OTT AVOD VS. SVOD?

Digital Landscape

 

Consumers have increasingly shifted away from bloated monthly pay TV fees and tethered programming in favor of a more personalized, curated and on-demand experience across virtually any Internet connected device (commonly referred to as over-the-top or OTT distribution). Direct to consumer OTT distribution presents both an opportunity and a conundrum for premium content rights holders. The challenge for new OTT entrants is to find an optimum, sustainable business model to secure, retain and grow viewership.

 

Setting aside exclusive live events, which are ideally suited to reside behind a pay-wall, the question for premium video content providers remains—what is the best OTT monetization strategy...subscription (SVOD) or ad supported (AVOD)?

 

SVOD, with its monthly recurring revenue, seems an obvious choice and is the dominant business model in the market. Deloitte's recent study shows that the number of U.S. households subscribing to a paid streaming video service increased 450% from just 10% in 2009 to 55% in 2017.[1]

 

But the hyper-growth of OTT adoption allows plenty of room for ad supported and hybrid models as well.

 

A recent study from eMarketer reported that “7 in 10 Americans are now consuming ad supported OTT videos regularly”, which points to continued market acceptance and growth for AVOD services.[2]

 

A hybrid approach, combining advertising and subscription, is also likely to become more popular with the overall uptake of OTT. Providing limited ‘free' ad supported content with the ability to upsell and convert users to paying subscriptions can hedge risk  and increase engagement, delivering the best of both models.

 

Regardless of which approach you choose, it is important to have full access to robust watch data to inform business decisions and fine-tune the appropriate monetization mix. A powerful content management system will also allow flexibility to experiment with pricing, packaging and bundling in localized markets.

 

MARKET CONSIDERATION

 

Looming in the background of the burgeoning OTT market is concern regarding the ever increasing amount of consumer choice and the number of streaming services the market can sustain. Some media pundits see the current glut of programming on broadcast, cable and streaming services as reaching ‘peak TV' — a phrase coined by FX Networks CEO John Landgraf --  suggesting a point of market saturation, consumer confusion and subsequent decline.

 

But the perceived ‘content bubble' appears to be far from peaking. U.S. OTT adoption still represents less than one-sixth of all households with cable and satellite subscriptions.[3] This suggests significant growth opportunity in the OTT market for the foreseeable future, with leading  tech behemoths (such as Netflix, Amazon Prime, Hulu, Google/YouTube, Apple and Facebook) leading the effort.

 

Over $60 billion dollars was invested in non-sports programming in 2017 across traditional and OTT companies [4], a number that is projected to increase as much as 10% year over year in 2018. Netflix alone is slated to invest $8 billion dollars on scripted programming in 2018, up from $6.3 billion in 2017, with Amazon and Hulu projected to spend $4.5 and $2.5 billion respectively.

 

In 2018, 55% of US households subscribe to at least one SVOD OTT service provider.[5] And by 2022, over 265 million households worldwide will subscribe to an OTT  video service.[6]

 

Based on these market trends, there continues to be  good rationale for launching an OTT service. But before making decisions on the appropriate business model, there are a multitude of factors to consider.

 

CHOOSING THE RIGHT MODEL: SVOD

 

SVOD is often the preferred OTT business model because it can deliver higher average revenue per user (ARPU) than AVOD (which is largely still measured on a cost per thousand / CPM basis – more on this below). The potential to lock-in subscribers on monthly or annual packages makes SVOD a predictable revenue stream.

 

Exclusive, premium content lends itself to a SVOD model because there are limited (if any) consumer alternatives to access and watch elsewhere, especially if it is long form, engaging programming (e.g. feature films, documentaries, TV series) streamed in high quality resolution and optimized for bandwidth and device (Web/PC, mobile, connected and smart TVs).

 

Securing subscribers is only the beginning. It is critical to market the service and track every aspect of the customer journey to ensure engagement, reduce churn and enable growth.

 

To get consumers to agree to pay a subscription fee, they need continual confirmation that the content and service delivery is worth their money—a decision that is made largely on perceived value of programming, quality of experience and quality of service. Any buffering hiccups or streaming difficulties and subscribers will churn out.

 

The ability to access real-time, web-enabled analytics to effectively monitor the service is the best way to ensure SVOD success. Actionable business analytics that capture watch, user and support data can connect marketing, sales and multi-device user behavior to provide a comprehensive view of the customer lifecycle and drive subscriber growth.

 

CHOOSING THE RIGHT MODEL: AVOD

 

AVOD models, with ‘free' premium programming, offer a viable consumer alternative to a subscription service. However, there are inherent complexities to maintain consistent revenue.

 

OTT advertising is in relative infancy when compared to broadcast television. Brands and ad agencies have been slow to ditch the traditional cost measurements such as CPM that rely on gross impressions to assess cost effectiveness and profitability. For the AVOD service provider, this means success is directly tied to scale—more viewers, more revenue. But building, maintaining and growing a large and sustainable audience can be an expensive marketing proposition.  

 

On the plus side, the OTT consumer trend is not lost on advertisers looking to reach segmented audiences. The ability to deliver non-skippable pre-roll ads that can be hyper targeted and localized with back-end performance metrics is very attractive to advertisers. Incorporating dynamic ad insertion (mid-roll) into long form content allows the ads to be stitched seamlessly into the video streams making it less susceptible to ad-blocker software. A reliable ad platform partner such as DFP or Freewheel can work with you to implement these features. The goal is to shift the focus beyond scale and deliver targeted engagement and viewer consumption measurements that potentially drive higher CPMs .

 

Audience location should also be a determining factor when choosing a monetization strategy. In territories such as South Asia, consumers prefer ‘free' ad supported content to expensive subscription-based programs.[7] Rampant piracy in pan-Asian markets (and other regions) can also make AVOD a more appropriate choice.

 

A HYBRID APPROACH:

 

Based on the various advantages that accompany both SVOD and AVOD models, a smart strategy may be to adopt a hybrid of the two models. This has become more popular as it delivers two discrete revenue streams—advertisers buying ad-space and/or a sponsorship and customers paying subscription fees . Services like Hulu, Spotify, Pandora and Amazon are taking advantage of the hybrid approach. YouTube currently offers free ad supported VOD access on its primary site, as well as two premium subscription services: You Tube TV, a skinny bundle service with a mix of broadcast networks, cable-TV channels and live news; and YouTube Premium (formerly You Tube Red), an optimized version of the free video site that is ad-free and features exclusive content.

 

At the close of 2017, Parks Associates reported the number of OTT video services in the U.S. is 200 or greater.[8] A hybrid ad supported ‘freemium' model, with premium and/or exclusive content behind a pay wall may offer the best approach to attract and retain viewers in such a competitive market. Ad supported free video trials are also a good way to engage and entice new viewers on a ‘try before you buy' basis, while ensuring money is not left on the table . A simpler approach is to give viewers the option to choose between ad supported and subscription (turning ads-off), which is essentially what You Tube currently offers.

 

Deciding which devices to support should also factor into your monetization strategy. 56% of AVOD video views come from tablets and smartphones[9], which suggests adopting a Web/PC and mobile first strategy with device specific apps should be a primary focus. However, in the U.S. Roku is responsible for the highest cumulative weekly time spent of any device for viewing OTT content, followed by Amazon Fire TV/Stick and PlayStation.[10] Keep in mind that device use and availability can also differ worldwide. So make sure you do your homework and consult with your OTT vendor on best regional practices.

 

With the right research and marketing investment, OTT streaming does not have to be a risky or complicated proposition. Selecting a credible OTT vendor—with proven performance, deep market intelligence and best-in-class case studies—can go a long way to evaluating (and then implementing) go-to-market strategies.


Writing Contributions: Matt Herren, Director of Business Development at NeuLion


[1] Deloitte [2] eMarketer [3] AdWeek [4] Recode [5] Advanced Television [6] Streaming Media [7] Digital StudioMe [8] Parks Associates [9] IBC [10]  AdWeek