Introduction

An in-depth analysis of whether telcos can make money from original content, this executive briefing builds on previous STL reports exploring the role of telcos in entertainment and advertising:

This new report evaluates the success of AT&T, BT and Swisscom’s original content and related distribution strategies, as well as identifying lessons to be learnt. It also appraises their investment in original content, exclusive content (e.g. sport) and buying content creators (e.g. Time Warner).

Following the acquisition of Time Warner, AT&T is a content owner and content distribution colossus. What is its underlying objective for providing a wide range of over-the-top (OTT) services, including DTV Now (satellite TV service delivered over-the-top) and AT&T Watch (live and on demand content)? How will content from Time Warner’s acquisition in June 2018 be incorporated into its products?

Has BT’s head on clash with Sky in the market with live sports met expectations? Has its heavy investment in football grown its revenue take, broadband subscriptions and attracted eyeballs?

Swisscom has grown to become Switzerland’s largest TV provider, using live sports as its differentiator. What other initiatives have contributed to its market leadership and can it maintain its dominance?

The case for investing in original content

Telcos typically invest in original content to achieve three objectives:

to open up new sources of revenue (direct subscription sales, wholesale distribution and ads sales)
to increase sales of core telco services/products (e.g. fixed broadband)
to raise their profile, increase their relevance and build brand loyalty.

But trying to pursue all these objectives simultaneously requires some difficult compromises – maximising content revenues means distributing the content as widely as possible, which means it no longer becomes a competitive differentiator through which to sell connectivity and build loyalty to the core proposition. In any case, regulators may require telcos to make some original content, notably the rights to live sport, available to competitors.

Therefore, achieving all of these objectives requires telcos to perform a delicate balancing act between making their content widely available and integrating it with the core connectivity proposition from both a technical perspective (using a cloud-based or physical set-top box) and a commercial perspective (attractive bundles and/or zero-rating the content). They need to perform this balancing act at a time when the digital entertainment market is in upheaval – customers in many markets are migrating from traditional pay TV (one or two year contracts) to video-on-demand subscriptions (month-by-month).

Not all content is equal

Ownership of sports rights should guarantee an audience linked to the size of the fanbase. Investing in original content, such as dramas, is far riskier. For every series of The Crown, a Netflix hit airing its third series in 2019, there is Marco Polo that cost US$200 million, cancelled after two series and an abject failure. Telco shareholders would baulk at taking such risks, given many have qualms about BT’s investment in Premier League rights (32 matches a season, 2019-22), which are equivalent to £9.2 million per game.

Alternatively, telcos could purchase a content developer/media company with a back catalogue of proven programming, as AT&T has done by buying Time Warner in June 2018. Investment in original content is a differentiator for pay TV providers (e.g. Sky) as well as over-the-top players (e.g. Netflix). Netflix has dramatically increased its investment in original content from its early foray with the House of Cards. During 2018 Netflix invested about US$6.8 billion in original content, including films, simultaneously screening some films at cinemas (e.g. Coen brothers’ The Ballad of Buster Scruggs).

However, the audience for expensively-created content is finite. They are binge watching fewer shows. In the USA, according to Hub Entertain Research, viewers watched an average of 4.4 favourite shows in 2018, compared to 5.2 in 2016. These viewers increasingly find out about favourite shows through advertisements and watch them on an video-on-demand service.

More and more competition

Although they benefit from economies of scale and scope, the major global online players are not oblivious to the risks of creating original content. Amazon somewhat mitigates the risk by using co-production. Amazon is working with pay TV companies (e.g. Sky / Sky Atlantic) as well as public service broadcasters (BBC). The co-production of content with Sky provides Amazon with the rights to show series outside Sky’s footprint. For the BBC, a junior partner in the relationship, it gets to air the co-produced programmes after Amazon has shown them (e.g. the final three series of Ripper Street). Apple is also investing US$1 billion in original content, which will be distributed by its new streaming service[1]. The new service, business model unknown, will also be accessible on non-Apple products. New Samsung, Sony, LG and Vizio TVs will support Apple iTunes movies and TV shows[2].

It is not just the major Internet platforms that are competing with telcos for eyeballs. Major content rights owners are also taking their first steps to launch direct-to-consumer services. The Disney Play streaming service will launch in late 2019, once its existing distribution agreement with Netflix comes to an end. New sports streaming services are vying for attention, e.g. DAZN owns the rights to English Premier League (EPL) in Germany, Switzerland, Austria and Japan, as well as combat sports (e.g. Matchroom Boxing and UFC) and other sports. Many sports federations also provide direct-to-consumer streaming services, alongside the sale of linear TV sports rights. These include The National Hockey League’s NHL.TV and National Football League’s GamePass in the USA, and the English Football League (EFL)’s iFollow service in the UK. Consumers outside the UK can also pay to stream EFL matches.

The importance of multiple content distribution models

But it is not just about having the right content: consumers also want the right commercial proposition. Pay TV providers recognise that not all consumers are willing to sign-up to 12- or 18-month contracts. Falling pay TV subscription rates, and a realisation that one-size doesn’t fit all has seen the emergence of month-to-month skinny pay TV packages. These offers may or may not be packaged with broadband connectivity.

Those that do subscribe to traditional pay TV will not subscribe to a second pay TV subscription, but many households are willing to subscribe to more than one additional over-the-top service. Half of the video-on-demand (SVOD) subscribers in the UK subscribe to more than one VOD service (Amazon, Netflix, NOW TV), and 71% of households with a VOD service also have a pay TV subscription (according to GfK SVOD Tracker).

There are essentially four key roles in the content value chain, identified and discussed by STL partners in previous reports. These roles are programme, package, platform and pipe. Traditionally, telcos’ primary objective is to sell as many pipes as possible. To that end, they offer packages of content (generally TV channels), which are sold on a subscription basis or offered for no fee, supported by advertising. A platform is used to distribute the channels, films and other content created and curated by another entity.

Telco content distribution models

Source: STL Partners

Telco revenue from content and related services

An in-depth analysis of telcos’ return on investment in sports or film rights or original content is tricky. Telcos are not in the habit of revealing content revenue data. Figure 5 summarises the main metrics that need to be considered to evaluate the effectiveness of telcos’ investment in content.

The revenues that telcos can generate from content consist primarily of:

Sale of the content to consumers
Sale of banner, video and TV ads that sit / roll alongside the content
Wholesale of content via third-party platforms
Net additions of broadband / mobile pipes, increased ARPU/C and reduction in user/connection churn, increase in broadband / mobile pipe revenue.

Measuring return on investments in content

Source: STL Partners

In the rest of this report, we evaluate AT&T, BT and Swisscom against these criteria.

Contents:

Executive Summary
Introduction
The case for investing in original content
More and more competition
The importance of multiple content distribution models
Telco revenue from content and related services
Swisscom sells content with strings attached
Investing in rights holders to secure original content
It is about the packaging, as well as the content
Limited advertising
Enriching the viewer experience
Mixed financial results
BT and its big bet on live sport
BT TV reaches an inflexion point
BT TV – getting more expensive
Is BT Sport changing direction?
BT’s broader branding strategy
BT as a content aggregator
BT Sport is available to rivals’ pay TV customers
Is BT making a financial return?
Is there a case for continued investment?
AT&T takes on Netflix
King of content?
DirecTV Now: A lackluster start
Takeaways: Walking a tightrope between old and new
A shaky financial performance to date
Conclusions

Figures:

The differing strategies of Swisscom, BT and AT&T
AT&T’s Entertainment Group is dragging down the broader business
Rating the different elements of telcos’ original content strategy
Telco content distribution models
Measuring return on investments in content
Swisscom’s TV subscriptions and market share
Summary of Swisscom’s TV products
Cost and availability of Teleclub Sport
The growth in Swisscom’s TV Connections and Bundles
Swisscom’s content strategy hasn’t arrested the decline in wireline revenues
Swisscom’s ballpark annual revenue run rate from TV
BT TV packages, February 2019 compared to end 2015
BT has bought more low-grade matches and is paying less per game
How BT tries to monetise its sports content
A breakdown of BT’s brands and target segments
BT Sport App packages across its multiple brands
How BT is using content partnerships to broaden its offering
BT Sport has helped to drive a major uplift in annual revenue
BT’s Consumer Division has struggled to increase profitability
BT’s TV and broadband customers are now flatlining
Growth in BT TV and BT Sport connections has tailed off
BT’s consumer fixed line revenue has been fairly flat
BT Sport residential and commercial revenue estimates 2018 and 2022
AT&T’s telecom, media and entertainment businesses (February 2019)
AT&T’s pay TV and SVOD services (as of February 2019)
The Entertainment Group’s revenues are slipping
AT&T’s traditional pay TV business is in decline
AT&T’s broadband connections are fairly flat
AT&T’s Entertainment Group is seeing its top line squeezed
AT&T is combining inventory to help increase ad spend

[1] Apple TV will be launched in 2019 https://www.fool.com/investing/2018/12/15/apples-original-content-ambitions-are-growing.aspx, https://www.macworld.co.uk/news/apple/apple-streaming-service-3610603/

[2] Content can be streamed from an Apple device using Apple’s AirPlay wireless streaming protocol stack, which will be integrated into TVs.

Tag: distribution models

Investing in original content: Is it worth it?