Screen time: Online video and the future of distribution

Telecom, Media & High Tech Extranet
Screen time: Online video
and the future of distribution
A publication of the Telecommunications,
Media, and Technology Practice
February 2014
Copyright © McKinsey & Company, Inc.
Screen time: Online video
and the future of distribution
By: Patrick Behar // Jonathan Dunn /// Brendan Gaffey /// Kevin Roche
RECALL No.24 – Living digital: Aligning business to life online
Screen time: Online video and the future of distribution
As television sets compete with tablets and linear viewing is partially replaced by online programming, players in the video content
value chain will need to rethink their revenue strategies.
Streaming video has become a familiar sight on
computer screens across the US. From employees in their office cubicles watching news on to commuters on the train catching
up on “The Bachelor” on their WatchABC mobile
phone apps, environments that were once videofree are now home to viewers.
Established players in the video value chain – production studios, TV networks, pay-TV distributors,
brand advertisers, and so forth – have been closely monitoring these behaviors from the start. Yet,
with the vast majority of their income linked to the
television (not the computer) and online viewing
not really encroaching on “TV time,” most of these
players have felt only marginal impact on their core
business, if any. But things are changing.
Internet video moves into traditional
TV territory
Despite online video’s growing presence, a divide
has existed between traditional television viewing – via satellite and cable in family rooms and
dens – and online viewing – Internet-based in
offices or “on the go.” Thanks to two technology
trends, this is changing, since the Internet makes
its way more solidly into spaces inside the home
that used to be the
The growing numdomain of traditional
ber of tablets and
OTT devices is
bringing online
video into the living
room and into direct
competition with
traditional television
The first gamechanging trend has
to do with tablets.
The use of these
devices is rising exponentially with no
sign of a slowdown.
At the beginning of 2010, tablets were all but nonexistent. In the United States, where the streaming video market has developed commercially the
most, over 30 percent of consumers now have
access to a tablet computer. This matters because a majority use their tablets to watch video
at home: usually on the couch with a traditional
TV in sight. No longer desk-bound, the computer
screen has moved into the living room and now
competes with the TV for eyeballs and attention.
And as display quality and user interfaces get
better and prices continue to decline, the tablet
will only become a more pervasive and formidable
competitor to the television screen.
Each year in the US, brand advertisers currently
spend upwards of USD 60 billion to reach television viewers. Even a small but steady eyeball shift
away from the TV screen could put those dollars
at risk, potentially depriving networks and distributors of revenue and disrupting the foundation of
the industry’s current value chain.
The second driver of online video in the living
room is the growing popularity of devices like AppleTV and the Xbox, which help bring diverse Internet video content right onto the living room TV
screen. This “over the top” (OTT) delivery – which
occurs when a provider sends its content over
the network of a different operator – creates new
kinds of competition for distribution rights and licensing. It also gives rise to new opportunities for
capturing consumers’ time and money. Industry
analysts are closely tracking the impact (for now,
quite small) on subscription levels, average pricing
levels, and premium options.
Since 2009, the share of people watching OTT
video on their televisions in the US has doubled –
38 percent in 2012 (Exhibit 1). Among OTT
In three years, the number of OTT users has doubled and viewing time has tripled
In three years, the number of OTT users has doubled and viewing time has tripled
OTT on television – users
Percent of respondents
OTT on television – volume
Average minutes per day, by access type
Any usage
Smart TV
Internet video box
PC connection
Gaming console
Note: Sums may not add up due to rounding
SOURCE: McKinsey iConsumer (US, 2012)
Exhibit 1
watchers, viewing volume tripled between 2009
and 2012 to an average of 28 minutes per day –
enough to fill a typical network time slot.
Seven types of video users
So who exactly are these OTT consumers watching almost 30 minutes a day of Internet video on
their television screens? The 38 percent of people
in the US who watch video this way represent a
very diverse group of viewers. McKinsey’s research
has identified seven distinct usage segments
(Exhibit 2), based on a wide range of attitudes and
viewing behaviors across platforms (e.g., TV, DVR,
and PC) (Exhibit 3) and content types (e.g., episodic TV versus movies versus sports versus news).
Broadly speaking, the population is about onethird “Conventionalists,” an older, low-tech group
that watches a high volume of traditional, linear TV
in the old-fashioned, conventional manner. Another are “Screen Avoiders,” a diverse demographic
that spends very little time watching video on any
device. The remaining third represents the media
viewing future and is spread across a number of
important marketing segments.
“Big Bundlers” spend the most money for their
pay-TV services and typically have expanded
channel packages or premium movie channels. While these users pay for OTT subscription
services like Netflix at about the same rate as the
population as a whole, they appear to treat them
like one more part of a big bundle and actually use
these services very lightly.
“Sports Nuts,” whose regular television viewing is
nearly 40 percent sports (over four times the rest
of the population), are mostly male users. They
are currently very light users of any OTT video,
since current sports offerings are limited in both
breadth and in quality.
“YouTubers” view more video on a computer
display than they do on a television screen. As
expected, these users skew significantly younger
and include many current students. However, their
satisfaction scores with their video services are on
par with other segments, raising questions as to
RECALL No.24 – Living digital: Aligning business to life online
Screen time: Online video and the future of distribution
OTT users fall into one of seven distinct segments that transcend traditional
OTT users fall into one of seven distinct segments that transcend traditional demographics
Viewing segmentation
Percent of online population
Focus segments
Movie Nighters
 Most OTT is movies
 2.5x Netflix subscription rate
Sports Nuts
 80% male
 Very little OTT
 More video on PC than TV
 Heavy youth/student skew
OTT Addicts
 Most content is OTT
 Large share of cord cutters
Big Bundlers
 Diverse content mix
 Top spenders
 Nearly all video from linear TV
 Average spend
 Skewed to much older
Screen Avoiders
 Minimal video usage on any platform
 Broad demographics cross-section
SOURCE: McKinsey iConsumer (US, 2012)
Exhibit 2
whether and how their video habits will evolve with
age and work experience.
“Movie Nighters” turn to OTT video almost entirely
for feature films. This segment appears to treat
services such as Netflix as a direct replacement for
video rentals or paid on-demand offerings rather
than as another TV network with recurring series.
As more and more of the commercial OTT video
services lean toward episodic, series-driven content, the outlook for this segment is less certain.
“OTT Addicts” use OTT video services extensively – more so than they do regular television. These
users view both movies and television series, often
“binging” or having “marathon” viewing sessions.
Though the number of users who have abandoned
their pay-TV services is quite small, it includes a
large share of these OTT Addicts.
The differences between these segments highlight
the challenges companies will face in successfully
developing and marketing products and services
to each of these groups, then retaining them as
paying customers.
Segment-driven distribution
Given the diversity of the OTT viewing population,
a one-size-fits-all approach to product design,
marketing, pricing, and loyalty is out of the question. A winning approach will be mindful of all segments – not just the biggest one or the one that
clocks the most OTT minutes – and cater to their
specific preferences and usage patterns.
Focus on current high-value customers, but don’t
ignore potential. Although OTT Addicts make up
only 8 percent of the population, they consume
almost 65 percent of all OTT video volume on TV.
The next generation of winning distributors will
need to satisfy this important segment but also
make sure they don’t lose sight of the rest of their
potential audience at the expense of this prominent group. Maintaining a strong share of the Big
Bundlers segment and their profit potential will be
essential to maximizing the OTT value chain.
Prioritize allocation of retention resources. Pay-TV
distributors could prioritize certain segments in
their retention programs and better understand the
The platform mix varies widely across viewing segments
The platform mix varies widely across viewing segments
Television screen viewing by segment
Amount of viewing time, 2012
PC video
On demand
Recorded media
Regular linear TV
OTT Addicts
Movie Nighters Big Bundlers
Screen Avoiders
Sports Nuts
SOURCE: McKinsey iConsumer (US, 2012)
Exhibit 3
service aspects that will help anchor high-value
customers beyond an initial promotion period.
What keeps one segment loyal might not be what
entices another to
Successful OTT
hold on to a particular service. Changes
players will use their
to pricing or the
knowledge of the
addition of program
diverse set of usgenres will certainly
have very different
ers to extract value,
effects across, for
build loyalty, and
example, the Sports
negotiate effectively
Nuts, OTT Addicts,
and Big Bundlers
with other players
segments, and
these segments represent varying value, so OTT
players should prioritize and tailor accordingly.
Leverage customer insights to enhance negotiations. Rights owners can use what they learn from
cross-platform audience segmentation to more
effectively negotiate with OTT providers. All players
across the value chain will need to look at all of
their key customer metrics – audience, ARPU,
retention, churn, customer satisfaction, service
channel usage, and so forth – through a customer
segment lens to understand the true opportunities and risks as their customers’ video behavior
continues to evolve.
With the rise of tablets and OTT devices, online
video is no longer relegated to spaces outside
of the home. As online video moves onto the
couch and into traditional television’s territory,
established players in the video value chain are
taking notice. Understanding the nuanced usage
behaviors of these online user segments is critical
for players throughout the video distribution value
chain. As the world of video viewing evolves – and
as questions about cord cutting and cord shaving continue to be raised by analysts and investors – companies will need to develop winning
strategies for producing, licensing, and distributing OTT video content. It is critical to act now to
build video services informed by these consumer
segments and usage patterns.
RECALL No.24 – Living digital: Aligning business to life online
Screen time: Online video and the future of distribution
Patrick Behar
is a Principal in McKinsey’s Paris office.
[email protected]
Jonathan Dunn
is a Principal in McKinsey’s
New York office.
[email protected]
Brendan Gaffey
is a Director in McKinsey’s Dallas office.
[email protected]
Kevin Roche
is a Knowledge Expert in McKinsey’s
San Francisco office.
[email protected]