• A large and growing number of consumers register unhappiness with their current TV options. Bain & Company’s annual survey of television viewers shows steadily rising levels of disenchantment. Every year, television loses more “promoters”—the number of people who say they would recommend their TV service provider to friends and family. In our latest survey of more than 1,400 television consumers, almost 20 percent of the respondents listed themselves as “detractors,” saying they planned to switch their TV service provider in the next 12 months. More than 20 percent expect to cancel their premium television subscription. The number of detractors is increasing year after year, while the number of promoters is steadily declining. Both detractors and promoters felt most dissatisfied with the price-value equation of their current TV offerings. Increasingly, more consumers believe that they just don’t get the value for the price they pay. Even if the dissatisfaction levels grow marginally every year, the steady increase in detractors can change viewer habits and preferences.
• Competitive new technologies are emerging that address the latent needs of consumers. Our research shows that if the capital investment plans of network providers hold, by 2014 potentially more than 80 percent of US households could gain access to digital networks with 25 mbps of download speeds. Also, by 2013 more than 60 percent of US households with broadband will connect their TV to the Internet. As consumers shift to switching seamlessly between a flat-screen TV, a laptop and a mobile device, they will not only consume more video but also discard old viewing habits. That creates the opportunity for viable new business models that can challenge and take on television’s hold on video consumption. Our analysis shows that the Net Promoter® Score1 predicts the propensity to “cut the cord”—the more consumers don’t recommend their TV offering to friends and family, the more likely they are to shift to other options such as over-the-top video.
• Viable disruptive models are emerging. Disrupters will come in all shapes and sizes. They include incumbents from existing industries (content programmers and content resellers); entrants from new industries (retailers like Wal-Mart and Best Buy, device manufacturers like LG and Samsung); and partnerships between the old and new. We estimate disrupters could generate operating margins greater than 20 percent. As we work with companies coping with change, we see winners pulling ahead in five areas by focusing on the question: how can we delight the digital customer?
The new battleground
Digital formats have caused disruption in the past, for example, to the music industry’s traditional business model. Napster started the decline in the music industry’s revenues from a peak of $14.6 billion in 1999. Then, the iTunes Music store opened online in 2003. Suddenly, consumers could access a vast library of music, a song at a time. It’s the video industry’s turn now. Digital formats will change the rules and reorder the leaderboard. We find incumbents and disrupters squaring off in the following key areas:
Access to the consumer:
Digital formats provide direct access to consumers for a host of new participants entering the video space. From Hulu.com and Amazon.com to Google TV, access to consumers no longer requires traditional “carriage deals” with a cable television network or a satellite television provider or a retailer like Wal-Mart to distribute video. For content providers and incumbent resellers, that holds particular importance as disruption works its way through the current subscriber base. Bain analysis shows that the potential annual loss in subscription revenues from just 1 percent of households results in the loss of tens of millions of dollars in profits.
Increasingly, consumers want an exceptional breadth in content and the ability to narrow down to only the content they really want. Many content resellers have begun building a robust library of content. For example, Amazon’s Video on Demand service, which consumers can access through devices like TiVo, offers more than 75,000 movies and TV shows. In addition, gaming consoles like the PS3 and Xbox also directly offer their own content library of video-on-demand programming for rent or purchase.
Business model flexibility:
As in music in digital video too more consumers want to pick and choose content and pay only for what they watch. In our survey, many consumers liked their existing subscription, but more than 30 percent showed interest in alternatives. The options varied on dimensions such as the type of content (variety versus family content), the programming model (ondemand versus linear channel lineup) and the mix of ad support versus subscription pay. For example, Hulu.com offers video content on demand that is fully ad-supported but is available to viewers with a delay after the content is first viewed on television.
While delivery reliability does matter, certain consumers value it less than others. Our research shows that cord-cutters appear willing to give up some quality on delivery reliability to get more tailored content options. A good analogy to learn from is the wired versus wireless phone transition. Initially, even though wireless offered markedly lower quality, it was good enough for most consumers to make the switch. In video, as better broadband gets piped into homes, quality will no longer represent a roadblock.
Consumers also want ease of use in acquiring, selecting, managing and consuming content across any device. Any company that facilitates that—content provider, device, broadband provider— gets ahead in the race. For incumbent content resellers, that presents an opportunity to invest in innovation that improves the user’s experience: helping consumers access more choice or offering them more intuitive ways to pick and choose content. Apple’s innovation around the iPod and iTunes completely changed the music market. A more recent innovation in video: Microsoft’s Kinect, which does away with the Xbox 360 controller. Users simply wave their hand or use voice commands to play games, download movies and stream music.
Choosing the right game plan
Given the new competitive battleground, each player in the video arena—incumbent content resellers, disrupters and content owners—will need to chart their own path to success, depending on their starting point. Success will depend on developing insights around the consumer and using those insights to develop, design and deliver the most compelling offer that best meets their needs. The more promoters a company creates, the more secure its business model, no matter what the disruptive forces. Consider the emerging playbook for leading players in the video ecosystem:
Incumbent content resellers:
They can best secure their future by focusing on delighting the customer and delivering the most compelling customer experience. To arrest the growing tide of detractors and increase their promoters they will need to understand customer needs and preferences at a deeper level. One: They can better tailor their services to the new wants of the customer. For example, they may offer a seamless link from DVR to mobile devices for on-the-go consumers or provide discounted prices in exchange for sharing of personal data for price-sensitive consumers. Two: They can consider the option of offering customers metered pricing for broadband. Three: They can rapidly ramp up the content offering, for example, through more video-on-demand programming, as that would help lock in loyalty. Four: Some leading content resellers can lean into the opportunity by owning the user interface: the easier they make it for consumers to navigate the content intuitively, the higher the likelihood of an improved NPS ranking.
Armed with innovative new technologies and new business models, disrupters can build promoters fastest by targeting those segments that are most dissatisfied with their current content options. One: To acquire customers, disrupters will need to build content libraries as fast as possible. Two: They must develop very flexible payment and consumption offers for the consumer and use them to target detractors unhappy with their multichannel TV services. Three: To retain customers and win their loyalty, disrupters will need to ensure that consumers consistently enjoy the experience of content selection—for example, through features akin to Pandora, which offers content recommendation. Four: Disrupters should fish where the fish are, targeting areas (geographic or otherwise) dense with detractors.
They have the most to gain or lose and must therefore carefully proceed after considering two key questions. One: Do the disruptive forces in the video ecosystem work in their favor or against them? Two: What is the upside opportunity versus the downside risk to their model as the video market evolves? Based on this, each content company will have to make a choice between different scenarios ranging from using disruption to their advantage and aggressively pushing for transformation, to proceeding with caution, or trying to maintain the status quo by tweaking their content portfolio. For example, Sony has relatively high potential and low risk; the company is currently a relatively small player in the TV profit pool, but it does touch it in many ways through Sony content and devices. However, established content players that generate tremendous returns from their current models will need to proceed very cautiously with modifying their approach. Either way, content owners will need to identify and strike the most advantageous content deals—both with incumbents and disrupters. The key point of caution: making sure the content isn’t given away for free.
Experience in the publishing and music industries shows that the shift to digital platforms doesn’t always yield successful business models for incumbents or disrupters. Perhaps the biggest challenge to players in the video ecosystem is not just surviving disruption, but also ensuring that in the disruptive phase they don’t hand over value to consumers—for a song. Those companies that succeed in resolving the dilemma to their advantage will find they can garner their fair share— and more—of video’s new profit pool across digital platforms. For such companies, anytime, anywhere video will translate into a happy ending: revenues all the time, and in all ways.