4 video services. So if you wanted to add a fourth service, would you rather add a fourth bill, use a fourth app, or “bundle” the new service together with one you already use? Studies show that consumers are experiencing “subscription fatigue” and becoming increasingly frustrated with the already crowded streaming marketplace. And we’ve yet to see several launches that are planned over the next two years.
The idea of bundling services together to consolidate apps and bills sounds convenient. Pairing HBO with Amazon Prime Video, STARZ with Hulu, or Showtime with Roku. No longer would it be necessary to navigate multiple apps as content libraries can be combined.
Sounds like an attractive value proposition, but in reality, it’s not that simple. For the most part, OTT aggregators keep its SVOD networks constrained to their own silos.
Landing Pages. The New Apps?
With the exception of two measly content rows, HBO is virtually non-existent from the base Prime Video offering. To browse the network’s catalog on Amazon, you must click “HBO” listed under My Channels as depicted below:
Essentially what you’ve arrived to is an HBO-branded landing page with ten content shelves. Should you want to browse the network’s movies, you’re given a single row of 200 unorganized titles to choose from. For reference, on HBO’s direct-to-consumer offering, you get access to an additional 57 movies. More notably is the option to browse by genre.
How about a Prime Video customer that’s subscribed to STARZ? Let’s say he or she was seeking out comedy film? You probably guessed it… an unorganized hodgepodge of comedy movies that tops out at 200 films, which seems to be the maximum number of titles Amazon Prime Video Channels supports in one row. But who is ever going to sift through 200 unfiltered titles in a single row?
On the direct-to-consumer versions of Starz, the network has a total of 325 comedy titles alone. We also need to point out that the network did an excellent job of allowing customers to sort and filter resorts, creating a much more pleasant browsing experience.
The beauty of OTT is the ability to personalize the user journey with relevant messaging and video recommendations. Netflix, for example, is not only able to significantly increase subscriber engagement, but they’re even save the company an annual $1 billion by recommending the most relevant content to each individual. The ability for SVOD networks to personalize the user experience is not possible via OTT aggregators.
In addition to personalized recommendations, The Starz direct-to-consumer app adds the option for user profiles. User profiles lets users within the same household, or with the same login (we see you, “cord sharers”) enjoy their own curated experience.
Another notable feature absent for SVOD networks through OTT Aggregators is download-to-go, which lets app users download videos directly to their mobile devices. So whether you’re looking to watch the movie Venom or catch up on the final season of Game of Thrones on an international flight, download-to-go allows you to watch what you want, regardless of connectivity.
Starz makes this feature standard for its direct-to-consumer customers and not something subscribers through an OTT aggregator are able to benefit from.
So What Does This All Mean?
Well for starters, you’re no longer only competing with other SVOD networks. OTT Aggregators, which by the way are fantastic affiliate partners, have also become your direct-to-consumer threat. That is, if your business is looking to join the Streaming Wars and battle for direct customer relationships, you need to think long-term about how you strategically grow both sides of the business.
Toys R Us become overly dependent on a single strategy and single affiliate partner. And we saw a retail giant completely lose its leverage. Without leverage, your brand’s dead in the water.
Sure, if your SVOD service is available across 12 different outlets it may seem more convenient to a user to bundle multiple services together through an OTT Aggregator, but we’d argue that SVOD landing pages fall short and if you want to deliver the best branded experience to your customers, nothing replaces your own direct-to-consumer SVOD app.
You must never stop providing customers with a reason to do business directly by offering value they won’t receive elsewhere. And as we demonstrated above, there are several reasons for customers to do so.
This is what Toys R Us couldn’t figure out.