In many respects, the pay-TV industry is a global success story, exceeding a billion subscribers and US$200 billion in global industry revenue earlier this decade, and widely expected to approach US$250 billion in global industry revenues by 2020. However, the industry is going through a period of change and development, with service providers in many markets facing a perfect storm of slowing growth, intensifying competition and business model disruption, driven by improving broadband quality and availability, and by disruptive new entrants. Asia-Pacific – which accounts for half of global TV households, but less than 20% of pay-TV revenues – is being affected by these trends unevenly. The pace of economic and technological development has not been evenly distributed across the region, resulting in a divide between Advanced Asia and Emerging Asia. Advanced Asia has a more highly developed pay- TV industry and higher penetration of broadband; consequently, it is more strongly affected by business model disruption and disruptive new entrants. Overall, the region is highly fragmented, given strong differences in wealth, demographics, geography, penetration of broadband and pay-TV, and content preferences.
Innovation is key to remain competitive
There is a strong consensus among the pay-TV industry executives that innovation – the development of viable new offerings – is becoming more important and more urgent for the pay-TV industry in Asia-Pacific. Growing competition from existing and emerging players are perceived to be the main reason for service providers’ increased focus on innovation in both Advanced and Emerging Asia. Industry executives emphasise that in order to innovate successfully pay-TV The pay-TV industry is going through period of change and development service providers will have to ensure that innovation is at the top of their senior management’s agenda and that customer needs are the core focus of their innovation programmes.
The state of innovation today: Major pay-TV operators and telcos in advanced Asia are the most advanced
Given this urgency, what is the state of innovation across the pay-TV industry in Asia-Pacific today? Pay- TV service providers in Asia-Pacific are at varying stages of developing and diversifying their product portfolios, ranging from the most advanced portfolios, mainly offered by major pay-TV operators and telcos in Advanced Asia to the most basic service offerings, usually offered by small-scale local pay-TV operators and, in some cases, major pay-TV operators in Emerging Asia. Convergence between pay-TV and telco service providers has played an important role in Advanced Asia, with around 50% of pay-TV service providers offering telco services compared to only 17% in Emerging Asia. The majority of pay-TV service providers are evolving their core pay-TV offer and moving into OTT services by providing standalone OTT and TV Everywhere services. However, the level pay-TV proposition development varies significantly between Advanced and Emerging Asia:
In Advanced Asia, 97% of pay-TV service providers offer IP-connected set-top boxes compared to only 42% in Emerging Asia.
+ Next-generation set-top box functionalities are much more widely deployed in Advanced Asia – for example, third-party applications on set-top boxes are offered by 60% of pay-TV service providers compared to only 14% in Emerging Asia, while 4K is offered by almost 50% of service providers in Advanced Asia compared to only 6% in Emerging Asia.
+ TV Everywhere services are wide spread across the region, with 80% of pay-TV service providers in Advanced Asia offering these services compared to 53% in Emerging Asia.
+ Standalone OTT services are less widely available, with 30% of pay-TV service providers in Advanced Asia having launched these services compared to 22% in Emerging Asia. Diversification into adjacent business areas is less common. In most cases, it is pursued by well-funded innovation leaders in Advanced Asia that offer telco services:
+ 30% of pay-TV service providers in Advanced Asia offer products and services in adjacent business areas, such as business-to-business services (e.g. advanced advertising and technology white-labelling) and Internet of Things solutions, compared to only 3% in Emerging Asia.
+ Smart Home solutions are the most common type of adjacent business areas in, with 30% of service providers in Advanced Asia currently offering home security and 10% offering home automation services.
+ Business-to-business services are significantly less developed, with only a single service pay-TV service provider offering advanced advertising services across the region.
Looking ahead: OTT distribution, seamless user experience and smart home among investment priorities
What are the main innovation opportunities and priorities for the Asia-Pacific pay-TV industry?
With further convergence in the market, industry executives see substantial scope for innovation across the industry over the next five years. Although investment priorities will vary across the different markets, the key areas for innovation will be in pricing and packaging of content (particularly bundling video and data products), standalone OTT services, Smart Home solutions (particularly for telcos in Advanced Asia), and advanced set top box functionalities. Over the next five years, pay-TV service providers will focus predominantly on strengthening and differentiating their core pay-TV and OTT propositions. In Advanced Asia, the focus will be on ensuring a seamless video experience across all consumer devices and making content discovery as easy as possible, with IP-based, cloud and data technologies playing an important part in enabling these next generation features.
In Emerging Asia, pay-TV service providers are expected to focus on delivering value-added services such as HD video quality and PVR functionality – and slowly transition towards hybrid settop boxes. Multiscreen TV Everywhere services are seen as an integral element of the next-generation TV experience, while standalone OTT services should help pay-TV service providers differentiate their offerings and attract new customers outside their existing geographical footprints. Although the emergence of new technology and software solutions has made innovation easier and, in some cases, cheaper for pay-TV service providers, many innovation challenges still remain. Pay-TV executives in Asia- Pacific suggest that dependency on content suppliers, limited funding for innovation projects, limited business scale and risk avoidance are still important barriers to innovation across the industry.
As pressures to innovate continue to mount, pay-TV service providers will have to find new approaches to innovation in order to accelerate new product delivery and create more value for their customers. In many respects, the pay-TV industry is a global success story – experiencing a long period of sustained growth and development around the world, exceeding a billion subscribers and US$200 billion in global revenues earlier this decade, and widely expected to reach US$250 billion in global industry revenues by 2020.
Historically, pay-TV operators have pursued a distinctive business model, featuring end-to-end distribution platforms, consumer premises equipment, sophisticated conditional access systems, licensed third-party video content and monthly household-level subscriptions. Importantly, the industry has been distinctively collaborative, with pay-TV enterprises distributing content from a wide range of content providers and relying strongly upon a wide range of technology suppliers, many of whom have played a strong and central role in supporting the development and deployment of new offerings.
For many years, this model has worked well. However, the pay-TV industry is entering a period of change, with operators in many markets facing a perfect storm of slowing growth, intensifying competition and business model disruption. During the last ten years, broadband quality and availability have steadily improved in many markets, providing consumers with access to a much wider range of video content and allowing new OTT entrants to retail premium TV and film content directly to consumers. Major telcos have aggressively entered the pay-TV market, capitalising on the expanding capabilities of their networks to offer video content to their customers and leveraging their strong balance sheets to build or buy market share.
In some markets, OTT streaming devices are rapidly gaining traction, putting pressure on prices and introducing new functionalities such as voice control and casting. Meanwhile, leading content and channel providers, once exclusive providers to the pay-TV industry, have begun developing their own direct-to-consumer OTT businesses, while also capturing a greater share of the value created by the pay-TV industry as competition for the most attractive rights intensifies.
It is easy to over state the impact of these developments, which are unevenly distributed across different geographies and which are at a relatively early stage in many markets. Around the world, pay-TV remains robust and often highly profitable, and many pay-TV providers have responded to increased competition by expanding into telecoms markets, scaling up their investments in content, developing multi-screen and standalone OTT offerings, and offering adjacent services, such as advanced advertising and data analytics.
Moreover, many pay-TV providers have made significant headway in migrating to more advanced technology platforms, embracing the shift from hardware to software defined platforms and networks, deploying hybrid, heterogeneous networks, and adopting virtualised solutions and advanced data analytics. Seamless connectivity between devices, unified service creation and management, customer-centricity and agile development are increasingly common across the industry.
Despite these positive developments, many industry executives believe that the industry is entering a period of disruption. The traditional vertically integrated pay- TV business model is becoming more challenging, as consumers gain access to a far greater diversity of services. Asia-Pacific is home to around half of all TV households globally. However, due to generally lower levels of pay- TV penetration and lower revenues per subscriber than in other regions, it accounts for less than 20% of global pay-TV revenues. The region’s OTT video industry is developing rapidly, with around 100 million people subscribing to online video services in 2015. However, at less than a tenth of the pay-TV industry’s value in 2015, the OTT industry still has a long way to go.
Our analysis covers 12 territories in Asia-Pacific (major markets excluding China), accounting for about 240 million pay-TV households. The territories we analysed are very diverse in terms of wealth, demographics, geography, penetration of broadband and pay-TV, and content preferences. However, at a high level, they can be split into two broad categories:
1 Advanced Asia – wealthier and more technologically advanced economies (e.g. South Korea, Japan and Singapore).
2 Emerging Asia – less wealthy and technologically advanced economies (e.g. Thailand, Indonesia and Vietnam) that are often growing at a faster pace than those in Advanced Asia.
Other defining characteristics of the pay-TV market in Asia-Pacific include:
+ Poor quality fixed broadband in Emerging Asia – the roll-out of fixed broadband networks has been slow in the emerging markets due to economic and geographical constraints (e.g. in Indonesia and the Philippines).
+ Some of the markets in Emerging Asia are mobile-first – smartphones are the primary way for consumers to connect to the Internet in some emerging markets (e.g. Thailand, Indonesia, the Philippines) due to poor availability and quality of fixed broadband.
+ High variation in pay-TV distribution technology across markets – due to lack of network infrastructure satellite is the primary pay-TV distribution platform in Emerging Asia (used by around 60% service providers), while in Advanced Asia cable and IPTV platforms tend to dominate (used by 40% and 37% service providers, respectively)
. + High levels of content piracy – although data about the extent of content piracy is limited, there is a strong consensus among industry participants that both online and physical piracy is a big issue across the region, particularly among the less wealthy social classes.
+ Strong variation in content preferences – Asia-Pacific is characterised by very high levels of cultural and linguistic diversity, with many consumers having a strong preference for content in a local language. We have distinguished between four broad categories of pay-TV service provider in Asia- Pacific : major pay
TV operators, major telcos, smallscale pay-TV operators and small scale telcos. Major and small-scale pay- TV operators account for the majority of the market (48% and 34% respectively, as per the exhibit below). However, the overall picture is slightly distorted by the pay-TV market structure in India, where 10 major pay-TV operators (e.g. Dish TV, Tata Sky, VideoCon) and a long tail of small-scale cable operators, taken together, account for around 150 million pay-TV households. In other territories, telcos account for a slightly larger proportion of the pay-TV market. As growth becomes more challenging and competition intensifies, innovation is becoming even more important to the pay-TV industry, as providers look to drive future growth, remain competitive and satisfy the increasing expectations of customers and investors. The industry no longer enjoys a monopoly on the provision of premium film and TV services and industry shifts have made it increasingly challenging for pay-TV providers to be a one-stop shop for TV services. The imperative to innovate is becoming more intense. Innovation can be defined in various ways – and is often criticised as being too broad a term to be truly useful. It can encompass improvements to internal business processes, incremental extensions to existing products and services, and new business models.
Although all of these are important, our focus is narrower – on the creation of viable new customer facing products and services that can deliver value to the pay-TV enterprise. In this sense, innovations may be new to the market or industry, but they may also be evolutionary, based on previous advances and existing offerings. Innovation may involve invention, but successful innovation requires other elements too, such as anticipating, testing and exploring demand, the development of viable commercial propositions, and good partnering skills. There is a strong consensus among pay-TV industry executives that innovation is becoming more important and more urgent for the pay- TV industry.
The majority of industry executives in Asia Pacific believe that innovation should be one of their company’s top three priorities going forward. Growing competition from existing and emerging players is perceived to be the main reason for service providers’ increased focus on innovation in both advanced and emerging Asia:
- The incumbent pay-TV operators have enjoyed relatively low levels of competition and didn’t have to innovate, but now with all the new types of players entering the market, they can’t afford not to innovate.
- Innovation should be the top priority, if you want to survive you have to do it, you can kick the can a couple of years down the line, but the pay-TV industry has been doing that for a while, it’s not sustainable in the long-term.
