As OTT platforms grow prolifically, so do the number of viewers who are “cutting the cord,” opting to move away from legacy media. It’s estimated that, by the end-2022, 55.1 million people will migrate from traditional pay TV – a seismic shift.
While such a vast user base seems attractive, OTT brands have a challenge before them. First, they must attract new viewers in a crowded market with hundreds of rivals. Next, they need to turn these new viewers into loyal customers who boost the platform’s profitability. We have addressed ways to meet the former challenge in a previous article. Now, let’s turn to the issue of profitability.
OTT monetization models: the basics
The diversity of OTT platforms lends itself to multiple monetization models, each with pros and cons.
Ad Based Monetization (AVOD):
This is the most prevalent model in the market, which we all have encountered. Accounting for 50% of OTT revenue, it remains a mainstay thanks to its low customer acquisition cost. In addition, as an entry-level monetization model, it allows viewers to sample an OTT platform for free. This makes it popular with newer OTT services to attract viewers. It is also popular with advertisers, who have quickly appreciated the vast markets that OTT platforms address.
Although interruptive in nature, the AVOD model creates a low entry barrier for a larger audience and is a scalable revenue solution for OTT platforms with a large or rapidly growing viewer base.
Subscription-Based Monetization (SVOD):
This model requires users to pay a monthly fee to access an OTT platform’s content. While still totaling less than AVOD models – accounting for 40% of total global OTT revenue, it yields the highest revenue per user of any monetization model. Another advantage of SVOD monetization is that it makes financial forecasting easier since users are locked in, and incoming revenue can be easily tracked.
While SVOD is lucrative, the challenge is for OTT brands to get users to sign up. This is where a large bank of original and exclusive content helps. Using a paywall to protect exclusive content, OTT platforms attract subscribers who cannot access that content anywhere else. This is why SVOD is a highly effective model for large OTT platforms like Netflix. Conversely, a smaller OTT platform with less content may struggle to sustain an SVOD model since viewers are less likely to want to stick with its limited offerings.
Pay Per View (TVOD):
Viewers want to maximize the value they get out of their OTT expenses and would therefore choose to subscribe to a limited number of OTT platforms. One way of getting around this limitation is to offer them content on a one-time basis. So, instead of a monthly subscription, a viewer can decide what movie he or she wants to watch and purchase it for a fixed fee from an OTT platform. Similarly, users can get on iTunes and download only the music they like. This makes it cost-effective for viewers who consume less content but are picky about what they watch.
Again, the TVOD model favors OTT platforms heavy on exclusive or seasonal content, such as sports or movies. Pro boxing, for example, was a pioneer in pay-per-view broadcasting even in pre-OTT days. However, smaller providers may not find this an attractive monetization model, as it requires a large user base to generate consistent profits across seasons.
In a way, this model is the old guard striking back. But, faced with increasing migration to OTT platforms, TV E gives traditional broadcasters the option to cross-platform their services. How it works is that subscribers can watch their favorite TV channels on an OTT platform for a fee or as part of a package. So, rather than be stuck to cable TV, authenticated users can access their favorite TV channels anywhere, and on multiple devices.
While it is still in its infancy as an OTT monetization model, TV E allows OTT brands to offer third-party content without producing it. The model works on AVOD, where revenues are shared between the OTT provider and TV channel, and on SVOD, where it becomes part of the subscription package.
Hybrid OTT models: making the most of monetization
As we’ve seen above, each OTT monetization model has its strengths and drawbacks. As the OTT industry matures, though, a single pure-play model is proving to be inadequate. So instead, brands are increasingly adopting multi-tiered OTT models – a hybrid of two or more models – fine-tuned to maximize their revenue.
This hybridization can be done in different ways. Perhaps the most common is the AVOD+SVOD model, where free content is interrupted by advertising but becomes ad-free for subscribers. Many platforms, however, are adopting new hybrid models to suit them.
Disney+ and several sports platforms, for example, blend SVOD with TVOD. So, new releases or live events are offered on a pay-per-view (TVOD), but their existing catalogs are available to all subscribers.
On the other hand, Discovery has a two-level AVOD plus an SVOD model. So, a viewer can watch ad-supported content, pay an intermediate amount to get served fewer ads or watch ad-free content by opting for a full subscription.
Which hybrid model is right for you?
Selecting a hybrid OTT monetization model is as much an art as a science. What must be kept in mind, first and foremost, is that these models evolve along with the platform’s life cycle. So, you could start with AVOD at launch, gradually shift to SVOD once your content library is extensive enough, then offer TVOD when your platform has matured enough to offer exclusive or time-sensitive content.
That said, the most significant asset when selecting a hybrid OTT model is data. The more you know about audience demographics, preferences and pricing sensitivities in different markets, receptiveness to advertising, and seasonality, the sharper will be your understanding of which model is suitable for you.
Another approach is to base your monetization model on your content strategy. Unless a platform has deep pockets, its content buckets will only be able to fill up gradually. So, the time and effort to scale up is a factor to be considered and may be complicated by geographical and regulatory differences across markets.
Partnerships with content providers may also influence how a platform monetizes its content. Many sports franchises, for example, see OTT streaming as a supplemental source of income, with sponsorships and merchandising raking in the bucks. So, a sports OTT channel may be well advised to stick to AVOD, letting many viewers watch their content.
Finally, platforms need industry experience to implement hybrid models, as they are intricate to install and need regular maintenance. There are also more third-party linkages, such as payment gateways, content partners, and content security providers needed for hybrid models to work seamlessly.
All these require not just technology providers but partners with extensive experience developing monetization solutions for OTT platforms of all sizes and maturity. Working with such companies lets you benefit from their insights and the challenges they have overcome in the past. But, once that is done, hybrid OTT monetization models are your platform’s best bet to stay profitable in the long term.