As the SVOD market matures smaller players should reassess their approach

Consumers’ increased need to rationalise their spending, plus recent price changes from leading players, is fuelling yet more change in the SVOD market – driving smaller services to reconsider their pricing, audience segmentation, and distribution strategies.

Netflix continues to define consumers’ expectations

As first mover, Netflix has consistently provided a benchmark around quality and breadth of content for consumers and for its rivals. Its low cost, and high volume of content with no adverts approach challenged traditional high value pay-TV linear businesses and encouraged them to follow its lead in investing heavily in content to support D2C distribution, while accepting losses in the short term to build scale.

Now the market is changing again, with the likes of Netflix introducing an ad-tier and account sharing fees. Analytics firms are seeing early indicators that suggest that the account sharing fees are driving an increase in US subscriptions, a market where Netflix shrank by 1 million subscribers during 2022. Rivals need to consider the combined impact of these changes for their own ad revenues, and take-up of their services. The precarious nature of the market is of course exacerbated by the cost-of-living crisis, which is already seeing consumers rationalise their SVOD spend.

Maintaining the consumer relationship is still the goal for larger players

The economics of SVOD services has been based around their D2C nature – with control of the customer relationship providing an opportunity for larger margins. Even traditional content providers launching SVOD services tend to do so with the expectation that the additional investments in content and marketing will be offset by their ability to capture a larger share of consumer revenues than through their existing broadcast businesses. As we enter a new round of competition in the SVOD market, and the reaggregation of services, maintaining the consumer relationship (i.e. the role of aggregator) will be the key to success.

Whether or not this is possible will depend on the player. With services outside the top three fighting for subscribers, there is rationale in looking for partners to work with to ensure they retain sufficient scale to attract consumers. This could be creating a bundled offer whereby consumers pay one price and get two or more services – as Disney is doing in the US with Hulu, Disney+, and ESPN – or alternatively this could be done more formally through unifying services into a single proposition (i.e. as a joint venture), as Sky and Paramount have done for smaller European markets with SkyShowtime.

Smaller streamers should adapt their approach for new realities

Beyond attempting to build scale through partnerships, options available to streaming services vary, from tactical decisions to bigger shifts in strategy. Changing pricing structure is perhaps the most obvious lever to pull; services could introduce new ad-supported tiers and move the base cost for non-ad supported services to a higher premium. Such a move should be able to increase thin margins and allow for investment in content and marketing in order to remain competitive. Alternatively, they might attempt to maintain a competitive edge by retaining their existing price, though this would likely require severe cost control discipline to ensure profitability in the short term.

As consumers seek to rationalise their streaming subscriptions, whilst success is possible, those SVOD players trying to serve the same mass market audience as the likes of Amazon, Disney, Netflix and FTA broadcasters are entering a very crowded market. One route to more sustainable profitability may be through a renewed look at their target audience, with a renewed focus on super-serving one or two segments and carving out a valuable niche. 

Alternative distribution paths should also be considered. To date, the dominant distribution method for streaming services has been a D2C app-based approach on Smart TVs, Smartphones, PCs and some pay-TV advanced STBs. However, to reach more price constrained consumers, SVOD services should look at entering one or more bundling deals. This could be with mobile operators, pay-TV providers, or even tech lead Smart TV services. On the other hand, this may impact overall ARPU and it will be necessary to evaluate if this is an acceptable trade off.

For pay-TV aggregators, this is a much-needed change in approach by SVOD services and it could allow them to more effectively compete against Smart TV OS and ideally arrest any longer-term decline in subscribers, for example, both Canal+ and Sky are already a long way down this path. For newer entrants, including the tech platforms and some more ambitious mobile operators, there is an opportunity to bundle SVOD services more actively with their own platforms or subscription services to grow their market share, improve loyalty with key demographics, and increase their revenues.

But being part of a bundle presents long-term risks

There are several factors that SVOD services must consider if they are to ensure bundling partnerships do not only drive revenues in the short term, but also deliver long lasting value.

Reduce reliance on one partner

Having a bundle deal should not stop continued investment in D2C subscriber growth, albeit marketing costs should be reduced. Likewise, unless exclusivity is too appealing, working with a range of B2B partnerships will lower the exposure to one partner. Additionally, ensuring the consumer experience is not restricted to the pay-TV app, but can be carried over to mobile apps to help build a direct relationship with the consumer, is a must.

Become a high value partner

Whilst building a proposition that is wholly separate from partners reduces risk in one way, services must also look to deliver value to their partners in ways that seem counter intuitive. High levels of integration into UI elements will both improve the partner’s service and enable the SVOD service’s audience to be aware of its content and easily find it. Likewise, allowing for key content to be used within a partners’ marketing efforts, as long as service branding remains prominent, to maintain consumer recognition and perceived value should be considered.

Streaming services are in need of a strategic rethink; O&O can help

The shift to D2C and IP streaming is proving hard for both IP natives and broadcast converts. Medium and smaller SVOD players will need to show adaptability through this period.

Deals with aggregators – both old and new – should be considered, but to maximise success in negotiations, understanding the value a service is bringing is key. Our deprivation work can help in determining this valuation. For longer-term success some services may benefit from revisiting their business plans. O&O can assist in stress testing these and providing advice on making them more robust. We can also help with reassessing target audiences; O&O has a long history in helping its clients to determine this as part of go-to-market plans.