Which Rules – Content or Distribution?

Recently, I found myself in a discussion with Andrej Kostresevic, the Founder and CEO of Nomads. Nomads is an multi-platform development company that specializes in building high-scale OTT applications for the media industry. (For example, they are behind Nomad TV, which is an OTT-as-a-service platform, which lets a media company launch their own “Netflix.”) Their website is www.nomads.co.

NOTE: Video delivered over the Internet is called “OTT,” or “Over-the-Top.” This contrasts with traditional distribution channels such as broadcast, cable or theatrical.

Andrej (pronounced “André”) is responsible for overseeing the company’s product development and overall strategy. He brings with him over 20 years of experience in the mobile and cloud engineering fields within startups and Fortune 500s, and 10 years of experience building high-scale media delivery applications.

The reason for our conversation was the announcement earlier last week, that Amazon was launching Video Direct, an extension of Amazon Prime Video. A key difference to Video Direct is that anyone can upload content, while still providing quality control. While Andrej’s perspective is more focused at distribution than content creation, our conversation touched on a number of interesting areas that I want to share with you.

Andrej is a huge fan of the unbundling trend that we are seeing in cable today because he feels that this allows for greater content experimentation on the part of content creators. Though, he feels that very soon, there will be too many channel choices, causing too much fragmentation within the audience because it will be too hard for consumers to find the content they want; which will lead back to new forms of bundling.

Also, the quantifiable monetization that the Internet makes available opens up distribution of video more than traditional studios or publishers. The key question about whether Amazon Video Direct will be successful depends upon where Amazon sets the bar for quality. For example, YouTube allows everything, which means that quality ranges from the atrocious to the fabulous. Andrej wonders whether Amazon feels it is competing with YouTube or Netflix?

I told him that I felt the big problem with audience fragmentation was that budgets were also collapsing along with the size of the audience. This was creating a race for the bottom to see who can create the cheapest programming, which is often not the same as quality programming. Lower costs create more channels, but that also increases marketing effort and costs to get people to discover that channel.

From my perspective, the perception that quality programming can be created and distributed virtually for “free,” is a disaster for creative producers because this reduces the incentive for clients to invest in quality programming or tools.

Let me share with you part of our email conversation.

Larry: Is mobile media the new mass audience?

Andrej: The Internet is the new mass audience – regardless of device. Mobile is seeing the most growth, but we are also seeing consumers using multiple screens – tablets, phones, computers, TVs, set-top boxes etc. – and developing an expectation that they should be able to seamlessly switch, mid-content, between any of them.

Larry: It is often said that “Content is king.” Why do you disagree with that?

Andrej: I agree, the disruption is happening at the distribution level, ownership of content is a way of future-proofing against that. Content is also the big differentiator, the user experience of most OTT platforms is becoming fairly standard. Investing millions into a better app has not shown to have the ROI of a similar investment into compelling content.

NOTE: I find his comment fascinating: “Content is a better investment than apps.”

Larry: Why should consumers even care if services are bundled or unbundled?

Andrej: Large-scale research shows that the main driver behind the consumer shift from broadcast to OTT is not a desire for unbundling, but a desire for access to content in a “what I want, when I want, where I want way”. So they generally don’t care about unbundling, per se, but the side-effects of the unbundling (a move to a VOD consumption model).

Consumers should also care about the disintermediation that is happening alongside of the unbundling – because it facilitates a proliferation of innovative and diverse content. It allows content producers to go directly to their audience, which increases profit margins, reduces costs, and creates faster feedback loops. The combination of these characteristics stimulates content experimentation, which is good for creators, and good for the fans.

Larry: Are we reaching saturation in OTT services? How many can the market sustain?

Andrej: The trend is still early and will continue, before it reverses. We don’t think the trend is sustainable, purely from a user experience standpoint – do I want Netflix or Hulu today? Where was that one video that I want to watch?

But that does not necessarily mean we will end up with a small number of OTT services. There are existing trends which combat the “too many services” problem, while facilitating the usefulness of those services: for example, the OEMs are creating aggregated content search and discovery on top of existing standalone OTT services.

Larry: What makes a successful OTT service (in other words, when you are designing a system, what goals do you keep in mind)?

Andrej: [We have several criteria:]

1. Content/Audience fit – compelling content with a passionate, engaged audience (with the cost/revenue models of OTT, a small passionate audience tends to be more profitable than large disengaged audience)
2. Ability to reach and grow the audience (content producers are increasingly becoming publishers, and there is a learning curve, even if the brand has gravitational pull)
3. Scalability/Reliability/User Experience – reliable delivery at scale, and apps that are intuitive and get out of the way of content
4. Infrastructure cost/revenue balancing – infrastructure costs of OTT are commoditized, and therefore in a race to the bottom. However, the costs are still in the same order of magnitude as the revenues. This means careful balancing is required – there are examples of failing due to being too successful. (If you want to see what that looks like – go to our OTT Costs/Revenues calculator, and plug in a low subscription fee, low number of ads per hour, and high number of users/video hours: http://nomads.co/ott-calc)

Larry: You described a world where unbundling will continue for a while, then reverse into a new configuration of delivery systems and bundles. How would you describe the media world, say, three years from now?

Andrej: Hard to predict accurately, but I can imagine a world where a few of the incumbent content publishers have successfully transformed into multi-platform pure-plays, there are a few large newcomers (a la Amazon), and there is a very large number of small and successful niche plays.

Larry: How should a content creator determine which OTT service to support?

Andrej: Most important factor is the behavior patters of their audience. Where do they congregate? What devices do they over-index on? For example, Xbox may be very important for a sports league, but irrelevant to a content offering targeting retirees.

SUMMARY

OTT may be a fascinating opportunity for content creators, but reduced production budgets, audience fragmentation requiring increasingly challenging marketing and lack of significant monetization make this opportunity a big challenge as well.

As always, let me know what you think.