Video Entertainment Market Outlook - FY17 - SVOD drives the growth of the market as Physical continues to decline - Venture Insights

 
Video Entertainment Market Outlook - FY17 - SVOD drives the growth of the market as Physical continues to decline - Venture Insights
Video Entertainment Market Outlook – FY17
SVOD drives the growth of the market as Physical continues to decline

August 2017
Video Entertainment Market Outlook - FY17 - SVOD drives the growth of the market as Physical continues to decline - Venture Insights
August 2017

Executive Summary
                                              Premium Pay-TV
•     The Australian Video                    •   We expect Premium Pay-TV revenues to start to decline through to 2022.
      Entertainment market is                 •   Subscriber numbers will drop as consumers move to the new Foxtel Now offering, which offers the same
      plateauing, as growth continues             premium content yet at a reduced price, or alternative SVOD services.
      for SVOD alongside losses for           •   There will also be an ongoing churn of subscribers due to less constraining contracts.
      traditional media                       •   ARPU will show a slight decrease due to increased unbundling of services on offer.
                                              SVOD
•     We anticipate the market to reach
                                              •  SVOD continues to grow rapidly, driving overall growth of the Video Market.
      A$5.3b by 2022
                                              •  Strong uptake of Netflix continues, with the service anticipated to reach over 4 million Australian
•     Pay-TV will begin to decline as            subscribers by 2020.
      cheaper similar offerings become        •  Competition in the market continues; The two standout players, Netflix and Stan, continue to dominate.
                                                 Presto struggled to compete and closed in January 2017. Amazon Prime video entered the market in
      available through VOD                      December 2016, but has been unable to gain much traction, although this is anticipated to grow,
                                                 especially if combined with Amazon Retail. The release and rebranding of Foxtel Now is set to increase
•     Streamed digital media (SVOD,              competition in the market as consumers can access premium Pay-TV content at a fraction of the price.
      TVOD and EST) are growing
      strongly at the expense of              TVOD and EST
      physical media (Blu-ray and             •  TVOD and EST continue to grow steadily, and are likely to gain traction as further piracy laws come into
                                                 effect.
      DVDs)
                                              •  TVOD/EST is increasingly becoming a preferred method to access video content which is not available
•     SVOD subscriptions are                     on SVOD.
      anticipated to reach over 6 million     Physical Media
      by 2020, driven predominantly by        •   The physical market continues to decline, with an anticipated CAGR of -10.6% through to 2022.
      Netflix                                 •   Physical rental has dropped significantly over the past few years and the market will be negligible by
                                                  2022.
•     Strong competition remains in the       •   Physical retail will decrease, although a market for this product will continue as consumers enjoy the
      xVOD market as we see new                   physical “ownership” of content.
      players entering and established        Cinema
      players exiting                         •   The lure of cinema will remain, however, consumers turn to cheaper xVOD offerings in favour of
                                                  expensive ticket prices.
•     Consumer spending per
                                              •   Cinema attendance is undergoing a long term decline. Although this has rebounded slightly in the past
      household on video is set to drop           two years future decline is anticipated to occur and could be significant if the time period from cinema
      to A$518 by 2022                            release to xVOD shortens.

1708_198 Video Entertainment Market Outlook                              2
Video Entertainment Market Outlook - FY17 - SVOD drives the growth of the market as Physical continues to decline - Venture Insights
August 2017
Summary
The overall Video Entertainment market remains steady, with slight declines
anticipated, as SVOD continues to grow
•     The Video Entertainment Market grew               Fig. 1: Video industry revenue by platform (A$m)
      slightly in FY16 to $5.4b, driven by
      ongoing uptake of SVOD, an increase in
                                                              A$m
      people attending the cinema and a
      steady Pay-TV subscriber base.                        6,000                                                                                                6%

•     We anticipate the market to remain
      steady at a CAGR of -0.7% between
      FY17-22 to reach a total of A$5.3b.                   5,000                                                                                                4%
•     The market was previously undergoing
      decline, driven predominantly by the
      physical media sub-sector, however, due               4,000                                                                                                2%
      to the strength and uptake of SVOD, the
      market has witnessed growth since FY15.
•     Looking ahead, the slight decline in the              3,000                                                                                                0%
      market will be driven by:
      –    Continued decline of Physical Media.
      –    Pay-TV losing subscribers to cheaper             2,000                                                                                                -2%
           SVOD services.
      –    A continued increase in xVOD
           revenue, to counter some of the                  1,000                                                                                                -4%
           losses in Physical and Pay-TV, as
           more consumers purchase one or
           more SVOD subscriptions and opt to
           watch new film releases via TVOD                    -                                                                                                 -6%
                                                                    2011A 2012A 2013A   2014A 2015A     2016F   2017F   2018F   2019F   2020F    2021F   2022F
           services.
      –    In the next five years we expect                                  Premium Pay TV                        SVOD/IPTV
           xVOD (SVOD, TVOD and EST)                                         TVOD/EST                              Physical Media
           services to grow to 26% of the
                                                                             Cinema                                Video market revenue growth
           overall market, up from 9% in 2016.
                                                                             Video spend per household growth

Source:   VENTURE INSIGHTS, COMPANY
Note:     CAGR refers to CAGR over the FY17-22 period

1708_198 Video Entertainment Market Outlook                                  3
August 2017

Summary
Digital media is growing strongly partially offsetting the loss from traditional media

 •   The Video Entertainment Market is expected to decline slightly                         Pay-TV: subscriber revenue to decrease at a -3.3%
                                                                                  • Premium Pay-
     at -0.7% CAGR through to 2022.                                                 CAGR dropping to A$2.3b in 2022 from A$2.7b in 2016.
 •   Average household spend on video is expected to drop slightly                  TVOD/EST revenue to grow at a 5.5% CAGR to reach
                                                                                  • TVOD/EST:
     (-2.4% CAGR), as cheaper SVOD services are adopted by a                        A$277m by 2022.
     wider proportion of the population, whilst more expensive Pay-                                       Blu-ray): revenue to contract at a
                                                                                  • Physical Media (DVD / Blu-
     TV subscriptions decline.                                                      -10.6% CAGR to reach A$447m by 2022 as consumers
 •   Expectations for individual platforms over the next five years                 migrate spending to xVOD.
     are:                                                                         • Cinema: revenue to decline at a -1.3% CAGR, to
       SVOD/IPTV revenue to grow at a 16.3% CAGR to reach
     − SVOD/IPTV:                                                                   A$1.2b by 2022, driven by a lower number of cinema
       A$1.1m by 2022; growth is still rapid though beginning to                    attendances per capita.
       moderate.

Fig. 2: Video industry revenue forecasts by platform

 Video market forecasts (A$m)                 2016A     2017F         2018F       2019F         2020F         2021F         2022F        CAGR (FY17–22)

 Premium Pay-TV                               2,747     2,730     2,681           2,598          2,504        2,406         2,312              -3.3%

 SVOD/IPTV                                     281       517           730         827            925         1,022         1,100              16.3%

 TVOD/EST                                      204       212           223         236             249         263           277               5.5%

 Physical Media                                880       781           694         618             553         497           447             -10.6%

 Cinema                                       1,259     1,265     1,252           1,237          1,222        1,205         1,186              -1.3%

 Total video market revenue                   5,372     5,506     5,580           5,516         5,453        5,392         5,323               -0.7%

 Video market revenue growth (%)              3.6%      2.5%          1.3%         -1.1%         -1.1%        -1.1%         -1.3%

Source:   VENTURE INSIGHTS, COMPANY
Note:     CAGR refers to CAGR over the FY17-22 period

1708_198 Video Entertainment Market Outlook                                   4
August 2017
Summary
Average household spend on Video Entertainment is declining as dollars are shifting
from physical to digital media
•   Average Australian household spend on               Fig 3: Household spending on video entertainment
    video is expected to drop at an expected
    -2.4% CAGR through to FY22; resulting in a                                    2006         2016        2022    Example of Supplier
    decrease in actual spend from A$584 in
    FY16 to A$518 in FY22. This will be driven
    by reduced Pay-TV subscribers and a shift                     TOTAL          A$580        A$584        A$518
    towards cheaper SVOD services.
•   Consumer spending is shifting from
    traditional physical media to digital video
    sources, most specifically SVOD.                              Pay-TV         A$197        A$297        A$225
•   This shift is evident across the entire video
    spectrum:
    − Following significant price cuts in 2014,                   SVOD            A$0          A$33        A$107
      Premium Pay-TV has now released a
      new SVOD service, offering unbundled
      Pay-TV content at a fraction of the
      overall subscription price in an attempt                    TVOD/EST        A$0          A$22        A$27
      to access more of the SVOD market.
    − Physical media (the retail and rental of
      DVDs and Blu-ray) are continuing to
      experience massive declines as                              Physical       A$272         A$95        A$44
      consumers transition their dollars to
      more convenient and cheaper xVOD
      services.
    − Cinema is starting to lose revenue to                       Cinema         A$111        A$136        A$115
      digital offerings, as consumers opt to
      wait for new releases to reach VOD in
      favour of paying increasing cinema
      prices.
Source:   Company Website, VENTURE INSIGHTS, COMPANY
Note:     CAGR refers to CAGR over the FY17-22 period
1708_198 Video Entertainment Market Outlook                                  5
August 2017
   Summary
   The total Subscription TV market is growing, streaming revenue will overtake physical
   by FY2018
   •    The total Subscription TV market (which we define as Pay-TV + SVOD + TVOD) is growing, with the majority of growth driven by the SVOD market.
   •    To date, Pay-TV has not felt significant pressure from xVOD services, as consumers have opted to purchase xVOD subscriptions in addition to Pay-
        TV, with the impact of xVOD instead being felt by the physical media sub-sector, as consumers opt towards the more convenient and cheaper
        option (VOD).
   •    Going forward, and with the additional SVOD offering of Foxtel Now, Venture Insights anticipate SVOD to largely impact the revenue of Pay-TV as
        consumers opt for one or multiple SVOD subscriptions in favour of more expensive and constricting Pay-TV contracts.
   •    SVOD revenue is anticipated to grow substantially through to 2022, and will surpass that of Physical media in 2018.
   •    The rise of xVOD services falls hand in hand with the continued penetration of smart devices and improvements in internet services which
        collectively provide improved access to OTT offerings.
   Fig 4: Total Subscription TV market: xVOD vs. Pay-TV Revenue (A$m)                                Fig 5: Streaming Media vs. Physical Media Revenue (A$m) and YoY
   and YoY Growth                                                                                    Growth
4,000                                                                                    60%       2,000                                                                              60%
                                                                       TVOD
                                                                                                   1,800

                                                                                                                                                                   Physical
                                                                                                                                                                    Media
3,500                                                                                                                                                                                 50%
                                                                                         50%
                                                                       SVOD                        1,600
3,000                                                                                                                                                                                 40%
                                                                                                   1,400
                                                                                         40%
2,500                                                                                                                                                              TVOD               30%
                                                                                                   1,200
                                                                           Premium

2,000                                                                                    30%       1,000                                                                              20%
                                                                            Pay-TV

                                                                                                    800
1,500                                                                                                                                                                                 10%
                                                                                         20%
                                                                                                    600
1,000                                                                                                                                                              SVOD               0%
                                                                                                    400
                                                                                         10%
 500                                                                                                                                                                                  -10%
                                                                                                    200

   -                                                                                     0%           -                                                                               -20%
          2016A       2017F        2018F         2019F   2020F     2021F         2022F                     2016A    2017F     2018F     2019F   2020F      2021F              2022F

                                   SVOD & TVOD percentage growth                                            SVOD & TVOD percentage growth       Physical Media percentage growth
   Source:   VENTURE INSIGHTS, COMPANY
   Note:     CAGR refers to CAGR over the FY17-22 period

   1708_198 Video Entertainment Market Outlook                                                 6
August 2017

    Premium Pay-TV
    Revenues were up slightly in 2016, but we expect them to fall steadily from 2017
•    Following price cuts in late 2014, subscriber numbers increased for Foxtel, driving revenue growth across 2015 and 2016.
•    However, in 2016 and 2017 Foxtel experienced a slight loss in subscribers, dropping to 2.8m, which is potentially a knock-on effect of the company losing
     their EPL sporting rights to Optus, who in turn witnessed growth in their subscribers during this time, although not sufficient to outweigh the loss of Foxtel.
•    In a bid to recapture subscribers, Foxtel has undertaken multiple investment initiatives, with the most recent being a merger with Fox Sports, whereby
     NewsCorp will hold 65% of the merged entity with Telstra holding 35%. However, as of yet, these initiatives have only resulted in retaining current
     subscriber levels, rather than attracting more. However, the outcome of the newest initiative is yet to be seen.
•    As subscriber numbers have remained flat, revenue for both Foxtel and Optus TV has been through the bundling of their TV services with internet
     providers. Telstra offers Foxtel via their T-Box and Optus offers Fetch. These bundled services are anticipated to witness considerable growth going
     forward as the penetration of high speed internet improves.
•    Additionally, in order to access the lower price band SVOD market, Foxtel has released their own SVOD service (Foxtel Now), which offers unbundled
     content from the Premium Pay-TV provider. The consequences of this move will be discussed in more detail on the following page.
•    To date, SVOD services have not caused as much pressure as anticipated on the market. Instead of moving to SVOD services, consumers have instead
     continued with their Pay-TV subscriptions, purchasing SVOD subscriptions additionally in order to access a greater amount of video content.
•    However, Venture Insights anticipate SVOD services having an increased impact on Pay-TV subscriptions into the future. Additionally, should household
     disposable income shrink moving forward, it is likely Pay-TV subscriptions will be dropped in favour of SVOD.
•    Looking ahead, subscriber numbers are anticipated to continue to reduce as more subscribers move to the newly created Foxtel Now service (which
     offers an almost identical service at a reduced price) or alternative SVOD services.
•    We forecast Premium Pay-TV revenues to fall at -3.7% CAGR from $3.2b in FY16 to $2.7b by FY22. The assumptions that underlie our forecasts are:
      • SUBSCRIBERS will drop at a -3.4% CAGR to FY22 as more subscribers transition to cheaper VOD services (specifically Foxtel Now). However, there will
        also be an underlying ongoing churn of subscribers due to less constricting contracts and subscribers moving too / from SVOD services.
      • ARPU will decline slightly at a -0.5% CAGR to reach A$93 by FY22 from A$98 in FY16 (excl. advertising revenue). The lower ARPU will be driven by
         increased unbundling of offerings from Foxtel, specifically Kids and Documentary packs which were not available previously, allowing subscribers to
         more easily “pick and choose” the content they want to purchase.
    Fig 6: Premium Pay-TV forecasts
    Pay-TV Forecast                                 2016A    2017F    2018F    2019F        2020F     2021F    2022F   CAGR (FY17–22)   Source:   VENTURE INSIGHTS,
                                                                                                                                                  COMPANY
    Households                            (000's)    9,241    9,413    9,585    9,756       9,929    10,101   10,272       1.8%
                                                                                                                                        Note:     CAGR refers to CAGR over
    Premium Pay-TV penetration              (%)     30.6%    29.5%    28.1%    26.7%        25.4%     24.0%    22.7%
                                                                                                                                        the       FY17-22 period
    Subscribers - Premium                 (000's)    2,829    2,772    2,689    2,609        2,517    2,429    2,332       -3.4%
    ARPU - Premium                         (A$)       98       96       95       95           94        94       93        -0.5%
    Revenue - Premium                     (A$m)     3,247    3,219    3,123    3,014        2,901     2,786    2,668       -3.7%
    Revenue pcp growth                      (%)     4.6%     -0.9%    -3.0%    -3.5%        -3.7%     -4.0%   -4.2%
    1708_198 Video Entertainment Market Outlook                                         7
August 2017
    Premium Pay-TV
    Foxtel has re-entered the video on-demand market, launching their own SVOD
    offering
•    Foxtel announced the planned closure of their jointly owned streaming               Fig 7: Premium Pay-TV subscriber trend
     service, Presto, in October 2016 and since have heavily marketed Foxtel             3,000
     Play, their independently owned SVOD (renamed Foxtel Now in June 17).
                                                                                         2,500
•    The service provides access to premium Pay-TV content, including live TV
                                                                                         2,000
     viewing, without the need for a Foxtel subscription. However SVOD
     subscribers cannot record live TV or rent releases in the Foxtel store.             1,500

•    Foxtel Now subscriptions start from as little as $10 and range to $104 for          1,000
     all packages, with the highly desirable sports content being offered for              500
     $39 a month instead of $55 a month for Pay-TV. This is considerably lower
                                                                                             -
     than the cost of a full Foxtel subscriptions, and opens the potential
                                                                                                 2014A   2015A      2016A     2017F      2018F       2019F     2020F    2021F    2022F
     consumer market to a wider demographic.
•    As a result, Venture Insights believes Foxtel will gain additional customers        Fig 8: Foxtel Package Rates
     that could previously not afford Foxtel Premium, with a surge to be                Foxtel Price Packages             February                                            July 2017
     witnessed in the first two years due to the service providing the only legal       (per month)                         2014           April 2016        April 2017     (Foxtel Now)
     access to Game of Thrones without purchasing a full Foxtel subscription.
                                                                                        Entertainment*                      A$49              A$25             A$26                -
•    However, offering the same service, albeit slightly reduced, at a lower
                                                                                        Pop (Now only)                         -                 -               -                $15
     price may also seem counter productive to business as it lowers the overall
     ARPU of subscribers.                                                               Lifestyle (Now only)                   -                 -               -                $10

•    Venture Insights believe the creation of this service will encourage                  Kids                                -                 -             A$10**             $10
     Premium subscribers to transfer to SVOD. Although the proportion of                   Sport                            A$25              A$25             A$29             $29***
     subscribers is not anticipated to be high (around 2-3% per annum), this
     shift will drive the drop in overall Pay-TV subscribers and subsequent                Movies                           A$25              A$20             A$20             $20***
     revenue.                                                                              Drama                            A$25              A$20             A$20               $15
•    However, the majority of subscribers will be retained due to:                         Entertainment Plus           A$15 to $25           A$10             A$10                -
     • The functionality of the premium service, with the offering of the set top          HD                               A$10              A$10             A$10                -
       box and ability to record live TV.
                                                                                           Documentaries                       -                 -             A$10**             $10
     • The ease of use of the Pay-TV service will appeal to a number of
                                                                                           All Packages                     A$134            A$134             A$135             $104
       consumers, specifically those in older demographics who may not be
       so comfortable with an app-based streaming service.                              * The package must be purchased in addition to any other package
                                                                                        **Were not defined as individual packages at time of previous report
    Source:   Foxtel Website, VENTURE INSIGHTS                                          *** Must be purchased alongside a Pop or Lifestyle Package
    1708_198 Video Entertainment Market Outlook                                     8
August 2017

    SVOD
    The market continues to grow strongly, although this accelerated growth will not last
•    The SVOD market continues to show strong subscriber growth, driven
                                                                                        Fig 9: SVOD revenue and growth
     predominantly by the continued uptake of Netflix, which offers a host of
     unique content to consumers.
                                                                                        1,200                                                                                  100%
•    This rapid growth will continue over the next year, and will then start to                                                                                                90%
     decrease, although remaining on a positive trajectory, as market saturation        1,000
                                                                                                                                                                               80%
     is reached.
                                                                                                                                                                               70%
•    The continued uptake of SVOD will rise hand in hand with increased                   800
     penetration of smart devices (e.g. Telstra Box) and the NBN, which                                                                                                        60%

     collectively allow consumers better access to SVOD services.                         600                                                                                  50%

•    Netflix has effectively “won the war” for subscribers, with their subscriber                                                                                              40%
     numbers reaching over 3 million at the end of FY16. The service has                  400
                                                                                                                                                                               30%
     become the “must have” SVOD service, with consumers maintaining
                                                                                                                                                                               20%
     subscriptions in the long term.                                                      200
                                                                                                                                                                               10%
•    In contrast, all other SVOD services witness higher levels of churn as
                                                                                           -                                                                                   0%
     subscribers opt in and out of the services depending on content
                                                                                                  2016A       2017F      2018F         2019F    2020F      2021F       2022F
     availability.
                                                                                                                Total SVOD Revenue              Revenue - pcp growth
•    This translates into a subscriber growth expectation of 9.3% CAGR FY17 –
     22, driving a total SVOD revenue of A$1.1b by FY22, up from A$28m in                Fig 10: SVOD forecasts
     FY16 (16.3% CAGR 17 – 22).
                                                                                                                                                                    CAGR
•    These expectations were based on the following assumptions:                         SVOD Forecast                  2016A 2017F 2018F 2019F 2020F 2021F 2022F (FY17–22)

     – PENETRATION to grow to 55% of households with an average 1.4x                     Households           (000's) 9,241 9,413 9,585 9,756 9,929 10,101 10,272              1.8%
       paid subscriptions per household, based on a moderating growth rate.              Household
                                                                                         penetration          (%)       26%      40%     42%    45%     49%    53%     55%
     – SUBSCRIBERS to grow to 7.8m by 2022, driven strongly by ongoing
       growth of Netflix as well as uptake of Foxtel Now. Individual subscribers         SVOD subs per HH     (ratio)    1.3     1.3      1.4    1.4    1.4     1.4     1.4
       will increasingly have more than one subscription in order to access
                                                                                         SVOD subscribers     (000's) 3,308 4,739 5,125 5,724 6,364 7,015 7,418                9.4%
       unique content across different platforms.
                                                                                         ARPU                  (A$)      12      11       12     12     13      12      12     2.6%
     – ARPU to remain steady at a 2.6% CAGR reaching A$12 by 2022; this
       reflects the current pricing of Foxtel Now ($10-$15 basic) and Stan ($10          Total SVOD Revenue (A$m)        309     529     713     811    907    1,003 1,079     15.3%
       basic) as well as the recent increase of Netflix pricing, which has risen        Source:   VENTURE INSIGHTS, COMPANY
       basic pricing to $9.99 per month.                                                Note:     Includes IPTV subscribers (ie Fetch, Foxtel on T-Box).
    1708_198 Video Entertainment Market Outlook                                     9   Netflix   forecasts include VPN subscribers (ie Netflix US accounts)
August 2017

    SVOD
    Netflix is clearly the dominant player – driving strong SVOD subscriber growth
•    By 2022, we forecast the number of SVOD subscribers will reach 7.8m. This represents a household penetration of approximately 55%, which is
     considerably higher than the current Pay-TV penetration of 31%.
•    As commented, Netflix continues to be the clear winner in the race for subscribers and is forecast to increase to over 5 million by 2020, driving the majority
     of video subscriber growth within Australia. However, recent announcements from Disney have confirmed their plans to discontinue their partnership with
     Netflix in the US from 2019, opting to instead release their own rival SVOD. Although nothing is proposed for the Australian market, should this happen
     locally it would have implications for Netflix’s ongoing subscriber base.
•    2016 has been a year of massive shake up within the SVOD market:
      • Presto failed to succeed alongside Netflix and Stan in the increasingly competitive Australian market, closing its doors to service in January 2017.
      • December 2016 saw the arrival of Amazon Prime Video. This has yet to impact the market, due to the low content offerings against other providers,
        however, if released as part of Amazon Prime Commerce the user uptake of the video service could grow substantially, although not all subscribers will
        utilise the video services as it will effectively be a “free” addition to the Prime offering.
      • After closing Presto, Foxtel released its own SVOD service (Foxtel Play) which was rebranded to Foxtel Now in June 2017. The service offers access to
        Premium Pay-TV content at a cheaper price and in an unbundled format, opening the consumer market of Foxtel to a lower price point. The service is
        expected to grow substantially into the future, driven by the offering of the new season of Game of Thrones which is not available on any other SVOD.
      • Fetch, with 500,000 total active subscribers at the end of 2016, rebranded from Fetch TV in March 2017, launching a new marketing campaign in order
        to increase subscribers, looks to be realising strong demand moving forward.
      • Quickflix entered voluntary admission in April 2016 and was saved in October 2016 when US-based Karma Media Holdings agreed to pay A$1.3m to
        take over the company. The company has now refocused to provide Hollywood Blockbusters on a pay-as-you-go format.
      • Subscription services for sports content (AFL / NRL) are also present in the market, however have not been included in analysis.
       Fig 11: SVOD subscribers by service providers (2016)                          Fig 12: SVOD take-up and penetration profile
                                              1.1%      2.2%                                     8,000                                                                    60%
                                   0.2%
                                                                 7.6%
                                                                                                                                                                          50%
                                          11.4%                8.0%                              6,000
                                                                                                                                                                          40%

                                                                                                 4,000                                                            7,759   30%
                                                                                                                                                        7,338
                                                      17.2%                                                                                   6,658
                                                                                                                                    5,991                                 20%
                                                                                                                 4,976    5,374
                                      52.8%                                                      2,000
                                                                                                         3,108                                                            10%

                                                                                                    -                                                                     0%
           Amazon Prime        Others                Quickflix          Foxtel Play (Now)                2016A   2017F    2018F     2019F     2020F     2021F     2022F
                                                                                                                   SVOD subscribers         Household penetration
           Presto              Stan                  Netflix            Fetch
    Source:   VENTURE INSIGHTS, AHEDA
    1708_198 Video Entertainment Market Outlook                                             10
August 2017
     TVOD/EST
     The market is expected to grow modestly, driven by government action to limit video
     piracy
     •   Total TVOD/EST revenues are expected to grow at a 5.9% CAGR to                       PIRACY LAWS DRIVING TVOD/EST
         reach A$277m by 2022.                                                                •     The rise of SVOD has had a knock-on effect to the amount of video
     •   This growth is driven by users adopting TVOD/EST services in favour                        piracy occurring within Australia, with numbers significantly reducing
         of physical media.                                                                         except in the 12-17 age group.
     •   Although the majority of streamed video watching will be undertaken                  •     However, piracy is still the dominant method of accessing video
         through SVOD, for content not available on SVOD (specifically new                          content, should it not be available on SVOD.
         film releases), TVOD/EST will be the dominant method of                              •     The Australian Government is striving to reduce piracy within the
         consumption.                                                                               nation, introducing a number of Anti-piracy laws in 2015. Following this,
     •   TVOD generates 53% of the revenue within the sector; only movie                            five bit-torrent websites were blocked in January 2017.
         content is being purchased through this service as users opt to rent or              •     As the government continues to make the piracy of video content more
         subscribe to SVOD in order to watch TV series.                                             difficult, TVOD/EST is the clear option for viewing content not on SVOD.
     •   EST has a near 50/50 split of revenue from movie and TV content.                           Therefore, further anti-piracy regulations will in turn drive growth in
         Rental purchases account for 47% of the total sector revenue.                              TVOD/EST.

 Fig 13: TVOD/EST forecast                                   Fig 14: Physical Media spending shifts to SVOD                          Fig 15: TVOD/EST revenue mix 2016 (%)
                                                             and TVOD/EST
300                                                  10%   2,000                                                              60%
                                                     9%    1,800
250                                                                                                                           50%
                                                     8%

                                                                                                                      447
                                                           1,600

                                                                                                              497
                                                                                                                              40%

                                                                                                      553
                                                     7%                                                                                                                    Movie

                                                                                            618
200                                                        1,400
                                                                                    694

                                                                                                                              30%                                        Content 49%
                                                     6%    1,200
                                                                          781

150                                                  5%                                                                                                        47%
                                                                    880

                                                           1,000                                                              20%
                                                     4%     800

                                                                                                                      1,356
                                                                                                                              10%      53%                                TV Content

                                                                                                              1,266
                                                                                                      1,156
100
                                                                                            1,046

                                                     3%     600                                                                                                              51%
                                                                                    936

                                                                                                                              0%
                                                                          742

                                                     2%     400
 50
                                                                    513

                                                     1%     200                                                               -10%
 -                                                   0%       -                                                               -20%
         2016A 2017F 2018F 2019F 2020F 2021F 2022F                 2016A 2017F 2018F 2019F 2020F 2021F 2022F

                   Total TVOD/EST Revenue                                       Physical Media                                               EST Revenue Mix   TVOD Revenue Mix
                   Total TVOD/EST Revenue growth                                SVOD & TVOD
                                                                                SVOD & TVOD percentage growth
      Source:   VENTURE INSIGHTS, AHEDA                                         Physical Media percentage growth
     1708_198 Video Entertainment Market Outlook                                           11
August 2017

AVOD
Facebook and Google drive growth in video advertising
•   The AVOD market includes all digital video which has a revenue model                   Fig 17: AVOD forecast
    based solely on advertising; including catch up TV services, social video              3000                                                                          70%
    (Facebook) and YouTube (not YouTube Red).
                                                                                                                                                                         60%
•   Total AVOD revenues are expected to grow at a 19.6% CAGR to exceed                     2500
    A$2.5b by 2022.                                                                                                                                                      50%
                                                                                           2000
•   Growth will be driven by Facebook and Google, who are estimated to
                                                                                                                                                                         40%
    collectively hold 41% of the video advertising revenue in Australia as of
                                                                                           1500
    April 2017.
                                                                                                                                                                         30%
    • In the US, Facebook and Google have recorded 62% and 20% YoY                         1000
      advertising revenue growth respectively between 2015 to 2016, with                                                                                                 20%

      all other companies collectively only growing 9% YoY.                                 500                                                                          10%
    • Although local growth numbers are not available; due to the global
      nature of these two digital giants, it can be assumed that similar                        0                                                                        0%
                                                                                                       2016A   2017F    2018F     2019F      2020F     2021F     2022F
      growth is occurring within Australia and that this will drive growth into
      the future.                                                                                                 AVOD Revenue             AVOD Revenue Growth

•   To support this forecast assumption, time spent watching catch up TV
    services have remained steady from 2012 – 2016, whereas time spent                     Fig. 18: Time spent viewing Catch Up TV vs Online Video (mins/user/day)
    watching online video has increased dramatically from 11
    minutes/user/day to over 33.
                                                                                           60
    Fig 16: Market Estimates for Facebook and Google share of video
    advertising revenue (Jul 16 – Apr 17)                                                  50

                                                                                           40

                                                30%                                        30

                                                                                           20

                                 59%                                                       10
                                                11%
                                                                                            0
                                                                                                    Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16

                               Google   Facebook      Other                                                            Catch Up TV (PVR)     Online Video
Source: VENTURE INSIGHTS Analysis, IAB/PwC Advertising Report, Facebook, Morgan Stanley Research, PwC Australian Entertainment and Media Outlook 2017 –
2021, OzTam, SMI
1708_198 Video Entertainment Market Outlook                                          12
August 2017
FTA and Foxtel
The rapid growth of non-linear is a double edged sword for FTA and the Pay-TV
incumbent
•   Australia has one of the highest levels of Free-to-air (FTA) TV viewing across developed markets, with weekly viewing of this content averaging
    around 80% of total share of television viewing time (including catch up TV services).
•   However, total audience viewing time has dropped over recent years from a height of nearly 90 hours per viewer per month 3 years ago, to 70
    hours in the first quarter of 2017. This is a drop of nearly 22%. These numbers include viewing for live TV and catch-up services.
•   This decline is caused by viewers transitioning to xVOD services (YouTube, SVOD, TVOD) and increasingly watching content through platforms
    other than the television, as they opt to watch “what they want, when they want” in favour of traditional linear viewing.
•   Despite this, linear TV still remains the dominant form of video watching, accounting for 87% of total video viewing in December 2016.
•   Though we expect FTA television to be an important part of the video eco-system for a long time to come, we do believe these figures are a
    reflection of the decreasing reliance of linear. For this reason, we also expect Linear Pay-TV to come under pressure going forward.
•   Therefore, the ongoing success of both the FTA broadcasters and Foxtel depend on how well they can capture and monetize non-linear viewing
    without excessively cannibalising their advertising or Premium Pay-TV revenues.
     Fig 19: FTA TV % Share of Australian Viewers (2016 and 2017)

    100%

    90%

    80%

    70%

    60%

    50%

    40%

    30%

    20%

    10%

      0%
            Wk01-06 Wk07-10 Wk11-16 Wk17-20 Wk21-24 Wk25-28 Wk29-32 Wk33-36 Wk37-40 Wk41-44 Wk45-48 Wk49-52           Wk53   Wk01-06 Wk07-10 Wk11-16 Wk17-20 Wk21-24

                                                             2016                                                                             2017

                                                           ABC      Seven   Nine        TEN   SBS   Subscription TV
Source:    OzTAM, VENTURE INSIGHTS

1708_198 Video Entertainment Market Outlook                                        13
August 2017

Physical Media
Sales will decline as xVOD services steal consumers and revenue

•   We expect Physical Media (DVD / Blu-ray) revenue to contract     Fig 20: Physical Media forecasts
    at a -10.6% CAGR to reach A$447m by 2022, at which point
    rental revenue will be largely insignificant (A$4m) and retail   1,400                                                                                         0%
    revenue will have dropped to A$443m.
•   RENTAL
                                                                     1,200
    − Over the last decade, rental businesses have largely
                                                                                                                                                                   -5%
      disappeared – declining -14% CAGR 2006–14.
    − Since the rise of xVOD the market has undergone                1,000
      significant decline dropping from A$279m in 2014 to
      A$74m in 2016.                                                                                                                                               -10%
                                                                      800
    − This rapid decline is anticipated to continue at a CAGR of
      -39% FY17-22 as the value proposition of DVD/Blu-ray
      rental becomes increasingly redundant in the streaming
                                                                      600
      world.                                                                                                                                                       -15%
•   RETAIL
    − Retail purchases of physical media make up the largest          400
      proportion of the sector revenues (92% in 2016).
                                                                                                                                                                   -20%
    − Though declining, retail sales were falling at a much more
                                                                      200
      moderate rate of -3% CAGR between 2006-14.
    − However, following the rise of xVOD this decline has
      increased and will continue at a CAGR of -9.5% from 2017-         -                                                                                          -25%
      2022.                                                                      2014A   2015A    2016A     2017F   2018F   2019F    2020F    2021F     2022F

    − However, we do anticipate that there will still be a market                        Rental           Retail       Total Physical Media Revenue growth
      for physical retail through to 2022, as a small percentage
      of consumers will still want to physically own their video
      content, despite the majority transitioning to xVOD.

Source:   VENTURE INSIGHTS, AHEDA

1708_198 Video Entertainment Market Outlook                                 14
August 2017
Cinema
Revenues witnessed a boost, but are anticipated to decline as xVOD services impact
the USP of Cinema
•   Total Cinema revenue is forecast to decline to $1.19b by 2022, a -1.3%
    CAGR as less consumers visit the cinema.
•   Cinema has previously been on a downward trajectory, but witnessed a
    strong two years throughout 2015 and 2016, with attendance and revenue           Fig 21: Cinema forecasts
    increasing, following a series of prominent releases.                              1,400                                                                          16%
•   During this time admissions rose from 3.3 admissions per capita in 2014 to
    3.8 in 2015 and 2016. Likewise, ticket prices experienced robust growth of         1,300                                                                          14%

    4% CAGR through 2006-14.
                                                                                                                                                                      12%
                                                                                       1,200
•   However, Venture Insights believes the affordability of tickets is peaking and
    will taper off.                                                                                                                                                   10%
                                                                                       1,100
•   Likewise, the admissions per capita is forecast to decline going forwards,
                                                                                                                                                                      8%
    due to a host of other xVOD offerings available to consumers alongside             1,000
    increasingly expensive ticket prices, with consumers opting to wait for                                                                                           6%
    releases to reach xVOD in order to save money.                                       900
•   Collectively, these factors will impact cinema revenue, causing the overall                                                                                       4%

    decline of the market.                                                               800
                                                                                                                                                                      2%
•   Yet, cinema will retain a proportion of audience due to its unique selling
                                                                                         700
    point; offering exclusive access to new video content alongside the                                                                                               0%
    “experience” factor, meaning revenue decline will not be rapid.
                                                                                         600                                                                          -2%
•   Going forward, the “wait times” from when a film is released in the cinema to
    being released on DVD/VOD services is appearing to decrease. The                     500                                                                          -4%
    traditional 90 days time period is under discussion, as VOD services look for              2014A 2015A 2016A 2017F      2018F    2019F   2020F   2021F    2022F
    between 10-45 days moving forward.
                                                                                                           Cinema Revenue           Cinema Revenue growth
•   Additionally, rumours are mounting that xVOD services are joining with film
    producers to provide an alternative for new releases; publishing films               Source:   VENTURE INSIGHTS, Screen Australia
    directly to xVOD rather than the cinema.
•   Should these changes occur, they would remove the USP of cinema, being
    that it provides unique and first access to new film content. These changes
    could have a significant knock-on effect to the industry, with admissions
    dramatically decreasing, causing the market as a whole to come under
    intense pressure.
1708_198 Video Entertainment Market Outlook                                  15
August 2017

Glossary
  Glossary of Sector Definitions

 Type of Video           Description                                                       Companies                      Revenue from

                                                                                                                          Subscription and
 Pay TV                  Broadcast television that requires a subscription to watch        Foxtel, Optus TV
                                                                                                                          Advertising

                                                                                           Seven, Nine, Ten, ABC, WIN,
 Free to Air             Broadcast television that is free to watch                                                       Advertising
                                                                                           SBS

                         On demand video that requires a subscription and is               Netflix, Stan, Foxtel Now,
 SVOD                                                                                                                     Subscription
                         delivered OTT                                                     Amazon Prime, Other

                         On demand video that is purchased (EST) or rented (DTR)
                                                                                           iTunes, Google Play, BigPond
 TVOD                    through a single transaction (i.e. not subscription based)                                       One off purchase
                                                                                           Movies,
                         and is delivered OTT

                         Digital video (delivered OTT) that is free to watch and is        YouTube, iView, SBS on
 AVOD                                                                                                                     Advertising
                         funded by advertisements, including social video                  Demand, Plus7, 9Now, Tenplay

                                                                                           Warner Home Video, Walt
 Physical Video          Purchase / rental of physical DVD's and Blu-Rays                  Disney Studios, Universal,     One off purchase
                                                                                           Roadshow

                                                                                           Event Cinemas, Village
                                                                                           Cinemas, Hoyts Cinemas,        Ticket purchases
 Cinema                  Video content that is shown in a cinema
                                                                                           Reading Cinemas, Palace        and Advertising
                                                                                           Cinemas

Source:   VENTURE INSIGHTS, COMPANY

1708_198 Video Entertainment Market Outlook                                           16
August 2017

Methodology and Definitions

  Methodology and definitions

  •   Our forecast methodology assesses consumer viewing behaviour and focuses on ‘end-state’ behaviours (and spending patterns) at
      the end of our five-year horizon. To achieve this, we have drawn on industry interviews, global comparative data and analysis
      (including via our partners at Enders Analysis) as well as drawing on our previous survey of 5,300 Australian consumers

  •   The methodology section also contains important definitions (ie Premium versus Pay-lite) which should be understood before
      reading on

  •   The next page provides an illustrative overview of the methodology and our forecast data. We highlight the following definitions to
      be aware of:

      – Pay-TV: Our Pay-TV forecasts reflect Premium Pay-TV services only, which we define as services provided via Foxtel’s HFC or
        satellite service where the service is delivered to a set-top-box

      – Pay-lite Pay-TV: Although this definition is not referred to within this report, historically Pay-lite was defined as services provided
        via the internet and can be bundled in the sale of broadband. Pay-lite includes SVOD plus IPTV type services. These are
        excluded from our Pay-TV forecasts and are included in our SVOD forecasts.

      – Cinema: While not specifically a home entertainment video service, we include in our model to reflect that customers have a
        choice between video services consumed in the home and the cinema. Equally, and while not contained in our model here,
        when we assess share of time across video/TV, we include free-to-air TV in our assessment

  •   We expect to publish our next update to this report in February

Source:   VENTURE INSIGHTS, COMPANY

1708_198 Video Entertainment Market Outlook                                   17
August 2017

Methodology and Definitions
Bottom Up forecast methodology

                Pay-TV                                   SVOD                                    TVOD/EST                                     Physical Media                                  Cinema
  DEFINITION

                Premium Pay-TV - services provided       Includes SVOD services (Netflix,        Includes all TVOD/EST services (incl         Includes DVD and Blu-ray                        Includes all movie theatrical
                via Foxtel's HFC or satellite service    Presto, Stan, Foxtel Play, Quickflix)   iTunes, BigPond, Google, Fetch etc)          Includes all Rental (incl. rental kiosks) and   services
                Pay-lite - is backed out of the Pay-TV   plus Pay-lite (IPTV) type services                                                   Retail (ie JB Hifi, Dick Smith, Quickflix,
                forecast (included SVOD)                 (Foxtel on T-Box, Fetch)                                                             Target, K-Mart, ABC Stores etc)

                •   Household penetration                •   Household penetration               •   Transaction volumes - across rental,     •   Transaction volumes - rental vs sell-       •   Box office admissions
                •   Subscribers by operator              •   Subscribers by operator                 sell-through split by movie vs TV            through (retail)                            •   Average Ticket Price (ASP)
                                                                                                     content                                  •   Average Selling Price (ASP) - rental
                •   ARPU by operator                     •   ARPU by operator                                                                                                                 •   Revenue
  METRICS

                                                                                                 •   Average Selling Price (ASP) - across         vs sell-through (retail)
                •   Revenue by operator                  •   Revenue by operator
                                                                                                     rental, sell-through split by movie vs   •   Revenue - rental vs sell-through
                                                                                                     TV content                                   (retail)
                                                                                                 •   Revenue — across rental, sell-through
                                                                                                     split by movie vs TV content

                •   ABS                                  •   ABS                                 •   Company disclosures, industry            •   Company disclosures, industry               •   Company disclosures, industry
  METHODOLOGY

                •   Company disclosures, industry        •   Company disclosures, industry           interviews, VI insights incl survey          interviews, VI insights incl survey             interviews, VI insights incl
                    interviews, VI insights incl             interviews, VI insights incl        •   Company disclosure, industry             •   Company disclosure, industry                    survey
                    survey                                   survey                                  interview, retail pricing, VI insights       interview, retail pricing, VI insights      •   Company disclosure, industry
                •   Company disclosure, retail           •   Company disclosure, retail              incl survey                                  incl survey                                     interview, retail pricing, VI
                    pricing, VI insights incl survey         pricing, VI insights incl survey    •   Revenue a calculation of above           •   Revenue a calculation of above                  insights incl survey
                •   Revenue a calculation of above       •   Revenue a calculation of above                                                                                                   •   Revenue a calculation of above

Top Down validation
    •           Video spending per household - assessed against historical trend, global comps (UK, USA), insights from VI survey to determine future spending
                and mix by platform
    •           Digital disruption impact scenarios as spending moves to digital — assessed against global comps (UK, USA), insights from VI survey and global
                recorded music case-study
    •           Revenue share by platform — assessed against historical trend, global comps (UK, USA), insights from VI survey
    •           Share of time across all video platforms (incl FTA) versus share of dollars — assessed against historical trends, global comps (UK, USA), insights
                from VI survey, global TV viewing behaviour case-study

Source:             VENTURE INSIGHTS, COMPANY
Note:               References to CAGR are now presented on a FY17-22 basis, where previously they were FY15-20.

1708_198 Video Entertainment Market Outlook                                                                       18
August 2017

About Venture Insights

   About Venture Insights

   Venture Insights provides a subscription research service covering the media, digital and telecommunications industries in Australia, NZ and
   Europe, with a special focus on new disruptive technologies.

   For more information go to www.ventureinsights.com.au or contact us at info@ventureinsights.com.au

   About Venture Group

   Venture Group (parent of Venture Insights) provides strategic consulting and corporate advisory services to companies across the media, telco
   and tech sectors.

    SARAH KASHER                                                     ROBIN JORDAN                                                                                   333 George Street
                                                                                                                                                                    Sydney, NSW, 2000
    sarah.kasher@ventureinsights.com.au                              robin.jordan@ventureconsulting.com                                                             Australia

                                                                                                                                                                    www.ventureinsights.com.au
    GABBI STUBBS
    gabbi.stubbs@ventureinsights.com.au

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