Spotlight on Media & Entertainment: Over The Top TV Trends

Executive Insights | SPOTLIGHT ON MEDIA & ENTERTAINMENT
Over-the-top (OTT) video delivery
services are the hot topic in most
conversations among media
executives.
But with all the noise, it is
difficult to separate the myths
from the realities in this market.
In this new Executive Insights’
“Spotlight on Media &
Entertainment Series,” L.E.K.
dispels some misconceptions and
challenges perceived wisdom to
answer the following questions:
• Should you believe the
OTT hype?
• What challenges and oppor-
tunities does OTT represent
and how can media and
entertainment organizations
become digital ready?
What has spurred the growth of OTT TV? »
OTT TV Myths and Realities:
Should You Believe the Hype?
L.E.K. Consulting / June 2015 LEK.COM
The Nine Myths and Realities of OTT TV
1. The OTT hype is overblown
2. Millennials are cord cutters and have rejected the cable ecosystem
3. OTT is highly cannibalistic of traditional TV
4. Traditional TV viewing is dead
5. The cable bundle is going away
6. Premium networks will be extinct
7. Live sports is holding the cable ecosystem together
8. OTT is a mature market phenomenon
9. TV organizations are digital ready
OVER THE TOP TV TRENDS

Executive Insights | SPOTLIGHT ON MEDIA ENTERTAINMENT
The increasing ubiquity and
speed of broadband connections
have facilitated OTT content
delivery growth in the U.S., as
well as globally.
Household broadband
penetration is up from ~63% in
2009 to ~75% in 2014 and is
expected to reach ~80% by
2017. Other Western economies
are likely to achieve a similar
penetration, while most
emerging economies will exhibit
even stronger growth.
Given these growth rates, online
video services have become
increasingly viable options for
content delivery.
How has this impacted the proliferation of OTT services? »
The Fast and the Furious:
High Speed Broadband Has Enabled OTT TV Content Delivery Growth
Notes: Weighted based on 2013 population by country; 2
Australia, New Zealand; 3
UK, France, Germany, Spain, Italy; 4
Poland, Russia; 5
United Arab Emirates, Saudi Arabia; 6
Japan, China, Korea;
7
Brazil, Mexico; 8
India, Indonesia
Household Broadband Penetration for Select Global Regions (2009-17f)
Percent of households
0
10
20
30
40
50
60
70
80
90
100%
2009 2010 2011 2012 2013 2014E 2015F 2016F 2017F
ANZ2
Europe3 USA RCEE4
ME5
Asia6
LatAm7
SEA8

OTT services have proliferated
to cater to the growing OTT
demand base, and the rate of
new entrants is accelerating in
2015.
These new services range from
standalone entertainment-
focused offerings (e.g., CBS All
Access, Nickelodeon Noggin,
HBO Now), to live and sports-
centric content (e.g., WWE
Network, NFL Now), to virtual
multichannel video
programming distributors
(MVPDs), providing serious
alternatives to traditional cable
subscriptions (e.g., Sling TV,
Verizon), including offerings
from electronics players who
have entered the fray (e.g.,
Apple TV, PlayStation Vue).
How is the market valuing these OTT players? »
A Game of Thrones:
New OTT TV Services Are Battling to Be King
Content owner platforms
Virtual MVPDs
Jan
Feb2014
Oct
2015
Mar
April Feb Apr
Date TBD
Date TBD
Comedy
Date TBD
Note: *Selected Examples
Source: Company websites, press releases

As the OTT market matures, we
are seeing more proof points
— both in terms of subscriber
and revenue numbers — which
highlight the growth potential
of online video services.
Increasingly, the market at large
is recognizing these new
businesses and attaching
significant valuations to OTT
players.
Market cap grew from $6.5B to $27B (~60% CAGR) from January
2013 to 2015; ~54M paying global subscribers (38M U.S.)
Generated ~$1B in revenue in 2013; 6M subscribers as of April 2014
Fastest-growing OTT service – in first year signed up 1M paying
subscribers representing $120M in revenue (run rate)
Projected revenues to hit $1B by end the of 2016; recently closed deal
to power HBO’s OTT platform
Initial launch leveraged existing ~90M Amazon Prime subscribers;
will launch decoupled ad-supported subscription service in 2015
~45.3M monthly users with valuation between $500-950M
Over 800K shows/350K movies purchased per day; 2013 estimated
yearly spend of $1.75B on iTunes videos1
But are content providers simply jumping on the OTT bandwagon,
or are they responding to an underlying consumer demand? »
For a Fistful of Dollars:
There Are Tremendous Valuations Attached to OTT Players
Note: 1
Apple analyst calculated Apple users spend ~$1.75B a year on iTunes videos
Source: Fierce Online Video, company websites, Asymco, CapIQ

Over-the-top (OTT) is not all
hype. There are underlying
factors that explain its growing
appeal and importance in the
media landscape:
• Consumers are increasing
their consumption of OTT
services, driven by better
affordability and a broader
content offering
• Major OTT services have
grown subscriptions
significantly
• OTT has been a catalyst for
the “content arms race” to
capture new subscriptions
What is driving consumer interest in OTT? »
OTT TV Myth #1:
The OTT TV Hype Is Overblown
Myth
The OTT TV hype
is overblown
Reality
Not really

Note: 1
“On average, how many hours of the following types of media do you consume in a typical week?” (n = 1,490); 2
“You indicated that your weekly media consumption has increased / decreased
compared to last year. Please select up to three reasons why you currently consume more / less”; (n = 622); 3
Includes free video (3 hours) and paid OTT services (4 hours, mostly streaming)
Source: 2015 L.E.K. Media Entertainment Survey
Increase in choice / content libraries 15%
14%
14%
11%
11%
10%
10%
9%
5%
3%
Online video subscription services
are now more affordable
I have more free time for entertainment
More on-demand content is now available
I recently bought a tablet / laptop
and want to watch on it
I am spending less time
consuming other forms of media
Now use secondary / additional
devices to watch videos
I am traveling more and
need to watch content on the go
Paid and free OTT
online video services3
Reduced purchases of online rental
Other
Time Spent Consuming Various
Forms of Media Content1
Percent of total hours
Reasons for Increasing Consumption:
Paid OTT/Online Video Service, Streamed2
Percent
0
5
10
15%
0 5 10 15%
10%
Online video streaming services
now comprise ~10% of total
media hours consumed.
Consumers cite expanding
content libraries (15%) and
affordability relative to
traditional TV subscriptions
(14%) as the key drivers behind
increased consumption of paid
OTT and online video services.
The bottom line: OTT is
becoming more attractive and is
increasingly perceived as a viable
alternative for entertainment.
The above drivers have driven huge growth. How big is the growth? »
I Want It That Way: Better Pricing and More Content Are Driving High
Growth for Online Streaming

Source: Analyst reports, SNL Kagan, Company 10-Ks, The Wrap, L.E.K. analysis
Netflix and Hulu Plus Total Paid
Streaming Subscribers in the U.S. (2011-19F)
Millions
2011 2012 2013 2014 2015F 2016F 2017F 2018F 2019F
Netflix base case
Netflix low case
Netflix high case
Netflix
Hulu Plus
0
10
20
30
40
50
60
70Netflix’s U.S. paid streaming
subscribers are up from 20.2
million in 2011 to 37.7 million in
2014 (~23% growth per year).
Hulu Plus has shown even
greater growth (~67% per year)
albeit from a smaller base,
starting at 1.4 million subscribers
in 2011 to 6.5 million in 2014.
While rapid growth is expected
to moderate slightly over the
next few years, these services
will still expand significantly.
Netflix is projected to continue
growing at ~6-11% per year
through 2019, depending on
various analyst views.
OTT TV services will likely
continue to penetrate the
universe of U.S. broadband
households.
But how are these players driving subscriber acquisition? »
To Infinity and Beyond:
Leading OTT TV Services Are Growing Rapidly

Source: SNL Kagan, RBC, L.E.K. analysis
Total Original Production Spend (2014E-19F)
Millions of dollars
AmazonHulu Netflix
0
250
500
750
1,000
1,250
1,500
1,750
2,000
2,250
2014E 2015F 2016F 2017F 2018F 2019F
So who is opting for OTT services and are they cutting the cord? »
Netflix spend on original
production is expected to grow
at ~38% per year from $267
million in 2014 to $1.3 billion
by 2019, dramatically outpacing
its rivals.
Other OTT players are following
suit, with Hulu original content
spend likely increasing from
$44 million in 2014 to $250
million in 2019 and Amazon
going from $92 million to $462
million over the same period.
This content “arms race” to
attract subscribers and manage
churn is having knock-on
effects on content spend in the
linear TV space as traditional
players — primarily in cable
and premium TV — look to
differentiate themselves and
claw back viewers from online.
We’re Going to Need a Bigger Boat:
The Battle for Subscribers Is Driving a Content Arms Race

What are the video consumption habits of Millennials? »
The cord-cutting tendencies of
Millennials are less dramatic
than you think:
• Millennials do watch more
online media relative to
other demographics
• However, they are still
tethered by the multichannel
ecosystem
OTT TV Myth #2:
Millennials Are Cord Cutters and Have Rejected the Cable Ecosystem
Myth
Millennials are cord
cutters and have
rejected the cable
ecosystem
Reality
Less than you
would think

Are Millennials still connected to the multichannel ecosystem? »
While traditional TV viewing
remains the primary source
of media consumption in
the general population, its
importance relative to
online media varies by
consumer group.
Within the Millennial group,
traditional TV viewing is still
popular, but OTT video services
are making significant headway
and online video consumption
is almost three times as
prevalent with Millennials as in
the non-Millennial group.
But does this mean Millennials
are abandoning traditional TV
viewing and the cable
ecosystem entirely?
The Times They Are a Changin’: Millennials Watch More Online Media
and Less Traditional TV Than the General Population
Note: 1
“On average, how many hours of the following types of media do you consume in a typical week?”; 2
Includes in-theater and physical purchase / rental, and includes TV show box sets;
3
Includes free video (3 hours) and paid OTT services (4 hours, mostly streaming); 4
Defined as age 18-34
All respondents Millennials4
Non-Millennials
Time Spent Consuming Various Forms of Media1
PublishingMovies2
Games Internet
Music Radio Paid and free OTT
online video services3
TV (traditional)
0
20
40
60
80
100%
8%
8%
7%
23%
5%
8%
10%
31%
5%
8%
6%
25%
4%
8%
6%
37%
13%
9%
10%
20%
6%
5%
16%
21%

Is OTT TV cannibalistic of traditional TV? »
Surprisingly, despite a higher
reported propensity to cord cut,
Millennials still appear to be
connected to the multichannel
ecosystem. While this may be
due to Millennials sharing their
parents’ accounts (without
having to actually pay for the
service), several other studies
indicate that cable is not dead.
A March 2014 study by Verizon
indicated a similar trend,
estimating that 87% of
Millennials were multichannel
subscribers, compared with
91% of non-Millennials.
Experian estimates that ~12%
of households inhabited by a
Millennial were non-subscribers
compared to 6.5% of total
households in 2013.
The More Things Change, the More They Stay the Same:
Millennials Are Still Connected to the Multichannel Ecosystem
Source: 2015 L.E.K. Media Entertainment Survey, Verizon Digital Media’s “Millennials Entertainment – March 2014”; Experian’s “Cross Device Video Analysis”, 2014
Media Subscription Rates by Age Cohort (2014E)
Percent of respondents
OTT viewer BroadcastMultichannel subscriber
0
20
40
60
80
100%
All adults
89%
6%
5%
18-24
88%
10%
2%
25-34
87%
9%
4%
35-44
90%
5%
5%
45-54
89%
5%
6%
55-64
90%
4%
6%
65+
90%
4%
6%
L.E.K. Consulting is a registered trademark of L.E.K. Consulting LLC. All other products and brands mentioned in this document are properties of
their respective owners.
© 2015 L.E.K. Consulting LLC

OVER THE TOP TV TRENDSOVER THE TOP TV TRENDS
What type of OTT content is cannibalizing linear TV? »
OTT TV Myth #3:
OTT Is Highly Cannibalistic of Traditional TV
Alarmist statements abound
regarding the predatory nature
of over-the-top (OTT) and how it
is poaching traditional TV
viewers.
While cannibalization does exist,
the interplay between linear TV
and OTT varies depending on
the type of online content
offering.
For Myths 1-2, please see
part one of “Over The Top TV
Trends” in our Executive
Insights’ “Spotlight on Media
Entertainment” series.
Myth
OTT is highly
cannibalistic of
traditional TV
Reality
Only somewhat

Sports-related OTT services (e.g.,
UFC.TV, MLB.TV, WWE Network)
show the highest cannibalization
of traditional TV consumption.
Entertainment services such as
Netflix, Amazon Prime or Hulu
Plus are used as complements to
linear TV.
While there is no certainty of a
causal relationship, recent
research from the Cabletelevision
Advertising Bureau attributed
~40% of 2014 Q3 and Q4 TV
ratings decline to a combined
effect of online video services
and measurement systems that
do not capture digital device
viewership.
So is traditional TV dead? »
Guess Who’s Coming to Dinner: OTT Sports Services Cannibalize
Traditional TV, Entertainment Complements TV
Note: 1
How has your online video consumption impacted your viewing of traditional TV over the past year?; 2
Cannibalization indexed on the TV cannibalization from MVPD catch-up services
Source: 2015 L.E.K. Media Entertainment Survey, Cabletelevision Advertising Bureau
Relative impact on traditional TV consumption indexed
to impact of online catch up services2
Percent of respondents stating online service
had no impact on traditional linear TV consumption
Sports-related services Entertainment services
Impact of OTT on Traditional Linear TV Viewing of Similar Content1
(2014)
UFC.TV MLB.TV WWE
Network
Hulu+ Netflix Amazon
Prime
HBO Go iTunes
1.40 1.39
1.31
1.19
1.02 1.00
0.95 0.94
0.87
TV catch-up
services
0.0
0.3
0.6
0.9
1.2
1.5
0
10
20
30
40
50
Base
Index

What is the status of traditional TV consumption? »
OTT TV Myth #4:
Traditional TV Viewing Is Dead
TV has yet to breathe its last
breath:
• Traditional TV still remains
the largest media
consumption platform
• Consumers prefer free or
subscription-based services
(including linear TV) over
transaction-based offerings
Myth
Traditional TV
viewing is dead
Reality
Nope

Note: 1
“On average, how many hours of the following types of media do you consume in a typical week?”; 2
Includes in-theater and physical purchase / rental, and includes TV show
box sets; 3
Includes free video (3 hours) and paid OTT services (4 hours, mostly streaming)
Time Spent Consuming Various Forms of Media Content1
Movies2
Publishing
Games
Internet
Music
Radio
Paid and Free OTT
Online Video Services3
TV (traditional)
0
20
40
60
80
100%
8%
8%
7%
23%
5%
8%
10%
31%
Television accounts for ~31%
of total hours spent on media
per week.
Paid and free OTT online video
services have been growing but
still represent only a 10% share
of total hours consumed.
So what form of video
consumption platforms work
best with users?
How do consumers prefer to access video content? »
TV Is Dead, Long Live…TV (!):
Traditional TV Remains the Single Largest Platform of Media Consumption

People are watching more on
free/subscription services and
less on pay-per-view services.
This chart shows an increase in
the net variance in consumption
for free or subscription-based
media, indicating a consumer
preference for “passive” forms
of billing, which either do not
require a payment or which only
require an initial set-up.
On the other hand, transaction-
based media (which requires
users to make a payment
decision each time they wish to
consume) is struggling.
While this is good news for both
traditional TV and OTT services,
a question remains around the
viability of the cable bundle.
Is the cable bundle going away? »
A Tale of Two Cities:
Subscription Platforms Grow, While Transaction-Based Models Decline
Note: 1
“Compared to last year, has your weekly consumption (in hours) for different types of media increased, decreased, or remained the same as current?”; 2
General internet net variance
was 36% in 2010 and 27% in 2009
Change in Consumption of Forms of Media1
Percent
Net variance2
Increased
somewhat (5-10%)
Increased
significantly (10%)
Decreased
significantly (10%)
Decreased
somewhat (5-10%)
Pay
Television
Paid OTT /
online
video service,
streamed
Free online
video service
Paid OTT /
online video
service, rented
or downloaded
TV Series
(purchased /
rented
physical
discs – e.g,
DVDs)
Movies
(purchased /
rented
physical
discs – e.g.,
DVDs)
Movies
(in-theater)
Free / subscription based Transaction based
(20)
(10)
0
10
20
30%
(7%)
(7%)
13%
8%
(5%)
(6%)
11%
8%
(5%)
(5%)
14%
6%
(7%)
(5%)
8%
3%
(9%)
(7%)
6%
4%
(10%)
(7%)
9%
4%
(9%)
(6%)
10%
4%

What is the status of traditional TV consumption? »
OTT TV Myth #5:
The Cable Bundle Is Going Away
Multichannel video
programming distributor
(MVPD) subscriptions have
grown slightly at 1.4% per year
from 2011-14.
But new virtual MVPD services
such as Apple TV or Sling TV are
potential substitutes to
traditional cable subscriptions.
These services could contribute
to a drop in the share of
households subscribing to
traditional MVPDs from ~89%
currently to ~70% in 2019.
Myth
The cable
bundle is
going away
Reality
Maybe in the
long term
but not in the
next five years

Source: SEC Filings, L.E.K. analysis
Key Provider Subscription Rates (2011 – 2014)
Millions of subscribers
0
10
20
30
40
50
60
70
80
2011
76.0
2012
77.4
2013
77.9
2014
79.3
Verizon ATT Time Warner Cable DISH Network Corp. DIRECTV Comcast Corporation
Overall cable, satellite and
Internet TV subscriptions (MVPD
subscriptions) have grown 1.4%
per year even as OTT services
have proliferated.
Newer video operators such as
ATT (U-verse) and Verizon
(FiOS) are continuing to
penetrate the market (growing
at 17.4% and 10.6% per year,
respectively between 2011-14)
and are sustaining overall MVPD
expansion compared to the
stagnant/declining footprint of
more traditional cable and
satellite operators.
The bottom line: MVPDs are not
going away anytime soon.
Are virtual MVPDs a disruptive force? »
Don’t You Forget About Me:
MVPDs Have Continued to Grow Between 2011-14

Note: 1
Take rates are normalized by a 70/30/10 adjustment; 2
Millennial / Gen Z category includes those under 35 as of 2014
0
10
20
30
40
50
60
70
80
90
100%
How likely would you be to subscribe to a service (described to be similar
to PlayStation Vue) at a price that you would consider reasonable?
Take rate1
Current multichannel subscribers
Current non-multichannel OTT viewers
All Respondents
18%
22%
12%
24%
21% 20%
Millennials / Gen Z2
Non-Millennials
Surprisingly, non-Millennial current
multichannel subscribers reported a higher
take rate for the new OTT MVPD service
How great is the risk for the traditional multichannel ecosystem? »
Several new “virtual MVPD”
platforms have been announced,
such as Sling TV (Dish),
PlayStation Vue (Sony) and
Apple TV. These platforms
represent direct substitutes for
traditional MVPD services as they
provide live streaming of linear
channels.
Our recent survey of U.S.
multichannel respondents
yielded an ~18% take rate (after
overstatement adjustment) for
a virtual MVPD service similar to
those recently announced.
Interestingly, the take rate was
greatest among non-Millennials,
highlighting the cross-
generational appeal of
these offerings.
Clear and Present Danger: Virtual MVPDs Are Potential Substitutes
for Traditional Cable Subscriptions

But does this mean that even premium bundles are at risk? »
Without new virtual MVPDs, not
much will change. MVPD share
will be comparable (dropping
from ~89% to ~86%) if you
project demographic shifts to
2019 and apply the current
growth rate of subscription
video on demand (SVOD).
However, virtual MVPD services
could deliver a step change in
OTT penetration and drop the
multichannel share to ~70%
by 2019.
The predicted share gains for
virtual MVPDs assume that the
products actually work. They
might fail if the services have
too many bugs and/or cannot
get complete channel lineups.
Brave New World: By 2019 Virtual MVPDs Could Drive Multichannel
Share of Households Down to About 70%
New Virtual MVPD offerings Broadcast OTT standalone Multichannel
Media Subscription Rates Over Time:
Demographic Shift + Existing SVOD Growth + New Offerings (2014E-19F)
Percent of adult broadband population
0
20
40
60
80
100%
2014E
88.8%
6.0%
5.2%
2019F dem. shift + existing
SVOD growth
85.5%
4.9%
9.7%
2019F dem. shift + existing
SVOD growth + new OTT MVPDs
70.4%
7.5%
17.2%
4.9%

How resilient are premium offerings to OTT? »
OTT TV Myth #6:
Premium Networks Will Be Extinct
Increasingly traditional premium
TV networks such as HBO are
experimenting with standalone
OTT offerings, by-passing their
existing operator relationships.
The bulk of premium networks’
revenues will continue to be
driven through traditional
multichannel distribution in the
short term. But as the share of
the broadband-only population
increases, premium networks
need to develop alternative
platforms, likely through new
partnerships with device
manufacturers and tech
companies such as Microsoft,
Google or Apple.
This approach should help these
networks hedge their bets.
Myth
Premium networks
will be extinct
Reality
Not yet
(but they will
need to go
on the offensive)

Is live sports the only thing holding the cable system together? »
As both an offensive and
defensive move, HBO has
introduced HBO Now, a
standalone OTT offering of
HBO, which will target
consumers who only receive
content via broadband.
While HBO executives see the
initiative as a means to go after
“low hanging fruit,” customers
who currently only receive video
content through broadband, it
may generate pushback from
MVPDs.
According to our proprietary
survey, a premium OTT network
analogous to HBO Now could
potentially cause ~54% of
respondents to modify their TV
subscription.
Staying Alive: OTT Versions of Premium Networks Could Drive
Significant Shifts in MVPD Subscriptions
Note: 1
“What impact would such a service have on your existing premium pay TV subscription?”
Consumer Actions if Premium OTT Network Was Available1
Percentage of responses
No change
Cancel movie package
Cancel full TV subscription
Overall 54% would cancel their
movie package or full TV subscription
0
20
40
60
80
100%
18%
36%
46%

Can sports content protect the multichannel
ecosystem from the threat of cord cutting? »
OTT Myth #7:
The Cable Ecosystem Is Disintegrating
Access to live sports content is
a fundamental aspect of the
multichannel video
programming distributor
(MVPD) bundle offering.
Sports leagues recognize the
value of their content and have
been able to extract significant
domestic rights fees from
operators.
Bottom line: live content, and
sports in particular, is the glue
holding the MVPD ecosystem
together and a “killer app” in
slowing cord cutting.
Myth
The cable ecosystem
is disintegrating
Reality
Live sports is
holding it together

Is OTT only relevant in mature TV markets like the U.S.? »
Live sports is a key driver of
consumers’ willingness to
subscribe to cable. What’s more,
27% of survey respondents
would trim or cancel their TV
subscription if the ESPN channels
were OTT-only. Third-party
studies confirm the role of sports
in preserving MVPD subs:
• According to a 2013 Harris
Interactive poll, 43% of U.S.
adults cited live sports as a
reason for not cancelling
cable
• According to a Frank Magid
Associates’ 2014
survey,1.4% of ESPN
watchers were “very likely”
to cut the cord in the next 12
months compared with
2.9% overall
The Last of the Mohicans:
Live Sports Is a Key Barrier to Cord Cutting
Note: 1
“What impact would this have on your existing cable / satellite TV subscription?”
Source: 2015 L.E.K. Media Entertainment Survey; Frank Magid Associates, 2014; Harris Interactive, June 2013
0
20
40
60
80
100%
Consumer Actions if ESPN Channels Were Only Available in OTT Format1
Percentage of responses
No change
Cancel sports package
Cancel full TV subscription
27% would cancel their sports
package or full TV subscription
19%
8%
73%

Is OTT relevant beyond the U.S. domestic market? »
OTT TV Myth #8:
OTT TV Is a Mature Market Phenomenon
The growing importance and
opportunities presented by
over-the-top (OTT) TV are not
limited to mature media markets.
In fact, it is highly relevant to
emerging markets, which in
many cases have leap-frogged
the traditional media evolution
cycle to embrace digital content
distribution methods.
OTT TV represents an intriguing
option to roll out content
internationally (assuming, that
the underlying infrastructure can
support video streaming).
For Myths 1-2, please see
part one of “Over The Top TV
trends” in our Executive Insights’
“Spotlight on Media
Entertainment” series. Myths 3-7
can be found in part two.
Myth
OTT is a
mature market
phenomenon
Reality
Definitely not

The rapid growth of China’s
broadband infrastructure (~39%
penetration, ~168M households
in 2014), has fueled the
emergence of multiple online
video platforms (alternative video
platforms or AVPs) with national
audience reach.
A set of large, well-funded,
national digital players, including
Tencent, iQiYi (Baidu owned),
Youku/Tudou (Alibaba minority
ownership) and Sohu are driving
demand for content.
These players are increasingly
considered as a viable
monetization alternative to
traditional TV, particularly as
AVPs recognize the value of
exclusive premium content (e.g.,
Tencent’s exclusive agreements
with the NBA and HBO).
Can TV organizations take advantage of
domestic and international opportunities? »
Crouching Tiger, Hidden Dragon:
Demand for Online Video in China Is Vibrant
Note: 1
Stats as of September 2013
Source: L.E.K. analysis
Users of Major Chinese Online Video Providers1
Millions of users
162
Online video arm of
Baidu, leader in
mobile video users
168
Diversified digital player
ranging from ads and
pay-for-click services
to gaming
254
Major digital player
active in mobile, social
(QQ), gaming, online
ads and e-commerce
Previous share leader in
online video, acquired
Tudou in 2012
309
0
50
100
150
200
250
300
350

What cautionary tales exist for organizations that
attempt to get into OTT TV without being digital ready? »
OTT TV Myth #9:
TV Organizations Are Digital Ready
Digital readiness refers to a
company’s ability to:
1. Engage with their viewers
regardless of channel
(traditional Pay-TV,
broadcast, VOD, over-the-top
(OTT) Internet)
2. Provide a seamless and
integrated entertainment
experience across platforms,
anytime and anywhere
3. Develop a direct connection
to the consumer (higher
margin and less-
intermediated by others)
Myth
TV organizations are
digital ready
Reality
Not really

The OTT TV market is littered
with failed experiments because
organizations are not sufficiently
prepared to take on the
challenges of OTT.
Case in point: Despite large
organizational support and deep
investment (~$150M), Verizon
and Redbox shut down Redbox
Instant just 19 months from
initial launch after being
plagued with issues.
While fortunes will be made
going forward, the high levels
of current investment by
incumbents will require new
entrants to develop clever
strategies, find deep-pocketed
partners and carefully leverage
existing assets.
How can organizations develop the right capabilities to succeed in OTT? »
Risky Business:
The OTT TV Territory Is Treacherous
“… The service was plagued with problems right out
of the gate. The library of movies was nowhere near
as expansive as Netflix’s, Amazon Instant’s, or even
Hulu’s. They also didn’t offer any TV shows …”
Fast Company, October 2014
“… Compounding the misery of the service was the security
vulnerability – criminals were using Redbox Instant to
verify stolen credit cards and Instant was forced to shut down
new user sign up for three months .…”
Fast Company, October 2014
“… We made the mistake of putting traditional Telco and media guys
into the venture instead of bringing in someone who understands
digital media and digital subscriptions. It was a disaster .…”
Company board member, November 2014
Source: CNET, BGR, Variety, The Desk, Gigaom

While (OTT) TV is top of mind
for network executives, most
firms are not digital ready.
Studio executives acknowledge
OTT is a rising trend in home
entertainment. However,
traditional TV organizations
don’t know how to conduct
billing, collections, customer
service, app development and
other critical tasks.
TV networks that switch to an
OTT-ready mindset face content
acquisition challenges and
cannibalization risks. Competing
effectively in OTT requires a new
approach to content acquisition
and creation. There are also
inherent risks, especially for
networks that rely heavily on
traditional revenue streams.
What are the required criteria for a successful OTT launch? »
The OTT TV Hunger Games:
Big Opportunity Poses New Challenges for TV Organizations
Level of Preparedness
Traditional TV Functions (pre-2014)
Time
“Digital Ready” Functions (2015+)
Viewer / customer data warehousing
Platform / app development
Data analytics
Billing / collections
Scheduling
Content acquisition
Content development
Offline marketing
Legal / privacy / PII data management
Viewer / customer service
Subscriber acquisition / retention

What tips and traps should organizations know about? »
Fantastic Four:
Here Are the Required Criteria for Successful OTT Launches
Successful OTT TV network
launches require the following:
• Affinity base must be
reachable and can be
activated to a paying
audience
• Ongoing pipeline of
differentiated or new content
to keep the audience
interested
• Promotion platform to
access your affinity base and
drive it towards your service
• Excellent technology
delivery and ubiquitous
placement on devices for
anytime, anywhere viewing
– meeting these criteria are
table stakes for OTT TV
networks Source: L.E.K. analysis
Affinity Base Ongoing Pipeline of
Differentiated Content
OTT Launch
Success
Factors
Promotion Platform
Excellent Technology
Delivery and Ubiquitous
Placement on Devices

This installment of our Executive
Insights’ “Spotlight on Media
Entertainment” series
covering “Over the Top TV
Trends” aims to highlight a set
of tips for launching an online
video network and some pitfalls
to avoid.
Here are our lessons learned on
pricing. »
How can you deliver a great service? »
The Craft:
Pricing an OTT TV Service Correctly Requires Research and Flexibility
Conduct extensive market research to understand price parameters,
benchmark to competing offers, trade-offs and opportunity costs
Do Your Homework
Low switching costs and comparable features require pricing to be at least
comparable to other OTT services to facilitate adoption and steal market share
Making Pricing
Competitive
Test multiple offers to see consumer response beyond the
initial launch price
Be Flexible

How should you acquire and retain subscribers? »
Fundamentally, no OTT TV
service will succeed if it is not
intuitive and ergonomic.
Here are more lessons learned
on pricing. »
The OTT Engine That Could:
Successful OTT TV Services Deliver a Great User Experience
Remove barriers to easy sign-up and payment, ensure availability across
devices, facilitate discoverability and develop intuitive navigation tools that
empower the consumer (e.g., library queue, recommendations)
Simplify the Service
Consumers expect OTT networks and platforms to provide a seamless and
high-performing viewing experience from any device
Have a Leading
Edge UI
Understand product requirements and partner with vendors that can handle
seamless back-end support, including KPI monitoring
Partner Strategically

OVER THE TOP TV TRENDSOVER THE TOP TV TRENDS
What pitfalls should be avoided in launching an OTT service? »
What To Expect When You’re OTT-ing:
Getting Consumers and Investors on Board with Your OTT TV Service
Driving new customer acquisition
and return usage is critical to the
long-term success of an OTT TV
network.
Here are our lessons learned on
consumer offers and managing
expectations. »
Ensure the product offering has a rotation of “fresh” and repeat value
content; follow up on marketing efforts that work and don’t work to support
subscriber base
Feed Your
OTT Service
For content aggregators, consumers will not be motivated to add an additional
or replace their existing subscription if the new OTT service does not provide at
least the comparable catalog as offered by existing competitors
Offer a Comparable
Catalog
(for aggregator)
Building a successful OTT service takes time and requires a different set of
measures than are traditionally followed by investors; ensure that this is
communicated clearly and do not over-promise on the expected growth
Manage Expectations

So what can TV organizations do to become digital ready? »
Hawaii Five-No-Nos:
Pitfalls to Avoid When Launching an OTT TV Service
These critical mistakes can nip
promising OTT TV services in
the bud.
Here are our pitfalls to
avoid. »
Shifting to a subscription-based model requires a focus on subscriber care and
acquisition, a continuous refinement of the product, and ongoing monitoring
of subscriber analytics
Not Organizing
Appropriately
Be prepared for adverse reactions from other content carriers
(be they networks, MVPDs or other OTT providers) after you announce a
channel that circumvents their service
Not Anticipating
Partner Reactions
Underfunding
Marketing
Don’t short change the marketing resources needed to generate trials from
prospective users (wherever they may be), subsidize trials and support
ongoing retention. CACs will be painfully high at outset but will come down
over time as the network effect builds
Avoid launching before appropriately beta-testing and working out the
”kinks” in the service to limit negative PR at launch from technical issues
Launching Too
Quickly
Global expansion — beyond simply making the domestic service
available — necessitates a strong understanding of localization requirements
including dubbing/sub-titling costs, billing/payment infrastructure, local
regulations, in-country marketing etc.
Launching
Internationally
Without Appropriate
Due Diligence

What have we learned? »
Maps To The Stars:
TV Organizations Can Chart a Path to Digital Readiness
The path to becoming digital
ready requires organizations to
re-think their strategic
positioning and answer some
tough questions.
Here are our four steps to
success and digital readiness. »
Digital Readiness Is Where TV Organizations Can and Need to Act Now
End State
Definition
1.
• What is the ideal end
state for digital
readiness?
• How much control do
we want over our digital
rights?
• Which approaches are
most attractive?
– MVPD subscription
– Standalone subscription
– Transaction-based
platform
– Ad-supported platform
– Utilize a third party’s
platform
– Others?
Current State
Diagnostic
2.
• Where are we today?
• What is the current
status of digital
rights / licensing deals?
• Do we currently have a
touch point with the
end consumer?
• Where are we
distributed today?
• Is there sufficient
scale / demand for our
content?
• Where do we have
permission to play?
• Who owns digital within
the organization?
Gap Analysis
3.
• What are key gaps
between current state
and end state?
– Capabilities
– Organizations
– Processes
– Systems
– Content rights
– Distribution
partnerships
– Others?
Barrier Identification
/ Resolution
4.
• What are key
roadblocks to
addressing gaps?
• For each, what are our
options and pros / cons?
• What subscriber
numbers are required
for each approach to be
attractive?
• What are the financial
implications?
– Incremental revenue
potential
– Cost requirements
– Scenario analysis

Our Outlook:
Digital Ready Is the New Black
Our Executive Insights’
“Spotlight on Media
Entertainment” series covering
“Over the Top TV Trends”
presents a case to debunk a
few of the key myths around
online video services.
What Have We Learned About OTT TV?
1. OTT is for real
2. Traditional TV viewing is not dead, but under pressure
3. Millennials do consume OTT disproportionately but have not abandoned
cable/satellite
4. Virtual MVPDs will pressure the traditional cable bundle, but it will persist
for the time being…
5. …in no small part due to live sports, even if premium networks are at risk
6. OTT is not constrained to mature markets as many emerging markets such as China
represent tremendous growth opportunities
7. Despite the opportunity, many TV organizations are not “digital ready” to avoid the
risks of and realize the benefit from OTT

Spotlight on Media & Entertainment: Over The Top TV Trends

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Spotlight on Media & Entertainment: Over The Top TV Trends