The shift to subscriptions is happening across all industries, but nowhere is it happening faster than in media and entertainment. Today’s consumers have new expectations and preferences on how they want to purchase and take advantage of media products and services.
While the industry has used subscriptions in various forms for a long time, it has traditionally relied on advertising for its core revenue. But, a few years ago many media companies began to experience the vagaries of a cyclical advertising market, and realized their viewers were going to be their most important revenue source.
In this changed media landscape, the growth of one strategy is outpacing the rest – a shift to digitally enabled, multiscreen OTT video subscriptions.
OTT, or over-the-top, refers to content that is delivered over the internet and does not require a traditional broadcast or cable video infrastructure to distribute it. For telecom, cable, media and content businesses, OTT video subscriptions represent a new business model built around ongoing customer relationships. It allows them to take advantage of modern IP-based technology to interact more directly and regularly with consumers – anywhere, anytime and on any device.
This shift to digital OTT video subscriptions is not easy for all media businesses to operationalize. How companies price, sell, bill, collect payments and account for digital subscription services can be significantly more complex than in the traditional media world. Internal stakeholders in Marketing, Operations, Finance, IT or General Management, must be prepared and aligned to support this transformation, which often requires knowledge and implementation of new digital processes.
Fortunately, global media companies like News Corp, HBO, Rogers Media, RTL, Time, The Financial Times, Fairfax Media and over a hundred other Zuora media clients have re-emerged with new growth strategies and launched next generation digital subscription models to monetize their content and services. Based on key insights gleaned from Zuora’s media customers, partners and the community of subscription businesses at large, this is our attempt to help telecom, cable, entertainment and media companies thrive with practical guidance.
“The shift towards OTT subscription business models is driving companies to build better ways to run their businesses. In this new world, how you price, sell, bill, collect payments and account for your digital media business is entirely different.” - Amy Konary, Research Vice President at IDC.
An OTT video subscription model is a win-win for both customers and media businesses – Customers benefit because subscription-based businesses are focused on customer success, earning trust and continually providing new offerings to meet subscribers’ modern digital requirements. Businesses win because as long as they continue to meet their customer’s needs, they will continue to earn more predictable recurring revenue.
In addition, businesses have direct insight into viewers’ usage patterns and can tailor offerings based on real usage metrics, much the same way Netflix serves up a personalized home page to each one of its viewers. This level of insight is unavailable in a strictly ad-supported environment.
Many telecom, cable, entertainment and companies have realized that an IP-centric, OTT video business model built on recurring revenues is a better way to run their business. In order to grow, companies must recognize and operate around four critical values:
As you prepare to transition to this new business model, several questions will crop up such as:
“What is the best way to launch a new OTT video service?”
“How do I price effectively?”
“How do I reduce the number of failed credit card transactions?”
“How do I reduce churn?”
“What are the metrics I need to understand and grow my OTT subscription-based business?”
“Do I build or buy a system to reliably support my business growth?”
Over the past eight years, Zuora has arrived at answers to these questions through our partnerships and conversations with subscription based media companies of all sizes and geographies. We distilled the inputs, analyzed common themes and a very clear and consistent picture began to emerge.
These key principles will serve as your foundational blueprint for building and scaling a subscription-based OTT video business:
With an OTT video subscription, pricing and packaging is your most valuable strategic tool. It’s directly tied to revenue growth through new customer acquisition, increasing the value of existing customers, and/or reducing customer churn. But as it turns out, subscription pricing and packaging can be quite complex.
You can price by number of users or capacity, family plans or group plans, concurrent streams or by device type. You can price by different time periods — daily, monthly, quarterly, annually. You can utilize promotional models like freemium, free trials or partner offers to hook in customers at no cost. You can discount for multi-year purchase to incentivize long-term use. You can offer special pricing based on related services that users may already be paying for.
It’s best to keep it simple – start with basic models and iterate over time as you learn from your customers. You will need flexible operational systems that support regular iterations and allow you to respond quickly to your customers changing preferences.
Signing up customers for subscriptions needs to be a seamless user experience that can be done across multiple channels such as the web, tablet, mobile, smart TV or through assisted sales. Traditional systems were not designed to support the elements of the IP-centric OTT video subscription. Complexities in the customer acquisition process often lead to slow time-to-market and to single-channel commerce.
OTT video subscription businesses need to establish fast, simple, streamlined and automated customer acquisition workflows across multiple channels.
In a traditional business, products and services are one-time purchases with mostly single invoices. Billing for a subscription business is more complex — businesses have to bill new customers at sale, prorate customers that sign up mid-month, bill existing customers at different times of the month, bill for usage, etc. Without the right billing engine, it can take weeks to generate bills, errors may lead to frustrated customers, and it will be a challenge to scale.
The new complexities in billing for OTT video subscriptions require businesses to not only ensure accuracy but also present it in an easy to understand manner to subscribers. Your billing system needs to be a programmable engine that takes all the various inputs, calculates accurately and delivers a clear bill that’s in sync with your company’s brand and image.
In the product world, payments are relatively simple: You either pay for it upfront, cash or credit, before being given the product, or companies will check credit history and open a line of credit, allowing the customer to pay on net-30 terms. That does not work for OTT video services with a recurring model.
Media services deal with many more collections and have more sophisticated processes. Automation is the key to optimizing cash collections. OTT video subscription businesses need to collect cash fast, maximize collections and minimize write-offs.
Developing deeper customer relationships is at the core of the OTT video subscription business model. As a company’s customer base gets bigger, this becomes one of the most important elements in the entire framework. Acquiring new subscribers is critical, but a vast majority of customer transactions consist of changes to existing subscriptions: renewals, suspensions, add-ons, upgrades, terminations, etc.
OTT video businesses need to provide customers with intuitive and comprehensive tools to manage their accounts over the entire subscription lifecycle. They must give subscribers the control they want or risk customer dissatisfaction, which in turn leads to churn and revenue loss. Businesses must also closely monitor customer usage and adoption to mitigate churn risk or identify upsell opportunities.
An OTT video subscription typically has a large number of order transactions and changes over its lifecycle. This creates a ripple effect on bookings, billings, cash and revenue. Traditional GLs alone cannot handle complex processes such as revenue recognition rules brought on by the subscription model. This challenge may not get addressed when a company initially launches its subscription offering. As a result, subscription finance processes end up being handled manually in spreadsheets.
Businesses still need a GL to generate financial statements. Your OTT video business needs to identify a better, more integrated way to streamline accounting-close processes and maintain compliance.
OTT video subscription businesses often need to make swift decisions that leverage key metrics from bookings through revenue recognition. They need to have unparalleled insight into customer value and the financial health of their business. Traditional GAAP reporting will not go away soon, yet subscription businesses must also focus on unique metrics like ARR, retention rate, recurring profit margin, and growth efficiency index to be successful.
Unfortunately, many businesses are flying blind since traditional financial systems are unable to provide these metrics. Identify a system that focuses on subscriptions and will help generate the metrics critical to your OTT video business.
OTT video subscriptions have infinite pricing options and companies typically start with a simple recurring pricing model when launching their subscription offering. But markets can evolve quickly and customers’ needs will likely change over time. Competitors may enter with a differentiated offering.
Your business will need to rapidly iterate on pricing models to maximize subscriber acquisition and increase market share. It’s critical that your pricing and packaging is flexible and dynamic.
Subscription businesses need an enterprise-grade system with services that are built on a secure, mission-critical and scalable infrastructure with reliable 7/24/365 operations and assured business continuity.
Telecom, Cable, Entertainment and Media companies especially need the infrastructure support to scale rapidly and have seamless integrations with commerce systems, payment gateways and other technology systems.
For more on implementing the OTT Video 2.0 strategy, download our Blueprint for a Subscriber-Centric OTT Video Business. Based on best practices that Zuora has arrived at working with leading media companies, the blueprint highlights the five key areas to consider when developing or transitioning to a subscriber-centric OTT Video 2.0 platform.