How big a threat are OTT sports services?

Sports remains one of the last bastions of defence for traditional TV against a wave of over-the-top (OTT) services that continue to push audiences toward cord-cutting, though for now at least, they appear to form a stronger barrier in Canada than south of the border. “Watch closely where sports OTT services go since these live broadcasts are the last real anchor for pay TV,” Greg MacDonald, an analyst at Macquarie Capital Markets, said in an email. A recent TiVo Inc. trends report, based on a survey of 3,050 consumers in U.S. and Canada following the second quarter, found that a “new and prevalent threat to pay-TV providers comes from social and OTT services offering sports content to their viewers.” TiVo didn’t respond to questions about the margin of error of the survey. In July, United Kingdom-based Perform Group’s Dazn sports streaming service launched in Canada, with the exclusive streaming rights to National Football League (NFL) games. The Wire Report first reported in 2015 that live sports was making inroads to OTT services. However, cord-cutting in Canada doesn’t seem to be increasing at the same rate as in the U.S. In an October research note, Scotiabank analyst Jeff Fan said two million Americans have cut the cord through to the second quarter of 2017, compared to 735,000 in the second quarter last year. That's compared to a Canadian market that “has remained fairly steady, with stable losses over the last two quarters,” he noted. Indeed, recent research by research and consulting company Boon Dog Professional Services in August found fewer Canadians cut their TV subscriptions in the first half of the year compared to the same period last year, which is “bucking the trend of accelerating TV cord-cutting in recent years.” The caveat there is that Boon Dog correlated the slowdown to Shaw Communications Inc.’s launch of Blue Sky TV. In addition, numbers compiled by the Wire Report have shown that TV subscriber losses were already flatlining in 2016. Fan offers sports as one of several reasons for why cord-cutting has accelerated and adoption of OTT services has risen in the U.S. “One of the major catalysts for the success of OTT platforms in the United States has been the shift of sports away from traditional television,” Fan notes. “Sports represents an important piece of content with very sticky viewership.” However, Fan added that in Canada, both Rogers Communications Inc. and BCE Inc. have a grip on sports broadcasting assets. Rogers, for example, has signed a long-term deal to lock in the rights to National Hockey League broadcasts. But when some of those sports rights come due in the 2020-22 period, MacDonald said we will likely see Netflix Inc. or Amazon.com Inc. bid “and then the broadcasters will be under greater threat.” And the pressure will mount: “leagues will start looking for ways to monetize content beyond broadcasters, so will likely look to launch their own OTT products,” MacDonald said, pointing to Major League Baseball (MLB) as one such example of a league that did its own thing. “The numbers I’ve seen in the past are that at least 50 per cent of TV viewers are keen sports watchers, 50 to 60 per cent,” Peter Miller, an independent broadcasting consultant, said in a phone interview. But he added that not everyone is into multiple sports. “So when individual things start to appear — when you get a basketball network or a hockey network — it can peel off those people.” He added: “If see the OTT business as a , then that’s when the whole system starts falling apart, and that could happen. It isn’t preordained, but it could happen.” “It’s a source of real anxiety,” Miller said. Miller added that this demand is part of the reason why sports costs have gone up. In March, both Bell and Rogers announced that they were removing sports channels from traditional TV subscriptions for business customers with a liquor license and charging an additional cost for them. “Recently in the video industry, streaming services have paid astronomical amounts for the rights to air popular sporting events,” TiVo noted. MacDonald said the sequence begins when skinny basic packages separate sports from the cable packages. “Sports is the most expensive part of the basic cable package so broadcast subscriber numbers go down as non-sports enthusiasts drop cable for basic or pure OTT,” he said. Numbers released by the CRTC last year found that sports made up 50 per cent of the top 10 grossing channels for 2015. Likewise, in 2016, the CRTC noted that sports channels were a “major driving force” for specialty-channel revenues, which increased 4.1 per cent in that period. It also doesn’t help traditional TV that social media networks have opened their platforms for hosting live sporting events. TiVo noted in the second quarter this year that 16.2 per cent of respondents said they have tuned into networks such as Facebook Inc. and Twitter Inc. to catch a game. That’s a three-percentage point increase over the year. But as Fan pointed out, the Canadian market might be slightly insulated for the time being. “In Canada, the market has not had the same impact on broadcasting distribution undertakings (BDUs) as it has south of the border,” Fan said in the note. “While customers still subscribe to OTT products, they tend to use them more as a complementary service to their TV subscriptions rather than as substitutes.” Fan presented several other reasons that may explain this. For one, less content on Canadian TV screens and therefore lower content costs have driven the average revenue per user (ARPU) to $64 compared to $95 in the U.S. “The lower prices paid by Canadians reduce the incentive for customers to switch to OTT as it becomes more difficult for cord cutters to create a similar content package and still reap the savings associated with switching from television,” Fan said. These lower costs bleed into the other reason Fan pointed to, which is that foreign content owners are attracted to selling their content through the wholesale model with a few broadcasters. That is because going direct to consumer would likely mean charging more, which would not attract a large enough base. Fan also said content providers get the best value when they sell to both linear and Canadian broadcasters “as opposed to selling just the digital rights to an OTT carrier.” As for Mario Mota, TV analyst and partner at Boon Dog, it may not be an existential crisis just yet. “I don’t see the end of subscription linear TV for a very long time, if at all,” Mota said in an email, pointing to the 11.2 million households in Canada with a traditional subscription TV service. “So, we’re going to have a very robust subscription TV market in Canada for some time.” — With reporting by Ahmad Hathout at ahathout@thewirereport.ca and editing by Anja Karadeglija at akarad@thewirereport.ca

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How big a threat are OTT sports services?

Broadcast | October 10, 2017

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