Deep Dive: The State Of The SVOD/OTT Subscription Market

The days of visiting a brick-and-mortar store to rent VHS tapes or DVDs have become a distant memory — one they have been replaced by a series of streaming video on demand (SVOD) companies. The Subscription Tracker deep dive examines the scope of the market and the challenges it faces.

Not long ago, Blockbuster Video was a go-to resource for consumers who wanted to watch a movie from the comfort of their homes. They would flock to stores, wandering the aisles to choose from thousands of VHS and DVD format films, then go home to watch their selections. A few days later, they came back to the store to return the rentals.

Today, the days of perusing a Blockbuster store seem like a bygone era. The brick-and-mortar movie experience has largely been replaced by the streaming video on demand/over the top (SVOD/OTT) industry, a market of cable and streaming subscription services offering vast libraries of movie and television content that can be streamed over the internet. Consumers can watch whatever movies they want to see from the comfort of their living rooms, without having to leave the house to rent or return a film.

Today, the SVOD/OTT industry is one of the most significant elements of the entire subscription vertical. The industry is thriving and economic growth is gaining steam, in part because services are available wherever internet connectivity is available.

The Tracker’s Deep Dive explores the growth of the at-home streaming experience and where the space could go next.

Where SVOD/OTT Is Popular

Garage band Severe Tire Damage became a pioneer of streaming in 1993 as the first musical group to broadcast live over the internet from a concert at Xerox PARC. A few years later, RealNetworks, one of the earliest streaming service providers, televised a Seattle baseball game over the internet in 1995. That same year, Seattle’s Paramount Theater made a symphony concert available online.

Those early forays into internet-based streaming have evolved into today’s global SVOD/OTT market. The space is growing notably fast in Europe, representing 66 percent of all on-demand service revenue reported in 2016 and approximately 38.7 million SVOD/OTT subscriptions. Revenue from these markets grew by 128 percent annually between 2011 and 2016, and the EU’s Scandinavian region has demonstrated the highest service penetration rates.

The potential for the SVOD/OTT market to expand is also high in African nations. Nigeria has more than 98 million internet subscribers, according to the Nigerian Communications Commission (NCC), a figure that points toward significant potential for on-demand subscription services to further penetrate the local market. Some of the streaming platforms — especially those currently offering both foreign and domestic content — are beginning to gain recognition among Nigerian subscribers, including iROKOtv, SOLO View, Showmax and iBAKATV.

The Leading Subscription Providers
Outside of Nigeria, several global streaming platforms are driving the market’s growth.

Outside of Nigeria, several global streaming platforms are driving the market’s growth.

Netflix is one of the hallmarks of the video on-demand market, as well as one of the most well-recognized streaming brands. As of January 2018, the company had about 117.58 million paying subscribers worldwide. This year, it expects to take in a subscription revenue of $15 billion.

Though arguably the most popular subscription streaming service, Netflix is not alone. Amazon has demonstrated its eagerness to compete with Netflix for subscription eyeballs with its own video on demand service, Amazon Prime. The companies’ offerings are leading what is now a crowded field of SVOD/OTT companies. As recently as Q2 2017, approximately 59 percent of American households had at least one video subscription service — most likely from Netflix or Amazon — and several smaller players have entered the competitive market. That includes 21st Century Fox-owned Hulu Plus, Walt Disney Co., NBC Universal and Time Warner’s HBO Now.

Understanding the SVOD Industry

PYMNTS also examined the features and characteristics enabling the SVOD/OTT industry to distinguish itself from other subscription offerings. The recent Subscription Commerce Conversion Index™ (SCCI) highlights several factors that allow good providers to stand apart from the bad.

Based on PYMNTS’ research, the SVOD/OTT sector provides the best value among all subscription services. Of the markets measured in Q1 2018, SVOD/OTT subscriptions had the highest average score at 65.6, two points higher than that of all merchants (63.2).

PYMNTS also found that many merchants in the SVOD/OTT space boast higher scores than other subscription sectors. The highest score for merchants in the SVOD/OTT category was 85.7 percent, and 15 percent of them are among the top 20 performers.

SVOD/OTT merchants exceed the average rating on subscription service features in all but two categories (plan changes and product ratings/reviews). In Q1 2018, they scored 95 percent in messaging (compared to an average of 87.1 percent), 90 percent in product details (compared to 88.8 percent), 90 percent in plan cancellations (compared to 66.9 percent) and 80 percent in free trials (compared to 46.6 percent).
Password Problems

There is a feature that distinguishes SVOD/OTT from other subscription services, though, and that is passwords.

PYMNTS found that 100 percent of these firms and the top merchants in the sector allow users to generate a profile password, compared to the industry average 73 percent reported in Q1 2018. This feature is very common among business-to-consumer (B2C) merchants that are eager to protect their consumers’ data.

It turns out some consumers do not take the same protective measures with their own passwords, however. A 2017 study found that more than a third of U.S.-based internet users report sharing their passwords for at least one streaming service. Netflix account information was the most likely to be shared, with the same survey finding 85 percent of respondents had shared that information.

While sharing streaming service passwords might seem harmless to consumers, the practice can take a toll on merchants’ bottom lines. The cable television industry alone is expected to see password sharing profit losses rise from $3.5 billion in 2017 to $9.9 billion by 2021. Meanwhile, Netflix could lose up to $391 million per year because of these practices.

In response to the password sharing problem, some companies are restricting how SVOD/OTT accounts are used. For example, some merchants and businesses are reducing the number of simultaneous streams allowed or requiring passwords to be re-entered for different devices over a period of time.

The Churn Factor

But PYMNTS’ research finds churn rates pose a more serious industry issue than consumers’ password sharing habits. SVOD/OTT churn rates are increasing slightly, with approximately 20 percent of U.S. households cancelling at least one OTT video service in 2016. That’s up from 18 percent in 2015.

The same research found Netflix’s churn rate problem is not as serious as that of other companies in the sector. Just 5 percent of U.S. homes had cancelled Netflix accounts, a figure representing 9 percent of the provider’s customer base.

There are several reasons customers choose to abandon streaming services. According to PYMNTS’ analysis, those include too many ads (27 percent), services costs (25 percent), the lack of good content (20 percent) and technical problems (17 percent). The lack of ads on Netflix’s platform means it does not have to worry about customers being turned off by advertisements.

These insights are important for SVOD/OTT providers as they seek to retain customers. It appears getting subscribers past the first three months will decrease the likelihood that they will abandon their subscriptions. Reducing the number of ads, addressing service costs, delivering exclusive content and providing strong customer service are essential for SVOD/OTT providers to lower their churn rates.

If that wasn’t enough, the SVOD/OTT market is suffering from saturation. The more competition in the market, the more providers must spend to remain competitive. In fact, 2016 research found that spending on SOVD/OTT services grew by 22 percent or $1.19 billion, a lower rate than the $1.21 billion in growth reported in 2015.

While the difference is small, it is not insignificant. It indicates consumer spending on these services appears to be declining, which could push some providers to look to international markets for new customers.

Netflix appears to understand this trend and is taking steps to expand its brand’s influence across borders. It is working on a superhero fantasy program in Turkey, for example, and Oscar-nominated director Agnieszka Holland is directing a political drama series for Poland.

Increased competition also means companies are under greater pressure to deliver content that will encourage consumers to commit to their products. In other words, they must meet rising customer expectations. A recent survey found 63 percent of customers want more programming from their streaming service providers.

The Future of SVOD/OTT

Despite the challenges outlined here, the future looks promising for the SVOD/OTT market. By some forecasts, average subscriptions per individual and household are expected to grow by 20 percent in 2018.

Online video streaming is expected to dominate internet usage in the next few years. Recent research indicates that global IP video traffic will represent 82 percent of all internet traffic by 2021, up from 73 percent in 2106. Meanwhile, the value of the SVOD/OTT market is expected to grow to roughly $108.6 billion by 2026 and have a presence in more than 50 percent of U.S. homes. Projections indicate continued market growth through 2026 at a CAGR of 8.3 percent.

Overall, SVOD/OTT is one of the top industries in the entire subscription market, boasting a higher value than other types of subscriptions. It is positioned for even more growth as consumers worldwide gain internet access. The days of Blockbuster may be over, but a new era in streaming home entertainment is already underway.

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