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Internet Media & OTT Market Industry Presentation, Q3 2017

Analytical Team: Deana Myers, Thomas Adkins, Michail Chandakas, Ali Choukeir, Wade Holden,
Seth Shafer and Brian Bacon

Prepared by: Jaemi Ham

Prepared: October 2017

Top Internet Media and OTT themes
Internet Media
• Viewing on YouTube remains robust even as Walt Disney
Co.'s Maker Studios, Fullscreen, AwesomenessTV and
others have increasingly focused on original
programming and scaled back network operations.
• The recent focus at YouTube may largely be on its
YouTube Red and YouTube TV offerings, but the platform
has continued to see strong growth in free subs for top
channels.
• Facebook Inc. has a solid lead over Twitter Inc. for both
active monthly users and video viewers on its platform
with 51% of respondents viewing free online video on
Facebook.
• CNN led the group of cable nets in average monthly
desktop content minutes viewed as news networks made
up four of the top five entities by that metric in the second
quarter, according to comScore Inc.'s Video Metrix data
OTT
• Excluding China, Japan is one of the leading subscription
video-on-demand Asia Pacific markets in terms of total
revenues and paid subscribers.
• While the online video market had been successful in
attracting subscribers and revenue, it seems to have recently
shifted into a higher gear.
• Some live streaming video platforms, such as Twitch, have
been widely available for about a decade, but more recent
efforts from Facebook Inc., Twitter Inc. and Alphabet Inc.'s
YouTube have breathed additional life into the sector.
• VSPs have generally been positioned as cheaper, technically
advanced and commitment-free alternatives to traditional
multichannel packages.
• While multichannel video operators endure subscriber losses,
online video services are likely to continue to see growth both
as consumers move to different platforms and as others
supplement their TV viewing with OTT service.
• Netflix Inc. continued to perform strongly internationally in the
second quarter, with its combined international subscriber total
approaching its level of paid subs.
• Apple Inc. has an estimated budget of $1 billion to acquire and
produce original content over the next year
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Internet Media

Private & Confidential

 YouTube multi-channel networks continue to reach big OTT audiences

• Viewing on the YouTube

platform remains robust
even as Walt Disney
Co.'s Maker Studios,
Fullscreen,
AwesomenessTV and
others have increasingly
focused on original
programming and scaled
back network operations.
• Top networks reach well
over 100 million unique
U.S. video viewers on a
monthly basis.
• Most top MCNs saw a sequential jump in total video minutes viewed in the second quarter, with several
notable exceptions. Maker Studios' minutes viewed fell by 13.7% sequentially, with its decision to
dramatically scale back its network partners likely impacting results.

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 Top YouTube channels keep piling up subs, views

• The recent video efforts from Alphabet

Inc.'s YouTube may largely be focused on
its YouTube Red and YouTube TV
offerings, but the platform has continued to
see strong growth in free subs for top
channels
• Annual percentage growth in combined
subs across the top 100 YouTube channels
has consistently grown at about a 25% to
30% clip since early 2016 even as total
combined subs have vaulted well past the
1 billion level.
• Felix Kjellberg's "PewDiePie" channel moved past the 55 million sub
mark in the second quarter, with numerous other top channels in the
range of 20 million to 30 million subs.
• The T-Series channel — owned and operated by India-based music
label and film studio Super Cassettes Industries Ltd. — has had huge
growth in both subs and views in 2017.

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 OTT User Profile: Facebook and Twitter

• Facebook Inc. has a solid lead over Twitter Inc. for both active
monthly users and video viewers on its platform with 51% of
respondents viewing free online video on Facebook.
• We estimate Twitter to have fewer active monthly users than Snap
Inc.'s Snapchat, although respondents were more likely to view
free video on Twitter (17% vs 6%).
• Nearly all Twitter video viewers (89%) also view video on
Facebook, and are more likely to use Snapchat Discover at 21%
versus 10% for Facebook users.
• Most respondents who viewed video on Facebook (75%) and
Twitter (84%) also indicated use of paid subscription online video
services, with Netflix being the clear favorite.
• Social media video users tend to be
younger than total respondents,
especially Twitter video users, with
Gen Z/Millennials making up a 52%
share compared to an overall share
of 34%.

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State of US online video: Live streaming

• Some live streaming video platforms, such as Twitch, have been widely available for about a decade,
but more recent efforts from Facebook Inc., Twitter Inc. and Alphabet Inc.'s YouTube have breathed
additional life into the sector.
• Twitch looms large in the world of live streaming, with its roots tracing back to the launch of Justin.tv in
2007.
• Facebook amped up its video ambitions with the widespread launch of its Facebook Live streaming
functionality in April 2016, one of its most serious efforts to date.
• Twitter's purchase of Periscope in May 2015 signaled its entry into the live streaming sector, with the
company adding Periscope's live functionality to the main Twitter app in 2016.
• Live streaming has been available via the YouTube platform since 2010, but the launch of live mobile
streaming in early 2017 put it on par with Twitch, Facebook and Twitter.

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Over-the-top (OTT)

Private & Confidential

 Desktop leads mobile viewing for most cable nets in Q2

• CNN led the group of cable nets in average monthly

desktop content minutes viewed as news networks
made up four of the top five entities by that metric in
the second quarter, according to comScore Inc.'s Video
Metrix data.
• The impact of mobile viewing unsurprisingly differed by
network, with Bravo on the far end of the spectrum with
nearly 80% of overall (mobile + desktop) minutes
viewed attributable to mobile devices.
• MSNBC was the most desktop-heavy entity; Freeform
measured a great deal of connected TV ("OTT")
viewing; NBC Sports viewing was desktop-focused, but
it also had meaningful viewing that occurred on mobile
and connected TV devices.

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State of Japanese online video: Subscription

• Excluding China, Japan is one of the leading subscription

video-on-demand, or SVOD, markets in terms of total
revenues and paid subscribers.
• A majority of that resistance stems from Japanese
consumers still warming to the notion of paying for
content.
• We estimate a 98% penetration rate in Japan for FTA DTT
households in 2017, compared to a multichannel
penetration rate of 30%.
• According to our affordability index based on 2017 gross
national income per capita at purchasing power estimates,
our select services each garner an affordability of less than
0.25%.
• Original and exclusive content has become increasingly
necessary for SVOD services to gain traction. The same
can be said for the Japanese market.

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State of US online video: Subscription video on demand
• The number of U.S. online video services has grown over the past decade, and while the market had been
successful in attracting subscribers and revenue, it seems to have recently shifted into a higher gear.
• The largest services, including Netflix Inc., which recently surpassed 50 million paid subs in the U.S.;
Amazon.com Inc.'s Prime Video; and Hulu LLC's Hulu have pointedly been bulking up on content and have
contributed to heating up premium programming prices across the industry.
• Kagan, a media research group within S&P Global Market Intelligence, projects that the OTT subscription
video-on-demand space will have 135.4 million aggregate subscriptions by the end of 2017 and grow 21%
to 164.0 million by the end of 2021.
• OTT subscription video-on-demand services capitalize on low cost (typically $3.99-$9.99 a month),
commitment-free subscriptions and flexibility with device support and the ability to create a new type of
video bundle.

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State of US online video: Virtual service providers

• Kagan estimates that U.S. VSPs had about

1.8 million subscriptions at the end of 2016.
We project that the space will grow to
nearly 11 million subs in 2021.

• VSPs have generally been positioned as

cheaper, technically advanced and
commitment-free alternatives to traditional
multichannel packages.

• Hulu LLC's main VSP offering includes

access to its on-demand library, and for a
few dollars more, a user can remove
commercials from those titles.

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 Online video projections show subscription remains leader
• While multichannel video operators endure subscriber losses, online video services are likely to continue to
see growth both as consumers move to different platforms and as others supplement their TV viewing with
OTT service.
• Also possibly impacting the online video market are broadband-only homes, which Kagan, a media research
group within S&P Global Market Intelligence, forecasts to grow from 15.3 million at end-2016 to 28 million in
2021.
• The biggest success story in paid OTT thus far has been subscription video services. Estimates indicate that
subscription services delivered about $8.3 billion in revenues in 2016, with that figure expected to eclipse
$10 billion this year.
• EST is the second-largest paid online video category, with expected sales of $1.8 billion this year. Rental,
the smallest category, should take in $687 million in revenues this year, growing to $718 million in 2027.

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Netflix international subs set to surpass US as UK leads the way

• Netflix Inc. continued to perform strongly internationally in the second quarter,

with its combined international subscriber total approaching its level of paid
subs, with U.K., Canada and Australia as Netflix's three biggest international
markets (among countries for which we have estimates for the service).
• The international paid subs segment was nearly as large as its U.S. segment
at the end of the second quarter and for the first time showed it could surpass
domestic's size in the near future.
• The individual markets still pale in comparison to the U.S., which had more
than 50 million Netflix subs at the end of the second quarter.
• A significant area of growth for Netflix has been Latin America, not included in
the country breakdown. We estimate the region could account for more than
half of the 20.2 million subs in the "all other" category.

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Apple aims to compete with Netflix, Amazon on a $1B content budget

• Apple Inc. has a budget of $1 billion to acquire and produce

original content over the next year, The Wall Street
Journal reported Aug. 16. Sources with knowledge of the
company's plans told WSJ that it could create and acquire as
many as 10 TV shows.
• As a new entrant to the video space, Apple has an impressive
budget. It comes in above what Lions Gate Entertainment Corp.'s
Starz and CBS Corp.'s Showtime are set to spend on content in
2018.
• It is far below the $8.22 billion that we project Netflix Inc. will
spend. We also expect that Amazon.com Inc.'s and Hulu LLC's
content spends will outstrip $1 billion in 2018.
• The company's iTunes service previously dominated
transactional online sales, but there is much more competition for
those dollars in the current market.
• Depending on the average budget,
$1 billion may not buy a mammoth
amount of content. We have
modeled out what several different
average budgets could buy.

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Articles used in this deck
• YouTube multi-channel networks continue to reach big OTT audiences
https://www.snl.com/web/client?auth=inherit#news/article?id=42049726
• Top YouTube channels keep piling up subs, views
https://www.snl.com/web/client?auth=inherit#news/article?id=42030152
• OTT User Profile: Facebook and Twitter
https://www.snl.com/web/client?auth=inherit#news/article?id=41748685
• State of US online video: Live streaming
https://www.snl.com/web/client?auth=inherit#news/article?id=41691086
• Desktop leads mobile viewing for most cable nets in Q2
https://www.snl.com/web/client?auth=inherit#news/article?id=42041393
• State of Japanese online video: Subscription
https://www.snl.com/web/client?auth=inherit#news/article?id=41812286
• State of US online video: Subscription video on demand
https://www.snl.com/web/client?auth=inherit#news/article?id=41676012
• State of US online video: Virtual service providers
https://www.snl.com/web/client?auth=inherit#news/article?id=41368717
• Online video projections show subscription remains leader
https://www.snl.com/web/client?auth=inherit#news/article?id=41892637
• Netflix international subs set to surpass US as UK leads the way
https://www.snl.com/web/client?auth=inherit#news/article?id=42041374
• Apple aims to compete with Netflix, Amazon on a $1B content budget
https://www.snl.com/web/client?auth=inherit#news/article?id=41691543

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