You are planning your on-demand video service and have already defined your target audience. That is great, but how do you go on to determine which of the two OTT business models is best suited for your objectives and monetization strategies? Should you opt for a subscription-based set-up where you can assure a steady stream of revenue for at least a specific period? Or is an advertising-funded model better, where viewership is free and users (in theory) have more of an incentive to sign-up? In order to reach an informed decision, it is important to first consider the current market as well as trends in consumer behaviorbehaviour across the board. However, it is equally central to assess the advantages and disadvantages of each model as well as to consider specific criteria relating to your service. These can be things like your target audience, their geographic location, and the type of content you will feature.
Assessing market trends
The video market is continuing to evolve at an incredible rate and such a volatile market has made. OTT monetization become increasingly challenging. Most of us are familiar with the huge surge that SVOD saw in 2020, and now we are witnessing a comparable rise in AVOD models. There is plenty of research reporting on a growing sense of subscription fatigue and as Accedo’s CEO, Michael Lantz, discussed in a recent blog, global affairs have made many consumers look to reduce their number of paid subscriptions. The effects of inflation around the world, combined with the rising cost of living, play significant parts in driving this move. In a bid to retain subscribers and attract new users, both Netflix and Disney have recently announced that, alongside their standard service, they plan to launch ad-supported tiers at a reduced monthly fee.
Assessing Subscription Video on Demand (SVOD) models
The SVOD business model brings a number of significant advantages, such as guaranteed regular revenue streams and the ability to create a sense of exclusivity because some content is only available through your service. As long as you can deliver an excellent user experience alongside an engaging and relevant catalogue, you are in a good position to build a loyal fan base that will help you grow and expand your service over time. In addition, the absence of ads keeps users engaged and generally makes them watch for longer.
On the flip side, video services relying on subscriptions have to invest heavily in content in order to make the monthly fee worthwhile to the user. Services that are entirely dependent on revenue generated from subscriptions have to work really hard to continually retain and attract new customers, ultimately convincing them over and over again that this is where their money is best spent.
Assessing AVOD (advertising based models)
In theory, it is easier to reach a wider audience with an AVOD business model since users don’t have to pay anything to use your service. A large user base also has the potential to bring big ad sales revenue which, of course, is an attractive proposition for many video service providers. Apart from a blip in 2020 (which was largely driven by Covid), global ad sales are on a steady upward trajectory so a business model based on this set-up should still guarantee a reliable source of income for the long term.
At the same time, a company relying on an AVOD model will always have to balance on the fine line of generating enough ad-sales revenue to sustain and grow the business, while still not irritating viewers with too many ads. Frustrated users are obviously at risk of churn and reduced audience numbers will then have a negative impact on sales. Providers relying on AVOD models also have to manage the risk of their viewers disengaging and switching to another service during ad breaks.
Assessing service-specific criteria
As mentioned, the decision on whether to choose a subscription or advertising based model will largely depend on factors such as your target audience and type of content provided by your service. It’s not surprising that different audiences are more receptive to certain models. More affluent viewers with higher levels of disposable income are more likely to be attracted to a subscription-based model, while older or lower income users are more likely to prefer advertising based set-ups.
The geographical location of your audience is also important considering that research shows how take up of AVOD is greater in some regions than others. According to one recent report, more viewers choose advertising-funded services in the US than anywhere else, and the growth of AVOD is projected to grow faster here than in any other country. In the light of this, it is little wonder that Disney’s ad-supported service tier is being launched in the US where it is expected to have the greatest impact.
Moreover, some types of content naturally sit better with a certain kind of OTT monetization model. Premium and exclusive content, such as top rating shows and new blockbuster movies, are generally incentive enough to make users commit to a SVOD model. For older or lower value content, an advertised-funded model might be better suited.
Considering a hybrid approach
Once assessing benefits and downsides, as well as having looked at service-specific criteria, you might realise that it doesn’t have to come down to choosing one OTT monetization model over the other. In many cases, it may well make most sense to let viewers choose how they prefer to pay for and access your service. As seen recently with the likes of Netflix and Disney hybrid business models are on the rise, where lower subscription fees are coupled with advertising. Another variant is to offer lower ad-funded service tiers with only selected content. These kinds of hybrid AVOD/SVOD models are set to play an increasingly big role in the global streaming market going forward.
From early 2023, Accedo One™ will make it possible for any video service provider to easily and cost-effectively launch hybrid OTT business models, supporting tiered subscription and advertising in one video service. The new feature will be previewed by Accedo at this year’s IBC, between 9th - 12th September. If you would like to find out more about how we can support your journey towards delivering a world class video experience, please get in touch with us to book a meeting.