by Patrice Samuels, Research Analyst, and Brett Sappington, Director, Research, Parks Associates
Samuels, left, and Sappington, right
The large and growing online population in Western European countries creates a significant audience for digital media services, albeit with many challenges for providers wanting to reach this audience.
Several broadband markets throughout Western Europe show an increasing level of maturity. Germany has the largest fixed broadband market in Western Europe, with over 29 million subscribers. France has an approximate 70 percent household penetration, with an extremely competitive broadband market. Residential broadband penetration in the U.K. is approximately 78 percent, with over 20 million subscriptions in 2011.
Poor economic conditions in Italy have slowed growth in adoption of telecom services. The country had 14.4 million homes subscribed to fixed broadband services in 2011. On the other hand, Spain continues to steadily increase its broadband subscribers despite its economic challenges, and the nation's broadband penetration rates are in line with the average for the European Union.
As broadband penetration increases, consumers are turning to online sources to find interesting content. However, poor financial conditions are affecting consumer digital media decisions, particularly for online video. By a significant margin, European consumers are using free video sources more frequently than sources that require payment. The most popular pay-TV offering among surveyed consumers in Western European countries is "free on-demand programming." Piracy is also prevalent, especially in markets such as Spain and Italy. So, while use of online video is increasing, economic considerations make profitability for content services problematic.
While content viewing habits continue to evolve, patterns in consumer use show the importance of online video. In all Western European countries, live TV is the most popular type of content. Live sports, in particular, are a significant driver of consumer spending on pay-TV packages. Among French broadband households, 51 percent rank live TV broadcasts as the most popular choice for video. While online video has not matched the overall popularity of live TV broadcasts, roughly 30 percent of French broadband households have watched a full-length TV show or movie over the Internet in the past month. By comparison, 45 percent watched content on a DVD or Blu-ray. In most European markets, broadband users watch over five hours of PC video per week, and Parks Associates' research finds a substantial portion of the European broadband population (up to and over 30 percent in some countries) prefers watching video on PCs over TVs, likely due to the cost and availability of content online. In fact, European consumers who watch five or more hours of online video claim that their use of online video is "because it is free."
Consumption habits vary by country, though. When compared with the French market, the online activities of the British are focused less on communication and entertainment and more on obtaining information and completing transactions, in particular related to retail and travel. Germans are comparatively more satisfied with their current pay-TV services than consumers in other Western European countries. Only 17 percent of German broadband households with a pay-TV subscription express a likelihood to change their pay-TV subscription over the next 12 months, as compared to 22 percent in France, 22 percent in Italy and 26 percent in Spain.
Service providers in Western Europe see online video as an important area of expansion, and many are investing in delivery infrastructure to enable such services. However, operators need to ensure that their service plans and business models account for these current market realities. Free content and economic challenges combined with the high costs for premium content acquisition make profitable services difficult for pay-TV providers to deploy.
However, these same factors also make revenue generation difficult for over-the-top (OTT) online video services. A key advantage that a pay-TV provider possesses is its existing services. Operators' business models can leverage current services to experiment with free on-demand programming and advertising-based offerings. Providers should test these models and look for strategies that leverage free online video to promote premium services and their other products. Parks Associates research shows these free services can have an impact on video subscribers. For example, 44 percent of French video subscribers would switch to a provider who offered a free on-demand service.
Originally, many pay-TV providers feared "cord cutting," in which subscribers are inspired by availability of free OTT content to cancel their pay-TV subscriptions. Parks Associates' data show that cord-cutting activities are, in many ways, the result of temporary conditions. In the United States, 7 percent of current pay-TV subscribers recently returned to pay-TV services after briefly abandoning them. Cord-cutting consumers are motivated mainly by economic factors, not by the content itself, and the cord-cutting act, resorting to "free" OTT services for all video entertainment, is not a simple process. The customer experience is fragmented and filled with different sites, varying quality and questionable legality. Thus, the initial threat from cord cutting was not as dire as feared, and furthermore, this phenomenon has not impacted Europe as much as the United States. However, because European pay-TV providers are already struggling to move subscribers to premium service tiers, increased competition makes the challenge that much greater.
The recent growth of new OTT offerings throughout Europe has raised fears anew, suggesting that sales of premium services may become even more difficult. In addition to Netflix's entry into European markets, content provider HBO Nordic is testing new offerings so that viewers can get popular shows such as Game of Thrones without needing a pay-TV subscription. Operators with niche content, such as Telecom Serbia, have launched new, local-language services to reach segments of consumers outside of their home market.
By offering free or low-cost initial or basic services, Western European pay-TV providers are in a better position to marginalize any threat of cord cutting, retain their subscribers and attract new ones. Keeping these subscribers up-front simplifies the path to upgrade them later to premium services.
Patrice Samuels is a Research Analyst at Parks Associates, specializing in OTT video, pay TV and broadband services in major markets across North America and Western and Eastern Europe. Brett Sappington is the Director of Research at Parks Associates.