Video’s Demands

The explosion of video content and online entertainment services has brought in the new chapter of the digital economy. Various kinds of products and communication services are now delivered online through IP networks, and accessed and consumed over multiple platforms at different times and places, and on various devices. Thanks to this process long awaited media convergence is now becoming a reality. In this new framework, as in the past, the internet continues to play a major role, disrupting consolidated industries and creating a competitive arena for new ideas, players and business models.

“Light touch regulation might be more effective to not lose the high level of innovation that has fostered competition in the internet economy.”

market trends

The growth of internet-based video is mainly driven by two factors. The first is broadband deployment that allows video to be smoothly transmitted and widely distributed. Video, which already takes up more than 50% of traffic on fixed networks in Western Europe, is expected to increase exponentially on mobile networks, growing almost 20 times between 2011 and 2016, at an average annual rate of 80%.

The second factor is the increase in demand for high-quality services, which provides a strong incentive to produce HD and ultra-HD (4K) content, which are bandwidth hungry. Consequently, the market scenario exhibits the following features: viewers ask for more high-quality video content, manufacturers want to distribute such content on as many platforms as possible, and the rights holders are finally conscious of the opportunities of broadband delivery for valuable content, once they are properly rewarded.

Accordingly, new players are entering the market to provide video on demand (VOD) services, implementing various business models: advertising video on demand (AVOD), which includes services such as Hulu and Dailymotion; subscription video on demand (SVOD), which includes services such as Netflix and Amazon Prime; transactional video on demand (TVOD), which has a pay as you go pricing scheme (such as iTunes); and freemium VOD, which allows all users to have a limited free tier, but they pay a service fee on higher tiers (an example is Hulu Plus).

All this will require better performing networks, able to deliver such content on many platforms, and leaves open questions on traffic management and quality of services, which are primary components of the current debate on net neutrality.

In the US, the top two video entertainment services occupy 50% of bandwidth in peak time, and Netflix alone exceeds 30%. For this reason, SVOD providers in the US are expected to benefit even more from this migration. Such services have indeed gained in popularity at the expense of pay TV, whose subscribers have declined over the past two years. Consumers are abandoning traditional pay TV subscriptions, while SVOD services try to impose themselves as premium channels, with original and exclusive content.

In Europe, the industry has a more complex competitive structure. The global market leader, Netflix, is trying to extend its dominance by launching services in 13 countries in the past three years. At the end of 2014 it reached 14 million subscribers, with a higher penetration in the UK and Northern Europe, the countries where it started in the region. Other international over the top (OTT) services such as Amazon Prime are popular in the UK and Germany.

Telcos and broadcasters are also investing in this market. Telcos, especially in countries where IPTV is more developed (France above all), have begun to extend their OTT VOD offer. For example, SFR in France has launched a VOD service for mobile and tablet, Deutsch Telekom the multiscreen service, ‘Entertain to go’, and KPN a multiscreen TV service on its own 4G network in the Netherlands.

The broadcasters, especially after the economic crisis and the saturation of their core business, are now investing in this sector and pay TV operators in particular have all established VOD services, ready to compete with those of OTT players.

All this considered, in Western Europe, according to our projections, total revenues coming from VOD services are expected to reach e2.3 billion at the end of 2017, up from e940 million in 2014, with an average annual growth of 35%.

Above all, the revenues from the SVOD model are expected to grow most: in 2017, SVOD will increase from e558 million in 2014 to e1,195 in 2017, with an average annual growth of around 30%. SVOD will count for 60% of the total VOD revenue, thanks also to Netflix’s expected expansion in the rest of Europe (Italy and Spain first of all) and the increasing competition from pay TV broadcasters.

policy challenges

So there are new and complex challenges for policymakers and authorities. First, the trade-off between more competition or more concentration has to be taken into account. Does the existence of network effects, economies of scale and sunk costs (programming, rights) increase barriers to entry to ‘native’ internet operators – or is this no longer sufficient to give competitive advantages to former analogue incumbents? This trade-off in particular involves the ability of established industries, such as telcos and media, to keep their acquired positions based on natural monopolies or oligopolies. The question here is whether the evolution driven by the internet economy generates a greater level of competition, providing the maximum efficiency of the market in terms of consumer welfare, or if it is only a transfer of revenues and market power from the former incumbents to the succeeding ones.

But the evidence suggests that the traditional approach, based on distinctive markets, seems to be inadequate to encompass this new competitive environment. As a consequence, the traditional antitrust market definition should be reviewed in the light of the great changes of the competitive framework, starting from the distinction between free TV and pay TV markets. In this view, economic theory on two-sided markets may be useful to explain how platforms interact simultaneously with different groups of agents, exploiting the crossgroup externalities and thereby correlating previously separated markets.

For ex-ante interventions, the quest for balance between the highly regulated TV (and audiovisual) sector and the internet is highly debated. A possible solution might be to adopt symmetric regulation between the two (a level playing field). But this is not easy to pursue. For example, ‘must carry/must offer’ obligations, pluralism requirements, quotas on EU and national audiovisual production and so on may be hard to extend to the new environment.

Instead, light touch regulation might be more effective to not lose the high level of innovation that has fostered competition in the internet economy, thereby enhancing consumer welfare.

In addition, the geographic market definition of audiovisual services is typically at the national level. But such boundaries between nations might soon be questioned by the global nature of the internet players. In this view, the market definition, which is at the moment different between the regulation and competition regimes (see figure, right), should hopefully be harmonised to be coherent and to avoid conflicting decisions in the new sector.

In conclusion, in this changing environment, regulators and antitrust authorities are likely to play a substantial role. Their determination, through ex-ante and ex-post interventions, will have a great influence on sector development and will significantly affect the speed of the transition to convergence.