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Screen time: Online video

and the future of distribution

A publication of the Telecommunications,

Media, and Technology Practice

No.24RECALL

Telecom, Media & High Tech Extranet

February 2014

Copyright McKinsey & Company, Inc.

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By: Patrick Behar // Jonathan Dunn /// Brendan Gaffey /// Kevin Roche

Screen time: Online videoand the future of distribution04

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Streaming video has become a familiar sight on

computer screens across the US. From employ-

ees in their office cubicles watching news on

CNN.com to commuters on the train catching

up on The Bachelor on their WatchABC mobile

phone apps, environments that were once video-

free are now home to viewers.

Established players in the video value chain pro-

duction studios, TV networks, pay-TV distributors,

brand advertisers, and so forth have been close-

ly monitoring these behaviors from the start. Yet,

with the vast majority of their income linked to thetelevision (not the computer) and online viewing

not really encroaching on TV time, most of these

players have felt only marginal impact on their core

business, if any. But things are changing.

Internet video moves into traditionalTV territory

Despite online videos growing presence, a divide

has existed between traditional television view-

ing via satellite and cable in family rooms and

dens and online viewing Internet-based in

offices or on the go. Thanks to two technology

trends, this is changing, since the Internet makes

its way more solidly into spaces inside the home

that used to be the

domain of traditional

television.

The first game-

changing trend has

to do with tablets.The use of these

devices is rising ex-

ponentially with no

sign of a slowdown.

At the beginning of 2010, tablets were all but non-

existent. In the United States, where the stream-

ing video market has developed commercially the

most, over 30 percent of consumers now have

access to a tablet computer. This matters be-

cause a majority use their tablets to watch video

at home: usually on the couch with a traditional

TV in sight. No longer desk-bound, the computer

screen has moved into the living room and now

competes with the TV for eyeballs and attention.

And as display quality and user interfaces get

better and prices continue to decline, the tablet

will only become a more pervasive and formidablecompetitor to the television screen.

Each year in the US, brand advertisers currently

spend upwards of USD 60 billion to reach televi-

sion viewers. Even a small but steady eyeball shift

away from the TV screen could put those dollars

at risk, potentially depriving networks and distribu-

tors of revenue and disrupting the foundation of

the industrys current value chain.

The second driver of online video in the living

room is the growing popularity of devices like Ap-

pleTV and the Xbox, which help bring diverse In-

ternet video content right onto the living room TV

screen. This over the top (OTT) delivery which

occurs when a provider sends its content over

the network of a different operator creates new

kinds of competition for distribution rights and li-

censing. It also gives rise to new opportunities for

capturing consumers time and money. Industry

analysts are closely tracking the impact (for now,

quite small) on subscription levels, average pricing

levels, and premium options.

Since 2009, the share of people watching OTT

video on their televisions in the US has doubled

38 percent in 2012 (Exhibit 1). Among OTT

RECALL No.24 Living digital: Aligning business to life online

Screen time: Online video and the future of distribution

As television sets compete with tablets and linear viewing is par-

tially replaced by online programming, players in the video content

value chain will need to rethink their revenue strategies.

The growing num-

ber of tablets and

OTT devices is

bringing online

video into the livingroom and into direct

competition with

traditional television

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watchers, viewing volume tripled between 2009

and 2012 to an average of 28 minutes per day

enough to fill a typical network time slot.

Seven types of video users

So who exactly are these OTT consumers watch-

ing almost 30 minutes a day of Internet video on

their television screens? The 38 percent of people

in the US who watch video this way represent a

very diverse group of viewers. McKinseys research

has identified seven distinct usage segments

(Exhibit 2), based on a wide range of attitudes and

viewing behaviors across platforms (e.g., TV, DVR,

and PC) (Exhibit 3) and content types (e.g., episod-

ic TV versus movies versus sports versus news).

Broadly speaking, the population is about one-

third Conventionalists, an older, low-tech group

that watches a high volume of traditional, linear TVin the old-fashioned, conventional manner. Anoth-

er are Screen Avoiders, a diverse demographic

that spends very little time watching video on any

device. The remaining third represents the media

viewing future and is spread across a number of

important marketing segments.

Big Bundlers spend the most money for their

pay-TV services and typically have expanded

channel packages or premium movie chan-

nels. While these users pay for OTT subscription

services like Netflix at about the same rate as the

population as a whole, they appear to treat them

like one more part of a big bundle and actually use

these services very lightly.

Sports Nuts, whose regular television viewing is

nearly 40 percent sports (over four times the rest

of the population), are mostly male users. They

are currently very light users of any OTT video,

since current sports offerings are limited in both

breadth and in quality.

YouTubers view more video on a computer

display than they do on a television screen. Asexpected, these users skew significantly younger

and include many current students. However, their

satisfaction scores with their video services are on

par with other segments, raising questions as to

In three years, the number of OTT users has doubled and viewing time has tripled

Exhibit 1

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whether and how their video habits will evolve with

age and work experience.

Movie Nighters turn to OTT video almost entirely

for feature films. This segment appears to treat

services such as Netflix as a direct replacement for

video rentals or paid on-demand offerings rather

than as another TV network with recurring series.

As more and more of the commercial OTT video

services lean toward episodic, series-driven con-

tent, the outlook for this segment is less certain.

OTT Addicts use OTT video services extensive-

ly more so than they do regular television. These

users view both movies and television series, often

binging or having marathon viewing sessions.

Though the number of users who have abandoned

their pay-TV services is quite small, it includes a

large share of these OTT Addicts.

The differences between these segments highlightthe challenges companies will face in successfully

developing and marketing products and services

to each of these groups, then retaining them as

paying customers.

Segment-driven distribution

Given the diversity of the OTT viewing population,

a one-size-fits-all approach to product design,

marketing, pricing, and loyalty is out of the ques-

tion. A winning approach will be mindful of all seg-

ments not just the biggest one or the one that

clocks the most OTT minutes and cater to their

specific preferences and usage patterns.

Focus on current high-value customers, but dont

ignore potential.Although OTT Addicts make up

only 8 percent of the population, they consume

almost 65 percent of all OTT video volume on TV.

The next generation of winning distributors will

need to satisfy this important segment but also

make sure they dont lose sight of the rest of their

potential audience at the expense of this promi-

nent group. Maintaining a strong share of the Big

Bundlers segment and their profit potential will be

essential to maximizing the OTT value chain.

Prioritize allocation of retention resources. Pay-TV

distributors could prioritize certain segments in

their retention programs and better understand the

OTT users fall into one of seven distinct segments that transcend traditional

demographics

Exhibit 2

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service aspects that will help anchor high-value

customers beyond an initial promotion period.

What keeps one segment loyal might not be what

entices another to

hold on to a particu-

lar service. Changes

to pricing or the

addition of program

genres will certainly

have very different

effects across, for

example, the Sports

Nuts, OTT Addicts,

and Big Bundlers

segments, and

these segments represent varying value, so OTT

players should prioritize and tailor accordingly.

Leverage customer insights to enhance negotia-

tions. Rights owners can use what they learn from

cross-platform audience segmentation to moreeffectively negotiate with OTT providers. All players

across the value chain will need to look at all of

their key customer metrics audience, ARPU,

retention, churn, customer satisfaction, service

channel usage, and so forth through a customer

segment lens to understand the true opportuni-

ties and risks as their customers video behavior

continues to evolve.

With the rise of tablets and OTT devices, online

video is no longer relegated to spaces outside

of the home. As online video moves onto the

couch and into traditional televisions territory,

established players in the video value chain are

taking notice. Understanding the nuanced usage

behaviors of these online user segments is critical

for players throughout the video distribution value

chain. As the world of video viewing evolves and

as questions about cord cutting and cord shav-

ing continue to be raised by analysts and inves-

tors companies will need to develop winning

strategies for producing, licensing, and distribut-ing OTT video content. It is critical to act now to

build video services informed by these consumer

segments and usage patterns.

The platform mix varies widely across viewing segments

Exhibit 3

Successful OTT

players will use their

knowledge of the

diverse set of us-

ers to extract value,

build loyalty, and

negotiate effectively

with other players

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Kevin Roche

is a Knowledge Expert in McKinseys

San Francisco office.

[email protected]

Jonathan Dunn

is a Principal in McKinseys

New York office.

[email protected]

Brendan Gaffey

is a Director in McKinseys Dallas office.

[email protected]

Patrick Behar

is a Principal in McKinseys Paris office.

[email protected]

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