In light of the sharp increase in video content and online entertainment the audiovisual market has changed dramatically over the past years, posing new complex challenges for European policy makers and regulators. The traditional approach based on distinctive markets seems to be inadequate to encompass this new competitive environment.
The market trend
The growth of internet-based video is mainly driven by two factors. The first one is the broadband deployment that allows video to be smoothly transmitted and widely distributed.
The video, which represents already more than 50% of traffic on fixed networks in Western Europe, is expected to increase exponentially on mobile networks growing almost 20 times between 2011 and 2016, at an average annual rate of 80%.
The second factor is the increase in demand for quality services which provides a strong incentive in producing HD and Ultra HD (4K) contents, which are bandwidth hungry.
Consequently, the market scenario exhibits the following features: viewers ask for more and more video quality content, manufacturers want to distribute such content on as many platforms as possible and the rights holders are finally conscious of the opportunities of the broadband delivery, also for valuable contents, once they are properly rewarded.
Accordingly, new players enter the market and provide VOD services, implementing various business models: “advertising video on demand” (AVOD), which includes services such as Hulu or Dailymotion; “subscription video on demand” (SVOD), which includes services such as Netflix and Amazon Prime; “transactional video on demand” (TVOD), which has a “pay as you go” pricing scheme (iTunes); and Freemium VOD model, which allows all users to have a limited free tier, and pay service offerings on higher tiers (Hulu Plus).
All this will require more and more performing networks, able to deliver such contents on many platforms, and leaves open questions on issues related to traffic management and quality of services, which are a primary component of the current debate on net neutrality.
In the US, the first two video entertainment services occupy 50 % of the bandwidth in peak time, and Netflix alone exceeds 30%.
For this reason, in the US SVOD providers are expected to benefit even more from this migration. Such services have indeed gained in popularity at the expenses of pay TV, whose subscribers have declined over the past two years. Consumers are abandoning traditional pay TV subscriptions, subject to cord-cutting, while SVOD services try to impose themselves as premium channels, with original and exclusive content.
In Europe, the industry witnesses a more complex competitive structure. The global market leader Netflix is trying to extend its dominance launching services in 13 countries in the last 3 years. At the end of 2014 Netflix reached 14 million subscribers, with a higher penetration in UK and North of Europe, the countries where it initially started. Other international OTT services like Amazon Prime are also popular in some of the main EU countries (UK and Germany).
Telcos and broadcasters also invest in this market. Telcos, especially in countries where IPTV is more developed (France above all), have begun to extend their OTT VOD offer. For example, SFR (FR) launched a VOD service for mobile and tablet, Deutsch Telekom (DE) the multiscreen service EntertainToGo, KPN (NL) a multiscreen TV service on its own 4G network.
The broadcasters, especially after the economic crisis and the saturation of their core business, are now investing in this sector and pay-TV operators in particular have all their established VOD service, ready to compete with that of OTT players.
All this considered, in Western Europe, according to ITMedia Consulting last report “Video on Demand in Europe: 2015-2018“, total revenues coming from VOD services are expected to reach €3.58 billion at the end of 2018, from €2.14 billion estimated at the end of 2015, with an average annual growth of 22%.
Above all, the revenues of the SVOD model are the one expected to grow most: in 2018, SVOD will count more than 50% of the total VOD revenues, with an average annual growth of 34%, thanks also to the expected Netfilx’s expansion in the rest of Europe (e.g. in Italy and Spain from October 2015) and the increasing competition coming from payTv broadcasters.
As shown above, the audiovisual market has thus changed dramatically over the past years, posing new complex challenges for policy makers and authorities.
First of all, the trade-off between more competition or more concentration has to be taken into account. If, on the one hand, the existence of network effects, economies of scale and sunk costs (programming, rights) increases barriers to entry against “native” internet operators; on the other hand this seems no longer sufficient to ensure competitive advantages to former analogue incumbents.
This trade-off refers in particular to the ability of established industries, such as telcos and media, to keep their acquired positions based on natural monopolies or oligopolies.
The question here is whether the evolution itself driven by the internet economy generates a greater level of competition, providing the maximum efficiency of the market in terms of consumer welfare, or if it is only a transfer of revenues and market power from the former incumbents to the succeeding ones.
All suggest, however, that the traditional approach based on distinctive markets seems to be inadequate to encompass this new competitive environment.
As a consequence, the traditional antitrust market definition should be reviewed in the light of the great changes of the competitive framework, starting from the distinction between free TV and pay TV markets.
In this view, economic theory on two-sided markets may be useful to explain how platforms interact simultaneously with different groups of agents, exploiting the cross-group externalities and thereby correlating previously separated markets.
As of ex-ante interventions, the quest for balance between the highly regulated TV (and audiovisual) sector and the internet is highly debated. A possible solution might be to adopt symmetric regulation between the two (level playing field).
On the other hand this proposition is not easy to pursue. For example, must carry/ must offer obligations, pluralism requirements, quotas on audiovisual EU and national production and so on may be hard to extend to the new environment.
A “light touch” regulation instead might be more effective in order not to lose the high levels of innovation that has fostered competition in the internet economy, thereby enhancing consumer welfare.
In addition, the geographic market definition of audio visual services is typically at the national level. However such boundaries between nations might soon be questioned by the global nature of the Internet players.
In this view the market definition, which is at the moment different between regulation and competition regime (see figure 5), should hopefully be harmonized in order to be coherent and avoid conflicting decisions in the new sector.
In conclusion, in this changing environment, regulators and antitrust authorities are likely to play a substantial role. Their determination, through ex ante and ex post interventions, will have a great influence on the sector development and will significantly affect in Europe the speed of the transition process to the convergence.