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Starz goes OTT: Leveraging the present for a stake in the future

As legacy OTT apps steadily gain subscribers, the choice fornetworks to go over the top seems less like an experiment and more like good business.

At least that is what Starzis hoping as it launchesan OTT app of its own. The company will deliver its programming via a digital subscriptionservice as well as through its traditional linear channels.

Granted, the OTT world is still largely in testing phases, especiallyfor network-based apps as opposed to aggregators like Netflix Inc. and HuluLLC.

"I think all of that frankly is partly driven by the desireto experiment with certain business models," S&P Global Market Intelligenceanalyst Tuna Amobi said in an interview. "We haven't detected any type of commonthread as to say, 'OK, here's the type of company that will go one direction orthe other,' because everyone is still trying to figure this out."

While it may be true that the actual models — bundled versusindependent apps, advertising versus subscription, hybrids of each — are still underdevelopment, Amobi and other analysts said that it is clear OTT services are goingto help define the future of content consumption. For a company like Starz, it isimportant to get in the game as soon as possible.

SNL Image
Hits series "Outlander"
Source: Starz

"It's going to grow. It becomes a question of who is goingto have the staying power when all these apps proliferate. It becomes a more consumer-drivenproposition," Amobi said.

One source said in an interview that HBO, one of the first traditional television networksto go over the top with its HBO NOW product, planned for a short-term OTT experiment.The network did not really expect the service to crack the 200,000-subscriber mark.Now, with an estimated subscriber base of 800,000 and growing, it seems HBO willkeep its popular OTT service in place.

Ooyala principal analyst Jim O'Neill was more confident on Starz'splans in the OTT television space, saying definitely that these apps are no longerin the experimental stages. It is clear now that digital streaming services willbe an important part of the future of video consumption, and while it is growingslowly, each network will likely implement its own OTT strategy to stay in stepwith the industry, the analyst said.

"The writing's on the wall. We're moving to this direct-to-consumermodel. It's not unreasonable to think that a total a-la-carte economy is out there,"O'Neill said.

He pointed to the 20 million broadband-only domestic householdsthat will likely stream content from one source or another, a market Starz CEO ChrisAlbrecht referred toin the news release for the new service.

The largest, most successful services are still SVOD aggregatorslike Netflix, Inc.and Hulu, of course. Even DISH NetworkCorp.'s Sling aggregated OTT platform is showing strong momentum. SNLKagan's estimates suggestthat the company added about 100,000 subscribers, or roughly 25%, to its subscriptionbase from the third quarter to the fourth quarter of 2015, and O'Neill said Slingis charting a very similar growth trajectory to Hulu, which now sits near the topof OTT services with almost 11 million estimated subscribers.

The reach of individual network apps is typically much smaller.HBO NOW, one of the most successful, still has fewer than 1 million subscribers,according to SNL Kagan estimates. But many in the network-app space are plenty bullishon the future. CBS Corp.,for example, intends tocollect $800 million in OTT revenue by 2020 for its Showtime and All Access platforms.

Bill Carroll, senior vice president and director of content strategyfor Katz Television Group, said that networks that have original content offeringsare especially considering a stand-alone app.

"Is it better to offer to a Hulu or a Netflix and monetizeit that way, or is it better to directly monetize it through your own over-the-topoffering? At this point I don't know that anyone could conclusively answer thatquestion, but if you don't experiment then you have no way of knowing," Carrollsaid.

For Starz, now is the time for an OTT launch, he argued. Thecompany's original-content offerings are gaining momentum, with shows such as "Outlander"growing viewership and seeing a strong critical response. Programmers with originalcontent will want to protect their brands, where a network's brand tends to getlost in a Netflix or Hulu service.

"You have the potential to drive viewers to the app whenyou have a breakthrough show, so I think that currently given that they have a breakthroughshow, that's when you want to take the opportunity," Carroll said. "Timingis everything."

O'Neill generally agreed. He said that the OTT apps availableare "enormously successful" relative to the nascent state of the industry,and that relative success will grow into strong revenue generators in the future.He compared the current system of smart TVs, mobile devices and clunky OTT interfacesto "playing with black-and-white TV sets." As the technology gets betterfor delivery, the business models become savvier, and the user interfaces becomemore streamlined, growth will accelerate. Already more than 60% of Americans subscribeto at least one SVOD service, he added.

"I don't think it's unreasonable to assume that 60% of themcould subscribe to an OTT service," he said.

So with traditional television viewership flattening out anddigital streaming services growing rapidly, if still from a small base, Starz islooking to air its newly minted content via a platform that offers more growth potential.

"You don't want to be left behind because investors aregoing to keep asking what you are waiting for," Amobi said. "So it's notsurprising Starz is jumping in, and there's going to be more to come."