The State of OTT 2023
Netflix’s shock fall in numbers at the start of 2020 not only slashed the streamer’s stock price but spooked Wall Street into reappraising the whole SVOD enterprise.
Wiser analysts were not so hasty. Stepping away from the heat of Netflix’s net 200,000-user loss in Q1, sage commentators were chalking it up to streaming business evolution, not one that doomed the whole sector.
“[T]o read many of these [inexpert media reports], you’d assume that anything less than 100% penetration constituted abject failure on Netflix’s part,” TVREV’s Alan Wolk wrote at the time, “and that millions of new users would magically keep cropping up once that 100% figure had been reached.”
Netflix may have pioneered online pay TV on-demand with a model that every other SVOD chased. From April 2022, a pivot was required of every player, Netflix included.
You have to take this back a year to when video consumption and subscription services experienced phenomenal growth during the global pandemic. Sign-ups for monthly subscription services jumped more than 24% between 2020 and 2021. Many consumers who were hesitant to subscribe to Netflix, Disney+, Amazon Prime Video, and other providers prior to COVID finally came around as the pandemic dragged on.
After the pandemic highs, in 2022, SVOD subs plateaued across the board, particularly in North America, where saturation has been apparent for some time.
“Now we know that the streaming universe is a lot lower than analysts predicted, maybe closer to 400 million,” Deadline Hollywood reporter Dade Hayes told the NAB show in April. “The ceiling [is shrinking] on Netflix but also for HBO Max, Apple TV+, Disney+. Anybody who wants to be global has to reckon with, ‘How good of a business is streaming?’”
All Rise With the Tide
Yet with new services continually entering the market and, crucially, major players still only part of the way through their global expansion efforts, SVOD expansion is set for several years.
Omdia forecast 1.48 billion online video subs by the end of 2022, on target to reach 2 billion by 2027. Ampere charts 1.6 billion OTT subs this year, tracking to reach 1.7 billion by the end of 2023. Data from Digital TV Research predicts revenue from global OTT TV episodic and movies will reach US$243 billion by 2028, a rise of US$86 billion on 2022 revenues (US$157 billion), with roughly US$17 billion forecast to be generated in 2023.
According to the Digital Entertainment Group, the industry’s growth in 2022 was only marginally lower than 2021, though significantly lower than the growth rates in 2018 and 2019. Its numbers suggest viewers have slowed in adding more services, though they have not stopped.
Data from Hub Entertainment Research confirms that US consumers continue to expand their SVOD services. The company says 50% subscribe to three or more of the big five SVODs (Netflix, Hulu, Prime Video, HBO Max, Disney+). Ampere figures for stacking are a little higher. Europe still has plenty of stacking headroom, with Kantar estimating the market can take an additional 1.6 SVODs per household on the current average figure of 2.6. By comparison, US households tend to pay for 4.2 SVODs (as of Q1 2022). Kantar puts this at 4.7 streaming services per US household.
The video streaming market could exceed US$750 billion by 2031, according to new data from Future Market Insights (FMI). Demand will rise at a 25% compound annual growth rate (CAGR) over the next 8 years from a mere US$61 billion in 2020, per the report. Also according to the report, the market was worth more than US$73 billion by the end of 2021, with increasing demand for mobile devices driving much of the growth.
If the global streaming pie continues to grow, what has changed dramatically are the business models that are needed to bake it.
As restrictions eased and consumers reacclimated, many faced the financial burden of paying for a surplus of monthly subscriptions. Viewers pivoted to free ad-supported services integrated with their connected TVs such as Tubi, Philo, Pluto TV, Samsung TV Plus, and others. As this adoption continued to accelerate, even the larger subscription-based stalwarts began to jump in. Despite historically being opposed to ad-based offerings, Netflix and Disney announced a significantly lower-priced subscription tier largely offset by advertising revenue. AppleTV+ is also planning an ad-supported launch in 2023.
AVOD Grows FAST
If the thoroughbred SVOD business model came unstuck in 2022, the business of streaming entertainment matured to embrace the rise of AVOD and free ad-supported streaming television (FAST) channels. In some cases, ad tiers were retrofitted alongside paid services.
The US is the biggest AVOD market, home to platforms such as Pluto TV, Roku, Tubi, and Amazon Freevee. “Between now and 2028, AVOD revenues from TV series and movies will grow faster than SVOD,” according to Simon Murray, principal analyst at Digital TV Research. “AVOD revenues will reach $91bn by 2028, up by $52bn from $38bn in 2022. SVOD revenues will climb by $29bn between 2022 and 2028 to $132bn.”
Digital TV Research also projects the domestic market will grow by US$19 billion to US$31 billion by 2027, by which time global AVOD revenues will hit US$70 billion. The US will account for 46% of the global total by 2027, up from 39% in 2021. “The US has the world’s most sophisticated advertising industry by some distance, plus AVOD choice is greater in the US than anywhere else,” Murray says.
Multiple factors drove the rise of AVOD, the flipside of which is the SVOD blip. One reason, outlined by Ampere’s Guy Bisson during VoD Market Day 2022, is “actual or pending saturation of SVOD in key markets,” which means free business models were “already playing a pivotal role in the transition of viewing to streaming in both a hybrid-service and an aggregation model.”
The global economic downturn continues to amass pressure on discretionary household budgets. In this environment, free or ad-supported content becomes more attractive to cost-sensitive consumers and helps avoid forcing existing customers to cancel.
For SVODs looking to combat churn, the equation shifted from customer acquisition to customer retention. Offering different price points is a tactic being pursued by every SVOD, with Netflix launching its own ad tier in November 2022. The goal is to increase revenues to sustain multibillion content costs without cannibalising the existing subs base.
Another reason is that online video advertising has been accelerated by COVID. One researcher predicts the global digital ad market will hit US$786.2 billion by 2026, although “television-equivalent” online video ads represent just 7% of total online video ad revenue, according to Ampere.
The arrival of Netflix’s ad-supported service and Disney+ Basic is predicted to grow the whole TV advertising market. Netflix itself expected to have 4.4 million unique viewers for its ad platform by the end of 2022. It also estimates that this tier could reach a global audience of 40 million within a year and generate US$1.9 billion in revenues by 2027—in Western Europe alone.
Virtually everyone agrees that Netflix’s ad play will be successful. Ampere believes that Netflix in Western Europe will experience an increase in average revenue per user (ARPU) that’s 4.9% higher in 2023 than without the ad tier.
The question is whether getting into advertising changes a company that has closely guarded its own data and prided itself on forging a distinct path in the cutthroat world of entertainment.
Lindsey Clay, CEO of UK commercial broadcaster body Thinkbox, says, “Advertisers expect the same standards set by the rest of the TV industry: a high level of transparency, targeting, and being able to track what happens plus a regulated, trusted environment in which ads are pre-cleared in the knowledge they will be aired in a brand-safe content.”
While Netflix has been highly secretive with its first-party viewership data, it did sign up to Barb’s audience measurement services in the UK. Barb—which is owned by the UK broadcasters—began reporting Netflix’s daily viewing at both a service and a programme level from November 2022. In the US, Netflix participates in Nielsen’s streaming yardstick, The Gauge, and will eventually be part of rebranded measurement tool Nielsen One. Netflix has also partnered with DoubleVerify and Integral Ad Science to measure its views and traffic that began Q1 2023.
It’s All TV Now
As the streaming business model changes from pure SVOD into premium plus ad-supported options, the way platforms measure performance has to change too. The shift toward focussing on “time spent” is now underway using metrics more familiar to broadcast TV.
“Subscriber numbers increasingly look like a vanity metric for a streaming platform,” says Tal Chalozin, CTO and co-founder of online ad company Innovid. “But in advertising-based video on demand [AVOD], these are not the most useful numbers for marketers because not every viewer delivers equal value to either the platform or the advertiser.”
Deloitte also expects VOD to be bonded permanently to advertising. According to Paul Lee, global head of technology, media, and telecommunications research, “[I]f we were to look at the last 30 years of television, you’ve always had the combination of pay TV and advertising-funded television. Those two sources of revenue are absolutely vital.”
In parallel, the content mix of a streaming entertainment business is changing too. Turns out that movies and scripted TV are no longer differentiators. That doesn’t mean just adding true crime or anime to the mix. It means bundling a combination of live sports or gaming and music plus FAST channels. This creates an aggregated content mix much like the cable of old.
The winners in the streaming wars will be those companies that diversify into news, sports, or video games or preferably a mix of the lot, according to former cable network chief turned industry consultant Evan Shapiro.
“It is glaringly clear that having movies and TV shows are now, simply, table stakes,” Shapiro states in a report for Publishers Clearing House (PCH). “They are not at all a differentiator: Every service has them. In streaming TV, scripted and non-fiction TV are an expensive, hit-driven, share-shift model. Consumers of all ages and incomes will sign up for them, to binge something. But if that is all you have, they will not stick around.”
Trends increasingly favor the tech giants. “It’s no surprise that the two streaming players with the most data—Apple and Amazon—are both heavily invested in bundling numerous genres of services,” Shapiro adds. “It makes perfect sense that Microsoft, who already offers gaming and productivity products, is getting into business with Netflix—and the likelihood of a bundle for all of them is high.”
Netflix has also been making significant investments in games and interactive content. Its latest nonlinear piece of content produced with branching narratives, the heist drama Kaleidoscope, premiered on New Year’s Day.
Amazon offers a mix of films, TV, sports, audio, and gaming as well as free home delivery. PCH’s study calls this “key to the lifetime value, low churn, and high revenue-per-user of their huge Prime membership.”
Even Paramount+ offers TV, film, sports, news, and local content. It created a bundle with Walmart that specifically caters to the most price sensitive subscribers.
“Playing across genres and needs is now key to true lifetime value for your subscribers,” insists Shapiro. “Content services who want to acquire and keep subscribers every month, with low churn, must provide more than one kind of content, and/or offer more than one type of service.”
In an ad-supported market, streamers need to speak the language of TV marketers and agencies in order to stand out. That includes better in-app cross-promotion of content. “Historically, TV broadcasters devoted a great deal of advertising time to promos for their own programming, across any channels owned by that particular broadcast company,” advises Chalozin. “Streaming services will need to take that cue … to keep viewers from hitting the home button. They should consider … interactive formats such as QR codes and … personalized messaging, relevant to factors such as demographic and time of day.”
TikTok Takes the Crown
The ascendant online video firm of 2022 is TikTok. The ByteDance-owned company now commands more attention per user than Facebook and Instagram combined. As reported by The Wall Street Journal, TikTok has 1.6 billion monthly active users—more than Twitter, Snapchat, and LinkedIn together.
TikTok has eliminated the burden of consumer choice with a continuous stream of videos curated for you, according to Scott Galloway, professor of marketing at NYU Stern, blogging at Medium. As he puts it, “Consumers don’t want more choices, they want more confidence in the choices presented. Its content is a continuous stream of videos where the decisions are made for you,” he adds. “Your only choice: what not to watch.”
TikTok may bill itself as a social media company, but it is really all about video streaming, and to that extent, it is not just Meta but all SVODs that are threatened by it. In April 2022, Forbes valued ByteDance at US$360 billion; the same month Netflix tanked from US$300 billion to US$80 billion.
TikTok’s ascent to the top was financed not with monthly subscriptions or cable packages, but attention. Specifically, the attention of Gen Z, who also views the platform as far cooler than anything from Meta.
On TikTok, the average session lasts 11 minutes, and the video length is around 25 seconds. Galloway points out that this generates huge amounts of data—way more than even Netflix can pull in. The platform’s “video-based social media,” with the ability for users to interact with the content (generating more and more data), is the killer app.
TikTok’s content production model also upends everything we thought we knew about how content that audiences want to see gets made. The film and TV industries still employ relatively few people in relatively few locations (London, Hong Kong, Mumbai, Los Angeles) compared to TikTok, where over half of users create and post their own videos.
“The world’s largest reserve of talent also has a near-zero cost of extraction,” says Galloway. “The top eight U.S. media firms will spend $115 billion on original content [in 2022]. … TikTok produces its content for almost nothing.”
“The company’s payout to top creators ‘is a rounding error,’” Engadget notes, “at $200 million per year. …And when your total addressable market is 1.6 billion users, your 15 seconds of fame on TikTok can be lucrative.” Galloway calculates that 9.6 trillion minutes were watched on Netflix in 2021. Impressive, until compared to the 22.5 trillion minutes viewed on TikTok.
“For creators who are in it for more than just expressing themselves, the real TikTok money comes from brand endorsements,” says Galloway. He adds, “The top creators make as much money as a Fortune 500 CEO or an iconic Hollywood actor.”
Economic Headwinds
SVOD fatigue was far from the only factor hammering wallets in 2022. Those pressures were exacerbated by Russia’s war on Ukraine, which propelled energy prices up across the globe, stoking steep inflationary rises on the price of even basic goods. While the travails of a streaming business are trivial compared to the horrors meted about by Putin’s aggression, there’s no denying the impact of such geopolitical forces.
“Heading into 2023 and beyond, there is general consensus that economic headwinds will intensify, meaning consumers will increasingly seek out free streaming video options,” concludes JW Player in its end-of-year survey.
In response, broadcasters are strategising their best path forward. Of those surveyed in November 2022, 74% believe streamlining operations and removing friction are top priorities.
Along with improving operational efficiency, JW Player notes that broadcasters are also prioritising three top objectives: increasing their existing audience base, improving viewer engagement, and growing revenue through advertising. “Ultimately, those that leverage an end-to-end platform to tackle these initiatives stand the best chance of success in 2023 and beyond.”
There were no major OTT casualties in 2022, although consolidation remains on the cards for 2023. Netflix’s partner in its ad-supported venture is Microsoft. With Netflix’s US$127 billion valuation of December 2022 way south of its US$300 billion market cap a year earlier, some analysts expect this foot in the door to blossom into full acquisition of the streamer. Unlike Google, Amazon, and Apple, Microsoft does not have a video content service, and after buying gaming company Activision, it could turn to Netflix next.
Sidebar: Major Streamers in Numbers
Netflix’s travails continued in Q2 2022, when subscribers dipped by 1 million, but business picked up in Q3, when the company added 2.4 million net new paid subscribers to reach 220.67 million paid subs (of which it has 73.28 million in the US and Canada). It projected 4.5 million net new subscribers in Q4, with an anticipated boost from its ads tier.
As of December 2022, the number of Disney+ subscribers reached 164.2 million. When combined with its other DTC subscription services, Hulu and ESPN+, the figure tallies around 235.7 million, surpassing Netflix for the first time.
The number of Apple TV+ paid subscribers was estimated to be around 25 million as of March 2022. Additionally, there are around 50 million users worldwide who access the SVOD via promotions, as the service is available for free for 1 year with the purchase of new Apple devices.
Warner Bros. Discovery reported 94.9 million active sign-ups in Q3 2022 (combining Discovery+, HBO Max, and HBO)—on track, it says, to reach more than 130 million by 2025.
NBCUniversal (NBCU) streamer Peacock added more than 2 million paid US subscribers in Q3 2022 to surpass 15 million. When factoring in bundles and free viewers, NBCU CEO Jeff Shell says Peacock now has 30 million active accounts.
Amazon Prime has at least 200 million members worldwide, but how many of these are active Prime Video watchers is not clear. Like Apple, Amazon may be using video as a loss leader to drive revenues across its e-commerce business.