The Next Episode
By: Russell Shaul & Jonathan Miller
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
With the increasing popularity of Netflix and other SVOD services, it is clear that the dynamics of the Canadian media sector are in flux. In response to this, Rogers and Shaw collectively launched Shomi in November 2014, a streaming service for movies and television shows. In a similar fashion, Bell Media has launched its own streaming service, CraveTV. Telecommunications companies are seeing consumers leave their ecosystems through the cancellation of their cable services in favour of SVOD services. From 2011-2013, Rogers Communications experienced an exodus of 7% of its cable subscribers, or approximately 170,000 consumers. Additionally, traditional television viewing has stagnated, while the amount of television viewed on the Internet has almost doubled from 2011 to 2013. In order to keep consumers in their respective ecosystems, it’s evident that communications companies will need to design a service that better caters to the needs and changing consumption patterns of their current clientele. Shomi as a service should be used to access potential customers who are not yet in Rogers’s and Shaw’s ecosystem so they can incur future benefits, such as reduced customer acquisition cost and the ability to cross-sell higher margin products. If Shomi does not attempt to expand its potential customer base now, Rogers and Shaw are missing out on an ecosystem advantage.
Options for Shomi
In evaluating the options available to Shomi, Rogers and Shaw are faced with two mutually exclusive options. The first option is to protect their current cable business by making Shomi exclusively available to individuals with a cable box subscription. This option would have Shomi function similar to a PayTV service, in which it will only be available to current cable subscribers. Pursuing this option would serve to incentivize existing cable subscribers to continue their cable subscriptions. This is the option that Bell Media has pursued with CraveTV, in conjunction with its satellite offering.
The other option for Shomi is to launch as an open service available to users without cable subscriptions, similar to Netflix’s offering. This option would concede that changing consumer trends have mandated that consumers wishing to cancel their cable subscriptions will do so regardless of the availability of a streaming service on their cable box. Shomi would seek to keep users cancelling their cable subscription within the respective ecosystems of Rogers and Shaw.
There has been a lot of speculation regarding potential CRTC regulations for Shomi and CraveTV, as each are restricted to Bell, Rogers, or partnering TV providers. As of March 12th, the CRTC ruled that these services would now be able to avoid a requirement to contribute to Canadian content, if the service was offered to all Canadians over the internet. This was initiated to provide these services equal footing competitively against other unregulated services. Consumers argue that there is a strong chance these rulings will not influence the decision for the services to shift to an “over-the-top” model. Bell has stated that they will be sticking to their current model and Rogers should not follow suit.
The Objective of Shomi
In analyzing these two options available to Shomi, it is important to specify the objective that Rogers and Shaw are hoping to achieve through the launch of the service. Given the importance of the ecosystem to their business model, Shomi’s primary objective should be to attract consumers to said ecosystems. Therefore, Rogers and Shaw should accept the declining nature of the cable subscription business, and attempt to compensate for this loss of cable subscribers through the scaling of Shomi, providing Rogers with a better foothold in a future telecommunications industry dominated by wireless and internet. By removing as many barriers as possible to subscribing to Shomi, including owning a cable box, Rogers and Shaw can access a larger market to position itself for the future.
Sizing SVOD
Unique content is a critical success factor for SVOD providers, as content is a key driver of consumer choice with respect to specific streaming services. Sixty-three percent of consumers feel that original programming is a key determinant of whether or not they subscribe to a service. This also means that providing high-quality, exclusive content is critical to success in the long run. As of 2013, Netflix has achieved a penetration rate of 29% in Canada, comprising approximately 3.5 million households. Netflix has been successful in offering consumers a wide breadth of quality content at a low price, starting at $7.99/month. CraveTV has a $4 price point, below Netflix and Shomi.
Redesigning Shomi
In designing the Shomi offering, Rogers and Shaw will need to consider where current opportunities exist to provide consumers with additional value when compared to the offerings of current SVOD providers. Additionally, they will need to assess how they can better tailor their product to the consumption patterns of the end consumers. As previously mentioned, content quality is an important component of consumers’ decision-making criteria. Shomi should focus on acquiring as much recent U.S. content through licensing as possible in order to build up its content library, which is no longer limited by the percentage of Canadian content required. Canadians tend to rely on recommendations and reviews, and have a preference for American over Canadian produced content. Therefore, in order to legitimize Shomi as a capable SVOD provider, high-quality American content is required to attract and retain customers.
However, even if successful in the acquisition of high quality American produced content, Shomi would still be left with little differentiation between its offering and that of Netflix. These acquisitions would, in the best case, leave Shomi in a case of competitive parity with Netflix, as many streaming contracts are not mutually exclusive, and their content libraries will ultimately not differ significantly. Shomi is more likely to be constantly trying to catch up to Netflix’s contracts, network, and model. Imitating, rather than innovating, risks the entire Shomi network.
In order for Shomi to develop an offering that is competitively positioned against Netflix, it must assess the weaknesses in Netflix’s current SVOD offering and examine Rogers’ core competencies. Currently, Netflix dominates in SVOD services to a variety of devices. However, given Rogers and Shaw’s experience in the media industry with multiple divisions, both firms have a competency in many different forms of content. Between the two companies, they have the ability to offer radio, print, and news related content. By integrating these different content types into Shomi, they can make the offering more attractive to mobile users. This would transition Shomi’s strategy of offering an exclusively SVOD service into developing a holistic digital media platform.
Shomi Choices
The Shomi platform would ultimately serve as a hub for various media content that is easily accessible to users on a television, computer, or mobile device. The application would offer the user the option to access a specific type of content (video, print, radio, etc.), which would provide a unique interface for each, respectively.
What’s Next?
As part of its product portfolio, Rogers is a partner in the Next Issue venture, a licensing arrangement with hundreds of the world’s most popular magazines on the Next Issue application. Next Issue’s business model is similar to that of an SVOD provider, offering unlimited reading of its library of magazines for a monthly fee. According to a survey by MPA – The Association of Magazine Media, 23% of the engagement time by mobile and tablet users is spent reading magazines on their smartphones. By including the Next Issue content library with Shomi’s SVOD services, Rogers and Shaw will be able to make the service more attractive to mobile users who are likely to already read magazines on their devices. This could lead to cost saving for the customer, through the cancellation of now redundant magazine subscriptions, and would help Shomi to offer a diversified content portfolio to its SVOD competitors.
However, Rogers is only a partner in the Next Issue venture, meaning it would still be necessary for them to create an arrangement regarding the licensing of Next Issue content to Shomi. As of December 2014, Next Issue has attracted more than 150,000 subscribers, but remains unprofitable. Next Issue’s offering is currently priced at $9.99/month. By creating an all-inclusive digital media platform offering a Next Issue subscription, Shomi can upgrade the price of its premium service to $11.99/month. For customers who do not subscribe to Next Issue and simply enjoy the SVOD aspect of Shomi, they will be less resistant to a price increase since the difference in price is relatively small, placed at only three dollars above that of Next Issue, and four dollars above Netflix, for a comprehensive premium service.
Since licensing businesses are characterized by high fixed costs and low marginal costs per user acquisition, scale is therefore extremely important for Next Issue. As a premium service at the price of $11.99/person, if Shomi is able to penetrate 10% of the market, which is very modest compared to Netflix’s Canadian penetration, then 5% of Shomi revenues would have to be passed on to Next Issue in the event of 50% cannibalism of the current subscriber base. The required transferred Shomi revenues significantly decreases with market penetration. Due to the probability of negative profit margins from content acquisition in its early life and a goal to pull consumers to the ecosystem with a convenient one-stop shop for entertainment, Shomi should be willing to take the initial loss to bring people to the Rogers network.
Radio of Tomorrow
Additionally, both Rogers and Shaw have several radio stations in their portfolio from across the country, including CHFIFM and CITI-FM. Rogers and Shaw would be able to provide Shomi users with the ability to access all of these radio stations remotely through their mobile devices, thus making it easier to stream music, talk radio, and the news on their devices. Stations would be accessed using the same interface and compete only on content. Seventeen percent of cellphone owners have streamed radio through their mobile device, further showcasing that this concept would be well received by Shomi consumers, and help to expand the services offering to mobile users. This will be an ideal medium between video streaming and digital magazines; providing passive listening media for consumers unwilling or unable to access the former at a certain point in time, ensuring consistent involvement in the ecosystem.
A Hook
Finally, Rogers can also offer arguably its most valuable product of GameCentre LIVE on the Shomi platform to lure sports lovers into the Rogers ecosystem. The option to access its content would be available on the Shomi application, but only be available to customers who currently subscribe to the service. By exposing Shomi users the option of streaming over 1000 live sports games on a platform they already use, Rogers is increasing the chance that a Shomi user purchases GameCentre LIVE additionally, ultimately providing more value to the customer and keeping them within the Rogers network. Rogers and Shaw could offer other similar select options in the same manner, being wary to try not to overly up sell new customers for fear of early retreat.
Putting it Together
Rogers and Shaw should look to utilize their wide breadth of valuable content to pivot Shomi into a comprehensive digital media solution. Shomi will be able to provide content that traditional SVOD services will be unable to compete with, while still offering a high quality video streaming service. This will allow Shomi to dominate usage hours from its subscribers, even if they subscribe to multiple SVOD services. By taking advantage of their licensing arrangements from different content sources, Shomi can create a sustainable competitive advantage. The end result will be more users entering the Rogers and Shaw ecosystems, where they can look to cross-sell products, increase revenue, and lower customer acquisition cost in the future. The de-emphasis of a moribund cable business will allow Rogers and Shaw to unlock value both for the end user and their ecosystems.
