While companies such as Netflix and Hulu have the potential to be serious media contenders, the content roster from over-the-top (OTT) television platforms is not as broad or compelling as the line-up provided by traditional pay television companies, suggests credit ratings agency Fitch Ratings in a market commentary.
According to Fitch, padding of their Internet and video libraries could make them more of a significant competitive threat in the future, although the price of content and its ownership by studios remain significant hurdles to OTT providers.
Fitch notes that OTT provider Netflix last month posted its first quarterly loss since its inception in 1997. “The company spiked subscriber fees by as much as 60 per cent precipitating an exodus of over 800,000 customers during third quarter 2011. Netflix’s streaming content had been gaining popularity, as the company expanded its library with legacy content from film and TV studios. Some customers chose to forego traditional and expensive cable subscriptions, opting instead to view cheaper Internet-based content streamed directly to their computer or television, a phenomenon known as ‘cutting the cord’,” advises Fitch.
Fitch suggests that the acquisition of a vast and compelling Internet and video catalogue remain key to attracting additional OTT customers, and consequently becoming a viable competitive threat. “Current OTT line-ups pale in comparison to those of traditional pay-TV providers who pay large affiliate fees to content creators/owners, such as Time Warner Inc., CBS, and Viacom. Fitch Ratings believes content owners remain well-positioned amid the rise of OTT platforms and are benefiting from the high margin incremental revenue streams associated with licensing their previously released content into the new OTT window,” says the firm.
“Adding content is expensive and could take time,” notes Fitch. “Consumers would likely be able to absorb a gradual rise in subscriber fees, but Fitch believes many would discontinue membership if costs were to spike as they did at Netflix. Fitch feels Netflix lacks the capacity to increase prices to a level allowing for a quick expansion of its library, leaving it a weak competitor versus cable and broadcast TV companies.”
Netflix said it expects to recover some of its US customer base, and has recently branched out business to the UK and Ireland. Fitch believes that while subscriber growth will offset some cost, increased prices will be inevitable to retain profitability while building its library.
Fitch acknowledges that a new OTT service backed by a cash-rich company (i.e. Google’s recent announcement of the creation of 100 YouTube channels populated with professionally produced original programming) could become a viable competitive threat if successfully implemented. Still, Fitch believes conglomerate-owned studios would not sell their content, a requirement of most customers, in such a way that it would undermine broadcast and cable network business models.