Why the networks can’t beat Netflix: speculations on the US OTT Services Market
| Published date | 09 January 2017 |
| DOI | https://doi.org/10.1108/DPRG-08-2016-0041 |
| Pages | 21-39 |
| Date | 09 January 2017 |
| Author | Eun-A Park |
| Subject Matter | Information & knowledge management,Information management & governance,Information policy |
Why the networks can’t beat Netflix:
speculations on the US OTT
Services Market
Eun-A Park
Eun-A Park is Affiliated
Faculty at the Institute for
Information Policy,
Pennsylvania State
University.
Abstract
Purpose –This paper aims to examine the dramatically different markets for over-the-top (OTT) TV
services that have emerged in the USA, and other leading markets such as Japan and Korea. Whereas
OTT TV services emerged as extensions of mainstream audiovisual providers in Korea and Japan,
further entrenching their dominance, they emerged in the USA as market-disrupting newcomers such
as Netflix. This paper seeks to explain why, putting forward four explanations: lower resistance to
disruptive innovation in public TV dominant systems; higher production costs; lower penetration of
broadband-capable devices; and more expensive mobile pricing plans.
Design/methodology/approach –This comparative case study examines news and trade press
articles, industry surveys and government reports to identify the reasons behind these contrasting
experiences of Japan, South Korea and the USA in the deployment of OTT TV services.
Findings –To explain why events in the three countries took such dramatically different paths, four
explanations were put forward, all complementing one another: lower resistance to disruptive innovation
in public TV dominant systems; higher audiovisual production costs in the USA making market-
disruptive moves to new technological platforms more risky; lower penetration of broadband-capable
devices reducing the profit potential of new OTT-based platforms; and more expensive mobile pricing
plans, making it harder for users to access OTT content.
Originality/value –The global trend in the growth of OTT TV services masks significant differences in
growth trends and business initiatives at the national level. This paper aims to examine and understand
why OTT TV services have shown such different patterns across countries.
Keywords OTT in Japan, OTT in Korea, OTT services market, The US OTT
Paper type Research paper
Introduction
Over-the-top (OTT) services have transformed all things in the media environment,
including televised entertainment and communication services. Consumers are increasing
their consumption of OTT TV services, driven by better affordability and a broader menu of
content offerings.
Seemingly paralleling the growth of OTT TV services, consumers’ cord cutting seems to
continue. In a survey of 1,200 Americans, 16 per cent of respondents replied that they
discontinued their cable television service last year, and about 20 per cent of users were
willing to stop their pay for TV service (PWC, 2016). Major OTT TV services have grown
subscriptions significantly, and OTT has become the catalyst for a “content arms race” to
capture new subscriptions (L.E.K., 2015). Traditional content providers have been
responding to this new phenomenon by adopting multiscreen strategies, monetizing
content beyond the subscription, providing online pay TV packages on a full OTT model,
developing cloud pay TV services accessed through an application on smart TV sets and
providing hybrid broadcast/broadband services (Song, 2013).
Received 31 August 2016
Revised 20 October 2016
Accepted 4 November 2016
DOI 10.1108/DPRG-08-2016-0041 VOL. 19 NO. 1 2017, pp. 21-39, © Emerald Publishing Limited, ISSN 2398-5038 DIGITAL POLICY, REGULATION AND GOVERNANCE PAGE 21
However, the global trend in the growth of OTT TV services masks significant differences
in growth trends and business initiatives at the national level. In the USA, OTT TV service
was popularized by third parties like Netflix, leading to an upheaval in the traditional
paradigms of pay TV markets. In response to the emergence of Netflix, TV broadcasters
later formed alternative screen strategies, such as Hulu⫹, but these have been lagging far
behind the market leader Netflix, and even a new entrant like Amazon (L.E.K, 2015). In
contrast to the USA, OTT TV services in South Korea have emerged as extensions of
established pay TV services, and part of their N-screen strategy, further entrenching their
market position. In particular, mobile IPTV services offered by the incumbent
telecommunication carriers have grown fast and found consumer acceptance on emerging
LTE networks. In Japan, NHK and major commercial broadcasters have developed OTT
services by themselves. A typical one is the Hybridcast service developed by NHK. Most
broadcasters in Japan think that TV sets are their exclusive terminals. Thus, television
application services on smartphone are mainly developed by TV broadcasters themselves.
Thus, the US experience is a direct contrast to that of Japan and Korea.
This paper aims to examine and understand why OTT TV services have shown such
different patterns across countries. Specifically, it asks why US mainstream audiovisual
providers have ceded the initiative in OTT TV services to upstarts like Netflix, compared to
market leaders in Japan and Korea who have much more eagerly innovated and adopted
OTT services. In other words, why did innovation occur at the center of the media systems
in Japan and South Korea further contributing to the entrenchment of the market leaders,
whereas it occurred at the margins of the US system threatening the status quo?
This comparative case study examines news and trade press articles, industry surveys and
government reports to identify the reasons behind these contrasting experiences of Japan,
South Korea and the USA in the deployment of OTT TV services. Focusing on these three
countries is justified, because these are currently three of the largest markets of OTT TV
services in the world. Their experiences may therefore be illustrative of potential futures in
other markets. In the paragraphs below, the current status of OTT TV services in Japan,
South Korea and the USA is first described. Then, four explanations are put forward for their
contrasting experiences: lower resistance to disruptive innovation in public TV-dominant
systems; higher production costs; lower penetration of broadband-capable devices; and
more expensive mobile pricing plans. The paper concludes with generalized observations
about the nature of business innovation at the technological frontier, and recommendations
for media firms.
Current status of OTT TV
Japan
In Japan, the most recent data suggest that only 15.7 per cent of all TV households watch
TV on air, while 7.8 per cent are watching TV through free satellite channels (KISDI, 2015).
Pay TV subscribers were 75 per cent of all TV households in 2014, but continue to increase
as the number of cable and IPTV subscribers keep growing. However, in Japan, television
is still the dominant platform for media consumption. People spend more than 3 hours day
watching television, and 99.8 per cent of households have TV at home (Shimura, 2014). The
largest content providers are TV networks in Japan, and the networks dominate the whole
audiovisual market. The largest public broadcasting service, NHK collects an annual
reception fee of approximately $136 from half of all households in the nation and provides
24/7 broadcasting including news, original dramas, major sports events, documentaries
and education-related programs. The reception fee addresses more than 40 per cent of the
whole broadcast market’s revenue. Also, terrestrial broadcasting networks receive 94.1 per
cent of television advertising revenue in 2014 (KISDI, 2015).
Diverse players including terrestrial TV networks, telecom companies, Web-based content
providers, internet portal companies and device manufacturers have entered into
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