Nº 9 2013 > Online content delivery

Business models in a converged market

Business models in a converged marketNetflix now acquires original content for its subscription streaming service, the first title being the House of Cards
Netflix now acquires original content for its subscription streaming service, the first title being the House of Cards

In today’s converged market, a single device can be used to access different types of content (voice, text or video) from multiple sources. Conversely, any particular item of content can be obtained through a variety of devices. At the heart of this convergence is the Internet. What does all this mean in business terms? This article takes the obvious commercial approach of following the money. It is adapted from “Digital broadcasting and online content delivery”, a discussion paper written by Gordon Moir and John McInnes, Partner and Senior Associate, respectively, at Webb Henderson LLP, London, for the 13th ITU Global Symposium for Regulators, held in Warsaw, Poland, in July 2013.

Internet value chain

The Internet value chain (see chart) includes: content rights, which cover both commercial and user-generated content; over-the-top (OTT) services such as e‑mail, voice-over-the-Internet Protocol (VoIP), video-on-demand, gaming and e‑commerce; enabling technology services which include web hosting, billing and advertising; connectivity covering both fixed and wireless network providers, Internet service providers, and content delivery network services; and user interfaces (for example, computers, smartphones and smart televisions).

The different parts of the value chain are now beginning to merge because of increasing consolidation, with players extending their scope. New means of delivering content are being used and new business models are appearing.

Main players

Convergence has seen a number of global brands, such as Microsoft, Apple, Amazon and Google, becoming active across various parts of the Internet value chain. Google, in particular, has been at the forefront of this development. From being a search engine, Google’s activities now range from device manufacture, operating systems and cloud storage to e‑mail, maps, content distribution and online advertising.

Telecommunication providers are also attempting to diversify into other areas. Examples include the development of Telefónica Digital, BT’s ventures into sport content and online television content via YouView, and AT&T and Verizon’s multiple play offerings.

Subscription television services offer premium programmes, such as new release movies and live cultural or sporting events. But they face competition from content producers that now offer their products direct to customers over the Internet. For example, several sporting leagues, such as Major League Baseball and the National Basketball Association, offer subscribers the ability to stream live games.

Similarly, content aggregators have started moving up the video supply chain to produce their own content for direct release to their subscribers. A recent example of this was the Netflix production of the hit series House of Cards.

Online music streaming services have become increasingly popular, with companies such as Spotify experiencing huge growth. Google has entered this space with GooglePlay. There has also been an increase in user-generated content viewed online as a result of the popularity of services such as YouTube.

Producers of smart television are increasingly bundling sales of their products with access to on-demand programming, such as YouTube and BBC iplayer, as well as Internet access.

Business models

The key to a business model is its revenue stream. In the converged market of content communication the main sources of revenue are subscriptions and advertising, while strategic partnerships can help to cut costs.

Subscription-based models

The delivery of digital content via the Internet has changed the nature of subscription-based models, although they retain their customary format of payment of a regular subscription fee in exchange for access to particular content.

Content providers now commonly offer both a free (basic) and a paid (premium) service. The free product is offered in an attempt to attract subscribers. For example, the Wall Street Journal provides free access to the video section of its website and non-subscribers are given a quota of free articles each month. Traditional news articles remain subject to a paywall.

Video-on-demand (VoD) providers generally charge users a subscription fee for “all you can eat” access to a content library. For example, Netflix subscribers pay a small monthly fee for unlimited access to its entire video library. Netflix’s VoD service can be accessed at any time from multiple devices. YouTube, the popular online video sharing site, originated as a free service but recently announced the introduction of additional subscription channels where users can pay for access to niche or premium programming. In the United Kingdom, BSkyB has launched a new “pay as you go” model on its Internet television service. End users pay a fee for 24-hour online access to BSkyB’s premium sports content.

Netflix provides a successful example of the subscription-based model. The company started by offering a basic DVD-by-mail service and built up a substantial video library that its subscribers could access for a small monthly fee. Netflix now has over 33 million global subscribers and a total revenue of approximately USD 3.6 billion for the 2012 financial year.

In contrast to traditional broadcast and cable television providers, Netflix offers its subscribers unlimited access to premium content that is free from advertisements. Netflix operates with a reduced cost base — online streaming tends to be cheaper than other delivery models and Netflix generally offers delayed access to new content — which has allowed it to rely on subscription fees without the need for advertising revenues. Netflix now acquires original content for its subscription streaming service, the first title being the House of Cards.

Online advertising models

In online advertising models, content is given away to users at no cost, or at only a minimal cost, in an effort to generate web traffic. This traffic is then on-sold to advertisers for a profit. An estimated USD 99 billion was spent in 2012 on Internet advertising.

The most common online advertising models are based on “cost per click” and “pay per view”. In the cost per click model, the advertiser pays each time a user clicks on a listing and is redirected to the relevant website. The pay per view model is similar, except that the advertiser pays for each click regardless of whether the user makes it to the target site or not. Another variant, the “cost per action” model, is performance based, with the advertiser paying only when a purchase is made. Google and Facebook are successful examples of the online advertising model.

AdWords is Google’s primary online advertising product, netting the company an estimated USD 43.7 billion in 2012. As the leading online search engine, Google offers advertisers advanced user information and the opportunity to provide their target audience with a tailored message. This level of access to consumers allows Google to charge a premium for use of its AdWords product.

Facebook, originally established as a small social networking site in 2004, now has some of the highest traffic volumes on the Internet. The company claimed to surpass one billion users in September 2012 and reported a profit of USD 5.1 billion for the 2012 financial year. Besides its huge user base, what makes Facebook particularly attractive to advertisers is the sheer amount of personal data that the company has access to about its users. Facebook requires all new users to set up an account which entails providing detailed personal data about the user. Following registration, Facebook members are then free to roam the site and to interact with other Facebook users. All of these interactions can be tracked and detailed personal profiles pieced together to give advertisers the ability to directly tailor and pitch their messages to a targeted audience.

Hybrid models

The hybrid model combines subscription with online advertising. A good example of this can be found in the online music streaming industry where several large players, such as Pandora and Spotify, have emerged to rival the broadcast radio industry. Rather than apply the traditional radio business model, which relied almost exclusively on advertising revenues, online music streaming providers have tended to offer a basic service that is funded by advertisements along with the ability to subscribe to a premium service.

Related business models are also being used in other online content delivery industries. For example, the New York Times has announced that its paywall has been removed for the video section of its website. Users will still be required to pay a subscription to access unlimited new articles (a quota of free viewing has always been available), but access to its video library will now be funded by online advertisements — meaning that it will be free for users.

Other revenue streams

Other revenue streams include product placement, expanding activities along the Internet value chain, and benefiting from business synergies.

Product placement is the purposeful incorporation of commercial content into non-commercial settings in order to promote a particular product or brand. It is estimated that two-thirds of television viewers attempt to avoid watching advertisements. Because product placements are directly integrated into the programme, they are more difficult to avoid, making them an attractive option for advertisers. Netflix decided to use product placements to subsidize the cost of producing House of Cards.

The production, aggregation and distribution of content online can present opportunities for growth in markets along the value chain. For example, network operators and content aggregators are often able to generate new business-to-business revenue streams by providing wholesale content delivery network services to content providers.

Exclusive content deals, where premium content is made available only over certain platforms in exchange for beneficial delivery terms, is a good example of a business synergy. Most set-top-boxes, such as AppleTV and Roku, offer their subscribers access to certain programmes based on the content deals that are in place with content producers. These producers have direct access to viewers at discounted rates and set-top operators are able to increase their offering to attract subscribers. The ability to partner with other businesses can lead to potential cost savings and new sources of revenue.

Concerns over customer data

Meanwhile, the increasing amount of personal data available to online businesses and the opportunities for using such information, for example through targeted advertising, is raising complex regulatory issues, in particular around privacy and data protection. How to deal with such concerns is likely to be a key focus for regulators in the future.


 

 

Milestones
From Hyderabad to Dubai

In this issue
No.1 January | February 2014

ITU’s Connect the World initiative:

Connect Africa Summit

ITU’s Connect the World initiative|1

ITU’s Connect the World initiative:

Connect CIS Summit

ITU’s Connect the World initiative|1

ITU’s Connect the World initiative:

Connect Arab Summit

ITU’s Connect the World initiative|1

Connect a School, Connect a Community project:

Spotlighting Sri Lanka

Connect a School, Connect a Community project|1

Youth and tech jobs:

Youth employment

Youth and tech jobs|1
Latest headlines

Broadband and development
Synergies for success

Dr Hamadoun I. Touré ITU Secretary‑General

Setting strategies and objectives for the next four years

Brahima Sanou Director, ITU Telecommunication Development Bureau