The great rebundle is set against a backdrop that makes The Game of Thrones plot look simple. A wide range of device manufacturers, streaming platforms, content providers and incumbent pay-TV service providers are vying for success in the media industry. We have discrete live and VOD content environments, aggregators and D2C services, subscription and ad-supported services, and the ability to target and sell products/services in the consumer’s viewing space. Consumer power is higher than before due to the number of choices for consuming content.  And advertising, one of the biggest drivers of industry revenue, needs to be intelligently delivered across traditional linear and new OTT domains.

Over time the media industry has found economies of scale multiple times. This time, the drive towards economies of scale brings together a new combination of OTT and linear delivery, with new bundles and new technology challenges.

The Money Problem Caused By Fragmentation

Let’s first recap the dynamics of industry money flow caused by fragmentation and aggregation.

Bundling of channels has been an industry norm over multiple decades. Over time, Broadcast Networks have pursued scale through becoming multi-channel operators, while the Pay-TV service providers have bundled video with broadband and telephony services for an increased share of the consumer wallet. For a D2C business (i.e., the Pay-TV operator) the bundling of these multiple services into triple play or quad-play reduced churn significantly and has been a long-term staple business model in the Pay-TV market. This created the scale necessary to drive profitable subscription and advertising revenues.

But things always change in the quest to satisfy and win customers. D2C streaming by content providers has fragmented the existing industry, forcing a new competition to aggregate.

In the world of OTT, subscription services led the way with an “on-demand watch what you want without ads at a much lower monthly cost” model. Clearly this has a strong appeal to many consumers. But we are now seeing a growing number of ad-supported services emerging as linear audiences continue their migration to OTT and as consumers reach their budget limits.

But too much choice is not a good thing. For the advertisers, more choice for consumers means that the audience is fragmenting. There are more places to go for content, so there are more places for ads. The advertizing process become more complex and spend is diluted.  So advertisers struggle to get a cross-platform view of their ad performance and their audience. For example, connected TV platforms have become another separate advertising domain like Facebook and Google, rather than a standardized syndicated network like Linear television offers to advertisers.

It’s clear that fragmentation is not helpful for the advertisers working with the media industry, even if it suits consumers. Advertisers need economies of scale. Fragmentation works against this principle. The very large industry revenues driven by advertising, currently heading towards $1 trillion per year, will naturally shift the balance of power back towards the larger entities that offer this scale.

Bundle 1 – Ads & Subscriptions. The first bundle for D2C streamers is to combine subscription and ad-supported services. VOD has been the core of OTT for many years, with the major players like Netflix driving subscription models, while national broadcasters have continued to offer free-to-air ad-supported services with a smattering of premium ad-free subscription services.

But now ad-supported services represent a growing % of total streaming. Data from Xperi show that in the US market ad-supported services represented 20% of total subscriptions in Q4 2020 and grew to 24% in Q1 2021. This appears to be driven by even more live/linear content making it to OTT platforms plus the household budget issue. Considering that the highly concentrated US pay-TV market peaked at around 100 million customers in the 2010-12 period with a market share of 87% of US households, and the UK’s less concentrated pay-TV market served by Sky, BT and Virgin has a market share of 55% of the 27 million households, then it is likely that the ad-supported OTT figure could be at least 30%-45% of the total market. It could easily be higher if people only subscribe to a small set of apps but use many more. This market share figure is critical for the future of most broadcaster’s D2C streaming services which will generally be supported by advertising revenues.

Bundle 2 - Content & Merchandising. Bundling content and retail is another evolving approach, made more measurable with OTT services that allow the online shopper’s “click-through” measurement. This could be the second area of bundling that helps the D2C’s revenue line.

We know that most people are not shopping when they are watching TV. In general, it’s a lean-back entertainment experience instead of a lean-forward shopping trip. Direct Response Advertisers working with broadcast advertising have been the most proficient sellers, knowing how to make the phone ring through their advertising. But as a rule, the media industry has not yet cracked the code of retailing while delivering content. So, advertisers focus on creating awareness rather than directly selling products and services.

Which is all well and good, but revenue must be generated at some point to cover the cost. With OTT services, perhaps more than ever before in the media industry, there is a general opportunity to monetize the content by retailing. Content delivered OTT in the right screen type at least presents an opportunity to promote products and services alongside content. In this great rebundling it remains to be seen if the media industry with their advertising partners will be able to crack the retailing code.

Bundle 3 - Linear & OTT Advertising. Even though there are subscription models and other potential revenue generating models for media businesses, advertising will remain a top priority for the industry. And for advertisers themselves, broadcast and accompanying OTT services remain an attractive advertising medium.

Advertising on linear broadcast TV provides advertisers with fast reach and relatively high engagement, it scales quickly with the audience, and it is easy for advertisers to buy. Alternatively, OTT offers targeting capabilities and provides near real-time data plus effectiveness measures. Achieving scale for advertisers requires bringing both platforms together into a singular advertising campaign approach. Technology solutions provide the capability for intelligent cross-platform management of linear viewers with connected TV advertising, as shown in figure 1.

In the OTT space, advertising campaign managers are becoming more sophisticated at predicting their audience and their reach through ever-improving data sets and analysis techniques. Their efforts to optimize ad performance are based on balancing the effectiveness of targeting vs. the campaign reach. OTT campaign managers can now pinpoint what “John” wants, but they still need to figure out how many Johns there are in the market. Reaching the maximum number of Johns requires constant tuning of ad frequency, ad sequencing and ad timing.

At a technical level, the addressable advertising in OTT links up with much more sophisticated outcome measurement. Consumers send a lot of signals about how the ad influences their behaviour. Online journeys can be tracked and signals can be ingested into decision-making algorithms which are optimized in real-time to allocate ad spend to the best performing ads and channels. It is therefore helpful that dynamic ad insertion in OTT is no longer a technical challenge. It can be scaled from an ad delivery perspective with elastic cloud services and fast delivery of ads. That doesn’t mean it is perfect. Frequency Capping is still an issue that is not yet addressed. Over-frequencing in connected TV ads is common, but almost unheard of in linear TV.

Bundling Is Coming

Because fragmentation is the enemy of profitability, we know we will see more and more bundling until economies of scale are re-optimized. We will see bundling of live and on-demand service types, of pricing models, and of content and retailing. And in the back-end technologies we will see closer integration between Linear and OTT ad platforms – to buy and sell inventory and to deliver general and targeted ads in a highly measurable and actionable way.

But outside of the D2C Streamers control is how the various separate advertising domains will evolve. Will we see consolidation back into massively centralized advertising platforms? Will the device giants choose to cooperate to create easier ways for advertisers to reach scale? Will collaborations emerge between device manufacturers and network operators? Will we need regulators to step in?

The expert opinion is that power structures in the industry will ultimately dictate how the advertising environment evolves. Today every major player wants to be a powerful walled garden because this is in their commercial interest. Device manufacturers, media businesses, Pay-TV operators, streaming platform companies and cable/telco/mobile operators are vying for position. Today, each area is pushing forward alone because the whole OTT video space is growing. At some point coalitions will form as walled gardens reach their limits of scale.

Already, because of content platform fragmentation, we have new advertising platforms emerging to offer aggregation services to help advertisers work with this myriad of separate environments. Xperi is an example of a business offering such a platform. As Walt Horstman, VP Monetization at Xperi says, “At Xperi we are bundling our linear TV data with our Connected TV advertising offerings so that we can draw insights from across platforms and maximize audience reach for advertisers.”

While The Game of Thrones constantly reiterated that “Winter is coming”, in our Media industry we know that there is an ongoing tussle between Content and Distribution involving many would-be kings. So, who will win in this great rebundling battle? A basic rule is that the billing relationship is key, so the platforms like Apple, Amazon, and Roku, plus the network operators like Comcast, British Telecom and Vodafone would seem to have the upper hand in their respective regions. A big question is whether some of these companies want to be in the video business and support advertising in video services, or whether they will leave this space to the content companies.

Whichever way it goes there is a lot to play for as the annual advertising revenue of the global media industry heads towards the $1 trillion mark. Bundling is coming.