Finance

Shomi Shutdown Shows Netflix’s Strength

MSO owners pull plug on struggling two-year-old Canadian SVOD service 10/03/2016 8:00 AM Eastern
The Shomi app
TakeAway

The shutdown of Shomi, the SVOD service owned by Canadian MSOs Rogers and Shaw, highlights the difficulties pay TV providers face in going head-to-head with Netflix.

The decision by Canadian cable operators Shaw Communications and Rogers Communications to shutter Shomi, their jointly owned subscription video-on-demand service, is the latest example of pay TV’s difficulties in going head-to-head with SVOD juggernaut Netflix.

 

Shaw and Rogers launched Shomi about two years ago, originally as an add-on to their respective pay TV services. Last week Shomi senior vice president and general manager David Asch confirmed that the service would cease operations on Nov. 30.

 

“The business climate and online video marketplace have changed markedly in the last few years,” Asch said in a statement. “Combined with the fact that the business is more challenging to operate than we expected, we’ve decided to wind down our operations. We’re proud of the great service we created and the role we played in the evolution of Canada’s video landscape.”

 

Other factors influenced the decision, including fierce competition with Netflix; what some critics saw as high prices, compared to the competition; and limited program offerings. Rising programming costs also likely played a role, according to Pivotal Research Group CEO and senior media and communications analyst Jeff Wlodarczak.

 

CONTENT COSTS HUR

 

 “Competing against Netflix and Amazon Prime is quite difficult and the amount they spend on programming, already massive, is only going up,” Wlodarczak said.

 

Those rising costs are evident in the C$100 million to C$140 million write-down Rogers said it expects to take for the service in the third quarter ended Sept. 30. Shaw took a C$51 million write down for its part of the joint venture in July.

 

Regulations also played a part, according to Canadian research company Convergence Research. Last August the country’s chief regulator, the Canadian Radio-television and Telecommunications Commission (CRTC), revised its videoon- demand regulations to include a new category — hybrid VOD — that would remove content restrictions on the service while making it available to all Internet-service providers.

 

On the surface, opting for the hybrid VOD designation seemed like a good tradeoff. Under that designation, Shomi wasn’t required to reserve a set amount of shelf space for Canadian-produced programming. But the regulation also required that consumers could buy the service without being customers of Shaw or Rogers, as the service had originally required.

 

“They defeated the purpose of the initial plan, which was a way to retain customers,” said Convergence Research president Brahm Eiley.

 

Eiley added that outside market forces — mainly Shaw’s sale of its Shaw Media content business to subsidiary Corus Entertainment in January for C$2.65 billion, and its recent purchase of wireless carrier Wind Mobile — also influenced the decision to shut down Shomi.

 

OTHER PRIORITIES

 

“They had other fish to fry,” Eiley said. “The upside of selling wireless to Shaw’s base of over 3 million subscribers, many of whom are already bundled, is a much larger and more important market opportunity.”

 

The shutdown also presents other opportunities for Shaw to sell its content.

 

“This touches on program rights and what’s the best way to leverage them,” Eiley added. “Corus and Shaw were sitting on many more of those rights. Now they are in a position to sell them to someone else, not just themselves.”

 

Shomi has about 900,000 subscribers, but according to reports in the Canadian press, many of those were Shaw or Rogers customers who received the service as part of their TV or Internet package at no additional charge. Others had to pay C$8.99 per month for the service, which some critics said wasn’t competitive to Netflix’s monthly charge of C$9.99.

 

Adding to the pressure has been Netflix’s shift from a content aggregator, stockpiling episodes of old TV shows, to a producer of original, exclusive content. Eiley said as Netflix has beefed up its programming lineup with popular original like House of Cards and Orange Is the New Black, its past perception as a replacement for traditional TV is changing.

 

“In a way, that’s not where the battle is anymore,” Eiley said, adding that customers are becoming more attracted to services that have content they can’t get anywhere else.

 

That is especially true in Canada, where Netflix has about 5.2 million subscribers and is growing at a faster pace than in the U.S., according to Eiley. Netflix has to rely more heavily on the strength of its own originals north of the border, because it has fewer programming rights in Canada.

 

Canadians have access to about half of Netflix’s U.S. library content, Eiley said, mainly because rights in that country are tied to different providers. However, that is up from about 20% to 25% just a few years ago.

 

Shomi does offer network TV content such as Modern Family, The Blacklist and New Girl, as well as exclusive Canadian rights to Amazon Studios’s Transparent, Fox’s Empire and Starz’s Blunt Talk, but it didn’t have enough original content to compete with Netflix. That, Eiley said, is becoming increasingly important in today’s climate.

 

“The market has changed,” Eiley said. “It’s not as though those replacements for [traditional] TV are seeing big numbers either.”

 

Canada’s OTT scene is much different from the U.S. Not only does Netflix have a thinner offering, but Amazon Prime doesn’t offer a streaming-video service in Canada and Hulu doesn’t operate in the country. For over-the-top offerings, Netflix, Shomi and Bell Canada Enterprises’s CraveTV are pretty much the biggest games in town.

 

BOOST FOR CRAVETV

 

The departure of Shomi should give a boost to CraveTV, which has the added cachet of providing library programming from HBO and Showtime.

 

CraveTV has about 1 million customers and similar to Shomi started out as an add-on for its pay TV parent — Bell Canada — before being made available to all consumers with an Internet connection earlier this year. Eiley said CraveTV would likely get a boost from Shomi’s demise, helped by its HBO programming.

 

“It gives them, both Crave and Netflix, a little more breathing room in Canada,” Eiley said.

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