THE DELTA PERSPECTIVE

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1 Insights on OTT video in emerging markets Michelle Gwee - Senior Business Analyst Vincent Stevens - Senior Principal June 2017

2 Insights on OTT video in emerging markets Authors: Michelle Gwee - Senior Business Analyst Vincent Stevens - Senior Principal (Credits to Lin Zheng for content inputs) Recognising the huge potential of OTT video in emerging markets, various players have made their forays in recent years most notably with Netflix s 2016 entry into markets such as India, Indonesia and Malaysia. While there are no clear signs of a winner yet, we have compiled the top four insights that traditional TV players, OTT players and telcos must bear in mind when catering to emerging markets. 2

3 Insight 1: TV screen to remain dominant with mobile as a secondary screen Although the prevalence of apps and smartphones has exploded in recent years, consumers are holding on to their time spent with a TV screen even in developed markets (See Exhibit 1). Time spent on mobile devices is observed to be accretive and often a secondary screen while watching TV (sometimes passively). Large screens like TV remain important for watching long-form video, while small screens (smartphones) are used to access short-form content. Unlike the rapid disruption of the internet on newspapers/print media, traditional TV appears more resilient to its (smartphone) OTT alternative. Main reasons are: 1. Restrictive mobile data pricing for long-form streaming 2. TV as a family entertainment medium in regions with large household sizes 3. TV penetration exceeding smartphone penetration 4. Smart TV and fixed penetration low and long TV replacement cycles As such, traditional TV is expected to continue to command a dominant share in ad spend, as well as remain a key lever in telcos quad-play strategies for the next few years. EXHIBIT 1: Time spent on TV remains constant, while mobile mediums increase 3

4 THE DELTA Insight 2: Local / regional content is king; Hollywood is queen Despite the popularity of global hits such as House of Cards, audiences still demand localised content that they can relate to (or even understand in the case of some emerging markets with low levels of English proficiency). This is the case especially in emerging markets which tend to have strong local cultures and a strong local/regional celebrity following. For instance, ~80% of video preference is for Bollywood and regional content in India (See Exhibit 2). Another example is Indonesia which has a large Bahasa-speaking Muslim population (~90%) and regional celebrity K-pop and Thai celebrity craze in recent years. In its video app rankings, eight out of ten top apps are focused on such local and regional content (See Exhibit 2). EXHIBIT 2: Clear preferences for local/regional content in India and Indonesia Recognising the importance of local content, HOOQ provides quality local content on top of its international movies through collaboration with leading production studios in Asia. Netflix has also been broadening its localised offering, for instance with Spanish-language Ingobernable and multi-national game show Ultimate Beastmaster. Looking ahead, it will be interesting to see how OTT players balance the mix between a globalised and localised offering. The more localised/ authentic the content is, the narrower its potential audience base 4

5 will likely be hence contradicting the very scale game OTT business model demand. OTT players must carefully model out different scenarios and place selective bets. Insight 3: Advertising models rank ahead of subscription models In emerging markets, SVOD models have yet to demonstrate long term financial sustainability due to: Poor affordability, after factoring in data cost. On top of monthly content fees, consumers must also pay for hefty mobile data charges given that most do not have fixed broadband at home. This often results in the total cost of consumption for OTT video being even higher than Pay TV (Exhibit 3A). High piracy rates. Due to insufficient copyright law enforcement as well as inadequate IP rights education, piracy is especially widespread in emerging markets. With consumers used to getting content for free, there is a long way to go before convincing consumers to pay for SVOD price plans. Predominant focus on international content (See Insight 2). EXHIBIT 3A: Total cost of consumption of OTT video (content + data) is often more than Pay TV 5

6 THE DELTA TV advertising is still the predominant revenue engine for media companies today and for the immediate future. For instance, the net TV ad market in Indonesia is around ~USD 1.5bn versus a subscription-based OTT video market of around ~USD 50 mn. Feedback from advertisers is that TV advertising is to stay since it is the only truly mass market medium with proven performance ratings. Additionally, free / ad-supported (AVOD) models such as YouTube have also thrived. It is projected that in emerging markets, advertising-fuelled video (TV, multichannel TV or AVOD) will be largest revenue pool will remain for the immediate future (Exhibit 3B). EXHIBIT 3B: Advertising video revenues far outweigh that from subscription Insight 4: Millennials are different from Gen X Generational differences between millennials and the older generation are crucial to understand especially in emerging markets, which often have youth-centric populations. 6 Millennials are undoubtedly the most tech-savvy group, with the highest smartphone and YouTube penetration rates (Exhibit 4). In terms of TV behaviour, they are the quickest to catch on alternative forms

7 of TV consumption (recorded, catch-up / on-demand, and online-streamed TV). As such, millennials are often naturally the first adopters of any OTT video proposition launched, making them a crucial segment to get right. In terms of content preferences, user-generated videos are particularly popular among millennials. Today, there are almost one billion Pro-AM and Amateur content creators including big YouTube stars like PewDiePie (who has more than 55 million followers), Raditya Dika and Kanan Gill as well as a long-tail of amateur content producers. OTT players can hence consider strengthening their content propositions with user-generated content which could potentially attract youths more effectively (and more affordably) than expensive professionally-produced content. EXHIBIT 4: Millennials have the highest smartphone and YouTube penetration, as well as prevalence of alternative TV watching methods In conclusion, OTT video in emerging markets requires a deep understanding of such rules of the game and consumer preferences as the first step towards capturing this dynamic and promising opportunity. 7

8 Michelle Gwee is a Senior Business Analyst with Delta Partners Management Consulting team. She has worked in several emerging markets across Asia and South America, within the Telecoms, Media and Digital (TMD) space. Prior to joining the firm, Michelle interned with the Joyful Frog Digital Incubator (JFDI.Asia), 3M and Deloitte Financial Advisory Services. Michelle graduated from the Singapore Management University with a double major in Accountancy and Marketing. Vincent Stevens is a Principal with over 10 years of telecom consulting experience and regional exposure in the Middles East, Africa and Asia. Vincent holds a Master in Engineering from Ghent University, Belgium, and is a Certified International Investment Analyst from the European Federation of Financial Analysts Societies. He is based in Singapore. If you would like to contact the author to further discuss this topic, you can to vs@deltapartnersgroup.com Delta Partners is the leading Advisory and Investment firm specialised in Telecoms, Media and Digital with offices in the Middle East, Africa, Europe, Asia, Latin America and the United States of America. We partner with global and regional telecom providers, digital players, other TMD clients and our investors to help them address their most challenging strategic issues. Our unique combination of Management Consulting, Corporate Finance 1 and Investments 2 creates unparalleled value for our clients, investors and business partners. For more information, please visit and follow us on 1 Delta Partners Corporate Finance Limited and 2 Delta Partners Capital Limited are members of the Delta Partners Group of companies and are authorised and regulated by the DFSA.