LOOKED AT THROUGH A Darwinian lens, the current Canadian television industry is at an evolutionary crossroads.
Changes in the ecosystem have resulted in a new species of TV-content provider: the non-Canadian, unregulated video sector, known as over-the-top (OTT). Among those migrating into the country are Netflix, Boxee, Apple and Google TV (oh, there are more – and more to come).
Like any addition to an environment, it’s changing the landscape, but the question is whether it’s a threat or will it be assimilated.
“We don’t see a big problem at this point. Look at OTT, whether Netflix or Apple TV or Google. That’s just part of consumer viewing service going forward,” says Michael Hennessy, senior vice-president regulatory and government affairs for Telus. “It’s only one way consumers are enjoying video.”
According to a Scotia Capital research report from January 2011, “the Canadian experience represents a unique perspective on the potential impacts for incumbent providers that make up the broadcast TV industry.” Canadian consumers have the highest consumption rate of online video content in the world, it says.
The latest edition of Solution Research Group’s Digital Life Canada quarterly confirms that Canadians like their Internet viewing. When they need to watch something on the big screen, 23% of them now connect their laptop or another computer to their main TVs. The majority (41%) watch movies and 25% watch TV shows. The average age of a laptop-TV viewer was 33.
This is on trend with Boxee. The company reports its main customers, males between the ages of 25 to 40 years, are either tech-savvy bachelors who use the computer for everything, or those in an older, family category looking to save on their monthly cable bills.
Canada is Boxee’s second biggest market outside the U.S., says Andrew Kippen, the vice-president of marketing. It’s available in 34 countries. Boxee finds online content (cleared for the country you’re in) and delivers it in a very user-friendly manner (pictured) either to the TV with a box just a bit bigger than a softball, or via a software download to your PC. So, if you’re looking for Modern Family, Boxee will deliver it from the Citytv web site, the company which owns the show’s rights in Canada.
Online video streaming service Netflix, the big fish in the OTT pond, has outperformed its expectations in Canada. It launched in the country last September and by the end of March already had 800,000 subscribers (and, Netflix movies and TV shows account for nearly 30% of home-use Internet traffic during peak evening hours, shows a recent Sandvine Inc. study). The company expects to reach a million Canadian customers by summer, far ahead of its forecast, says Steve Swasey, vice-president of corporate communications. “We’ll meet profitability in third quarter. We exceeded our growth plans.”
That’s tiny considering Canada’s population is over 34 million (and in our personalized media world, better to count individuals that households), but Netflix has enough of the industry concerned that representatives (originally thought to be over 30, but really just 13) from carriers to associations to producers formed the Over-the-Top Services Working Group. In April, the group sent a letter to the CRTC requesting an investigation of the issue. This month the CRTC is on a fact-finding mission to determine OTT’s impact on the industry.
“It’s a form of competition, no doubt about it,” says Hennessy. “For many it’s both a threat and an opportunity. Two things you have to take from that. One, consumers are sending strong signals that they like this. It’s a combination of being able to watch what you want, when you want and anywhere you want. It’s a mantra. You have to be able to deliver this to customers to be relevant. Two, people like the price. Consumers are tired of feeling that they’re hostage to cable packages. Cable has gone up significantly over past 10 years. These aren’t insurmountable challenges. This is good news if you’re an Internet provider.”
Cable has gone up 2% to 4% annually for a while. But Boxee isn’t a cable replacement, Kippen says. Live sports are blocked, there is no live local programming like news and many mainstream shows are delayed. “It’s a way to save on the cable bill and those who grew up with the Internet. We’re appealing to ‘cord never-getters’.”
Likewise, Netflix is also not a cable company, says Swasey, and shouldn’t be subjected to the same rules as Canadian broadcasting.
“At $7.99 per month, Netflix is complementary to cable,” he says. “You don’t have to displace anything—maybe a latte. Netflix doesn’t displace what traditional TV does. It doesn’t have a lot of current TV shows and new releases. It doesn’t offer news, weather or sports.”
In fact, its Canadian content library isn’t as extensive as the one in the U.S., and the Scotia Capital report says that Netflix Canada’s TV shows are on average two years older than those available in the U.S. Swasey notes that 10% of the company’s library is Canadian content.
But content isn’t the main issue. OTT might be more widespread if not for broadband data caps, says Dvai Ghose, managing director, head of research for Canaccord Genuity, in an email.
“Flat rate Internet pricing could be a major boost for Netflix, Apple TV etc…,” he says. “While Netflix in Canada is somewhat hindered by less content than in the U.S. due to digital rights management issues, in our view a major reason why Canadians have been more cautious about Netflix is due to Internet bandwidth caps. If such caps were removed, we could see an accelerated adoption of ‘over the top’ video in Canada.”
The result? “This in turn could negatively impact Canadian cable ARPU and subscriber counts and negatively impact Bell ExpressVu and Shaw Direct in the same way, without a positive offset on the Internet ARPU side. In our view Telus is much less exposed to such a threat because 1) unlike the cablecos and Bell it has very little video revenue to cannibalize and 2) its full two way IPTV solution lends itself to interoperability with Microsoft’s Xbox today and Apple TV, Google TV.”
Internet bandwidth caps are much higher in the U.S. than Canada. To deal with Canada’s lower limits, Netflix (which can be accessed, for example, via video game consoles like a Wii, pictured) changed its encoding so that consumers can watch 30 hours of Internet, using just 9 GB. At, say, three-hours per movie, that’s still 10 movies, at less than $1 per show, making it a better buy than pay-per-view. “You don’t get HD with that, though,” says Swasey. “That was a fast response to the market. This is a highly informed and aware public in Canada.”
At Boxee, how it’s encoded depends on where you get your content. The software is free (the box is $200 if you want it) but consumers pay for content and that’s its focus right now. “We’re looking at an iTunes-like platform that we want to introduce by the end of the year,” says Kippen.
Netflix is expanding to another market later this year, although Swasey won’t confirm where. A smart move, according to a recent report from SNL Kagan, a global leader in video economics research. It noted an increase in OTT service launches in Europe, driven by broadcaster-led catch-up services.
“Pay-TV incumbents are not standing idly by, with nearly all major cable, satellite and IPTV players exploring TV everywhere systems which bring OTT to the traditional services fold while satisfying consumer demands for multi-screen access to content on-demand,” the report states.
All around the world, people are connecting their laptops. France and the U.K. are leading Europe’s emerging OTT, but Germany is also high, while Spain offers OTT opportunities.
The TV landscape is changing everywhere. Whether that’s a threat depends on the industry’s willingness to adapt.
“Is the Internet really broadcasting or is it a video store in the sky?” Hennessy asks. “Bottom line, if consumers like it and see value, you can’t take it away. If you try to block the Internet, that’ll turn consumers against you and will lead to backlash.”
