Connected TV (or IP-based TV) is changing the competitive environment, as TV players are increasingly competing for viewers with on-demand audiovisual services accessible through the Internet – that is, over-the-top (OTT) services – such as Netflix.
Competition authorities have traditionally defined three categories of relevant audiovisual retail markets respectively for free TV, pay TV and video on demand (VoD). Competition authorities' recent decisions have called into question whether subscription VoD (SVoD), which is mainly distributed OTT, and pay TV are really two separate markets. Given the users' increasing propensity and ability to substitute SVoD to traditional pay-TV services, the two markets' convergence is a question of time.
This article is part of our series on connected TV and the associated policy debate (as introduced in our previous article, Will policy and regulation of TV services in the EU start converging in the short-to-medium term?), as well as the consultation green paper from the European Commission (EC). The article reviews the decisions of competition authorities in Europe that have questioned traditional market definitions, as well as examining OTT market dynamics and their consequences in terms of competitive conditions and regulation in Europe.
The competition authorities' traditional definition of three retail markets is challenged
According to competition authorities, products or services are in the same competitive market if they are substitutes in the consumer's perspective.1 Competition authorities have distinguished free-to-air (FTA) TV from pay-TV linear services since the 1990s; in the last decade on-demand services have been considered in a separate market because of the different consumer experience with non-linear services. The recent competitive cases involving the two main traditional pay-TV groups in Europe have significantly blurred this last distinction.
The investigation concerning Canal+ in France, which was closed in July 2013, did not consider that pay-TV and VoD services were competing in the same market, but the French Competition Authority clearly stated that traditional pay-TV and SVoD could become substitutes "in the future".2
In the UK, the Competition Commission faced the same hesitation, but finally found "sufficient rivalry between the SVoD services of LOVEFiLM and Netflix and traditional pay-TV services to include them in the same retail market." This position went against its initial findings of 2011, and led the Competition Commission to reverse its conclusion about the regulation of acquisition of first subscription pay-TV window (FSPTW) films. This controversial change was made on the grounds that the emergence of LOVEFiLM and Netflix would provide consumers with alternative pay services for films, and that "there was realistic prospect that, in the future, an OTT pay-TV retailer would be able to outbid BSkyB for the FSPTW rights of at least one major studio".3
OTT dynamics will force regulators and policy makers to adapt the market definitions sooner than expected
The only reason for the different market definitions of the two authorities was their view of the future of SVoD. In the UK, Netflix was launched in January 2012, 8 months before the decision on BSkyB was taken, whereas in France Netflix will arrive only at the end of this year. Given the wording of the two decisions, there is no doubt that the regulators are already in the process of changing their market definitions, and the dynamics should encourage them to do so.
Traditional pay-TV players are adopting strategies consisting of rolling out services with the same features as SVoD players to address competition from their services. BSkyB's NOW TV OTT service was launched in July 2012, shortly after Netflix arrived in the UK, giving access to Sky Movies Pass, the price of which was reduced from its original price of GBP15.00 (EUR18.48) per month4 to GBP8.99 (EUR11.34) in October 2013 to be more competitive with Netflix's service, which costs GBP6.99 (EUR8.82). Canal+ made a similar move, in view of the forthcoming arrival of Netflix in France, with the launch in 2013 of a new OTT SVoD service Canalplay, which costs EUR9.99 per month.
If some services offered by traditional pay-TV and new SVoD players seem to converge in terms of packaging, convergence could be increasingly evident with regard to the content displayed. Amazon and Netflix announced that they would produce exclusive original content for their European markets, which suggests that they could offer premium content comparable to that of pay TV. In the USA, Netflix's chief content officer, Ted Sarandos, summed up the situation by saying that "The goal is to become HBO faster than HBO can become us."5
The consumer will be the final judge of whether pay-TV and SVoD services are competing for the same subscribers. The data is not yet clear cut because traditional pay TV players such as HBO and BSkyB have managed to keep their respective subscribers, despite Netflix's success in their markets. One could argue that SVoD services are more likely to complement than substitute traditional pay TV. Nevertheless, the recent reported pay-TV subscription decline in the USA, while SVoD services continue to attract more users, suggests that these services are very likely to be substitutive.6
All market players will need to understand the consequences of acknowledging the competition between pay TV and SVoD
For policy makers, regulators and market players themselves, it should have at least two direct effects.
- It will exacerbate the long-running debate about regulatory asymmetries in the EU, with the call of traditional TV players for a level-playing field with SVoD services located in other territories (see our previous article Connected TV: the future for European audiovisual content).
- It could also alleviate the regulation of dominant pay-TV operators in Europe (such as Canal+ and BSkyB), which are currently subject to such measures as 'wholesale-must-offer'. The outcome of the UK Competition Commission's appreciation of Netflix and LOVEFiLM competition in 2012 was the absence of regulation of BSkyB's acquisition of FSPTW films.
This could facilitate the expansion of dominant pay-TV operators in the short term.7 In the long term, the European pay-TV industry's consolidation could be an outcome of the new competition of US SVoD services if reaching a European scale becomes crucial for the acquisition of valuable content in Europe.
Source: Analysys Mason
