The Continued Shift to Over-the-Top Streaming

Tuesday, December 19, 2017

Consumers continue to elect to stream more content—particularly ad-supported and long form—through TVs. Magna Global estimates $186 billion will be spent on traditional TV advertising in 2017, including $64 billion in the United States alone.  Using Nielsen data, adults over the age of 18 consumed six hours of video per day on average in fourth quarter 2016, up 4% year-over-year.

Moreover, 92% of those six hours, or over five hours, were viewed on TV sets, versus just 8% on PCs, smartphones, and tablets combined. Technology analyst Ralph Schackart explains, “While this calculation does not take account of video consumed in apps (such as on Facebook, Instagram, or Snapchat), even if we make the assumption that 25% of time spent in apps, on the web, and in social networks (which Nielsen categorizes separately from in-app activity) is watching video, the split in video viewing across TVs and all other screens is 80/20.” Regardless of his assumption made in this regard, the data reveals that the majority of video viewing for U.S. consumers is occurring on TV screens (even for those ages 18-34). Today, just 10% of viewing on TV screens is happening via TV-connected devices. The remaining 90% is still through traditional TV packages (live and/or time shifted).

Despite the dominant share, TV screens’ share of video viewing has been declining (from 87% of total video viewing as of third quarter 2014 to about 80% in fourth quarter 2016) for adults in the aggregate and for those specifically in the 18-34 age demographic (declining from 79% to 70%).

Schackart points out, “While we do not know what the ultimate screen share of video viewing the TV screen will be for U.S. consumers, we would expect the screen to still hold onto a clear majority of the population’s video consumption activity.”

Video viewing happening on TV screens has been shifting from traditional TV (including DVR) to TV-connected devices. This shift to TV-connected devices has been more pronounced among younger demographics, according to the Nielsen data. Twenty-seven percent of TV viewing in the fourth quarter for those 18-34 came from these devices, versus just 11% for all adults over the age of 18.

Moreover, the aggregate amount of time spent watching videos on all screens (including TVs, PCs, tablets, and smartphones) has increased, while time spent on TVs specifically has been relatively flat. Schackart believe this suggests that new screens, such as smartphones and tablets, are primarily complementing core TV viewing and not 100% replacing it.

Live TV’s share of total media consumption has declined, while overall time spent has been growing. While there has been a general decrease in the number of households subscribing to cable, the total viewing hours of long-form content remain high across all consumers. According to Ooyala, 98% of time spent watching video on connected TVs in first quarter 2017 was via long-form video, up from 83% in first quarter 2016.

The OTT video market is broken down into the following three categories:

  1. Subscription-video-on-demand:  Users consume as much content as they want at a flat rate per month. Examples include Netflix, HBO Now, Cheddar, NFL Sunday Ticket, and NBA League Pass. We also include the virtual MVPDs, such as DirecTV Now, SlingTV, Hulu Live, and YouTube TV, in this category.

  2. Transactional-video-on-demand: Similar to a pay-per-view in traditional broadcast language, consumers purchase content à la carte (for either permanent ownership or rental) and then stream. Examples include Amazon Instant Video, Google Play, Vudu, and iTunes.

  3. Advertising-video-on-demand: Channels with content that is free for consumers to view and monetized through advertisements. Examples include Twitch, YouTube, Facebook, Crackle, NewsON, and Pandora.

Digital TV Research estimates that global streaming video on demand (SVOD) revenues will continue to increase, from $890 million in 2010 to $11.1 billion in 2015 and to $25.7 billion in 2021. According to its estimates, this implies SVOD will contribute 40% of total OTT revenues in 2021, double the 20% recorded in 2010. Advertising video on demand (AVOD) is expected to make up the lion’s share of revenue by 2021. The forecast from Digital TV Research pegs AVOD revenues to grow more than $15.4 billion by 2021, compared with $14.6 billion in new revenue from SVOD.

Domestically, estimates from Strategy Analytics forecast the OTT market to grow from $19 billion in 2016 to around $32 billion. This $32 billion is around half the size of Digital TV Research’s estimated global OTT market of $65 billion. As with the global forecasts, the largest growth category in the domestic OTT market is AVOD, with an estimated CAGR from 2016 to 2021 of 13%.

According to Magna Global, traditional TV is a $460 billion market globally. This market is broken down among pay-TV and ad-supported. We use estimates from ABI to estimate that $275 billion of that $460 billion is pay-TV (cable/satellite subscriptions) and the remaining $185 billion is advertising; $64 billion of TV advertising comes from the United States alone.

In 2017, it is estimated that nearly 30 million smart TVs will be sold in the United States and Canada. Moreover, about 250 million TVs are sold annually worldwide. This shift could become more pronounced if TV purchasers expect to have streaming capabilities more integrated with their TV screen. According to Nielsen, 29% of households own a smart TV as of first quarter 2017. This is up from 23% in first quarter 2016. Moreover, 31% of households own a multimedia device (such as a Roku or Apple TV), up from 24% in first quarter 2016.

This report initiated coverage of Roku, Inc. For more information on this or other companies from Ralph Schackart’s coverage list, please contact your William Blair sales rep.

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