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Would you still be watching YouTube if you had to pay for every single video you watched there? Or do you think Netflix or Amazon Prime would offer the same amazing spread content if you could watch them all for free? The answer is, most likely, an emphatic NO.
Welcome to the various models of OTT video monetization. In this age of streaming wars, where incumbents like Netflix , Hulu, Amazon etc. face harsh competition from new entrants (the latest being Disney+), customer stickiness is crucial to stay in business. And that means that OTT video service providers should not only produce great content, but also offer lucrative opportunities for viewers to keep them subscribed to their services. In this article, we will present the various options available for OTT video monetization.
But first, a little bit about Video on Demand (VOD).
Video-on-demand (VOD) is a video media distribution system that allows users to access video entertainment at anytime, anywhere and on any device of their choice. While over-the-air broadcasting was the most common form of distribution of content in the 20th century, consumers began to gravitate to the Internet and IPTV for content consumption. This culminated in what is now popularly known as Video on Demand, where consumers can use their televisions and personal computers to access videos from a large online library whenever they want.
VOD services first appeared in the 1990s. This was made possible by the amalgamation of two powerful technologies of the era:
DCT (Discrete Cosine Transform) Video compression that reduced the required TV signal bandwidth from about 200 Mbps to 2 Mbps.
ADSL (Asymmetric Digital Subscriber Line) data transmission that helped increase the bandwidth of a telephone line from about 100 kbps to 2 Mbps.
Together, these two technologies helped implement VOD services at approximately 2 Mbps of bandwidth in the 1990s.
According to Statista, Netflix reported revenues of US$ 1.21 billion for the fiscal year 2018, with annual revenues of US$ 15.8 billion, an increase of approximately 116% over the previous fiscal cycle. Another case in point is the Google-owned YouTube video, which has approximately 2 billion monthly users consuming 250 million hours per day on TV screens.
It’s true that people are opposed to paying money to watch content in general. However, OTT video companies must devise their content strategy in conjunction with the appropriate revenue model in order to be successful in the video streaming business. After all, if people get quality content at a reasonable price, they won’t mind the cost!
Some of the popular VOD revenue models that help OTT service providers monetize their offerings:
SVOD is one of the most common and most popular revenue models. It is based on the principle that users subscribe to a video service at a fee for a certain period of time (monthly / quarterly / yearly) and access a variety of content available on that platform at any time on any device of their choice. Subscriptions are flexible, i.e. they are self-renewable or can be cancelled at any time. Subscription models are ideal for platforms with humongous content, such as movies, drama series and different genres to keep the audience engaged and improve customer stickiness.
Examples of SVOD include Netflix, Amazon Prime, Hulu, HBO Go to name a few.
Usually, SVOD service providers monetize through subscription fees, which explains why there are no ads shown to viewers while watching Netflix.
Once the content owner decides to proceed with the SVOD monetization model, there are a few pricing models that they can consider for their customers, depending on the content they provide:
1. Free Trial: This is a limited-time offer, typically used as a glimpse of prospective customers where they can access the entire content library free of charge for a specified period of time. If they find it satisfactory, they can sign up to the service by paying a fee. This is a very common pricing model and is used by people like Netflix, Amazon Prime, Starz, etc. to add more viewers to their league. Research says that 52 percent of people who sign up for a free trial will convert to paying monthly subscribers once the trial period is over.
2. Freemium: This refers to the basic version of the VOD in which users can access the content free of charge for any period of time they want. However, if they are interested in watching some premium content, they will have to pay for it. The “free” aspect of this pricing model attracts a large number of customers who want to access content, but the conversion rate is very low and is around 3%-5% (as per data). In addition, the VOD service provider needs to be on its toes to convince users to convert to premium customers.
3. Varied Access: A somewhat complex concept to grasp, the varied access model is based on the idea of offering differentiated access to content to subscribers on the basis of their subscription plan. For example, Netflix has the offer to pay for 1 screen, 2 screens + HD or 4 screens + Ultra HD. Customers can do their basic 1-screen viewing or upgrade to add more screens and improve video quality. Service providers can be creative in offering these options for differentiated service quality.
The transaction word in this monetization model suggests that the consumer must purchase content on a pay-per – view basis. This model is the exact opposite of SVOD, where the user has access to individual content pieces, as opposed to the entire library that is available to viewers when they sign up for SVOD. TVOD is further divided into 2 subcategories where consumers can pay once to gain permanent access to a piece of content also known as EST (electronic sell-through) or pay a lower fee for accessing content for a scheduled time period also known as DTR (download to rent)
Examples of TVODs are Google Play and iTunes. Usually, with TVOD, consumers are given timely access to recent releases and are offering higher revenues to rights holders. TVOD service providers maintain their viewership by offering attractive price incentives to keep fresh content coming back to them.
AVOD is the next popular VOD monetization model. It involves the inclusion of ads to compensate for the costs involved in the production and hosting of content. Typically, this model is free for users who can log in and stream videos in return for watching ads. This model of monetization generates lower revenues, but has a huge follower base.
YouTube, like Daily Motion, is an example of AVOD. Premium content owners are opposed to AVOD as consumers’ want ad-free experience and AVOD also generates lower revenue than other VOD models.
As the popularity of Over Top Video on Demand is on the rise, service providers are looking at hybrid models to monetize their VOD content. These mixed models are usually a combination of SVOD and TVOD, or a combination of SVOD and AVOD. For example, while you can subscribe to Amazon Video for a monthly fee and access existing content, in order to watch a brand-new movie or live sports event, the customer must pay a certain price. Or, for that matter, we can refer to Hulu, which gives its subscribers differentiated offerings at different prices. There is a lower subscription fee for including an ad and a premium fee for an ad-free viewing experience.
The ubiquity of the Internet, the proliferation of mobile devices and the plethora of content that is being produced have had a profound impact on video and the way in which it is being consumed. Technological changes and changing viewer habits will affect how future VOD monetization models shape.
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