The Future is AVOD – Pt. 2: Can Streaming Services Scale on Ads Alone?

Give a moment’s thought to consider the early heroes of OTT.  For most — Netflix, Hulu, HBO and Amazon Prime come to mind as the Mount Rushmore of streaming.  With their hefty financial and corporate backings, ultra-premium content libraries, and consistent subscription revenue sources, it’s fair to say that they’ve dominated the streaming world thus far.  Their inarguable growth has led to a false narrative in the industry and a misinformed belief held by many; that subscriptions are necessary to scale and support a massive OTT streaming service. Although this dogma is informed by the glory of SVOD services and public failings of their ad-supported rivals, the terrain of OTT is rapidly shifting. Those who underestimate the power of an AVOD business model may end up leaving millions on the table in the near future.

 

To understand why AVOD as a monetization strategy is capable of powering the next great streaming service, we have to understand the economics around ads on OTT.  To recap part one of our ”Future is AVOD” blog series, advertisers love OTT! With OTT, specifically connected TV’s, users’ engagement is higher, streaming services are able to reach valuable niche audiences, and OTT can target and offer analytics with far more precision than other digital and traditional platforms. These advantages for ads add up to two simple facts; OTT receives sky high CPM’s (the amount advertisers pay for 1,000 impressions) and impressive fill rates.  As audiences continue to migrate from cable to streaming, and advertisers are able to buy even larger quantities of inventory with advanced targeting capabilities, the CPM’s are going to increase even more, going beyond traditional tv.

 

In large part, thanks to these factors, AVOD’s growth is due to rapidly increase over the next few years.  According to Emarketer, billions of new dollars in ad spend are expected to pour into OTT, resulting in a 225% increase between 2018 and 2021.  This significant expansion represents an opening for new streaming services to swoop in and carve out their own niche’ within the market.

 

Comfortably nestled in the good graces of Advertisers, AVOD’s growth is set to explode in the immediate future.  

 

AVOD is already working to power monetization for some of the largest streaming services in the world.  Popcornflix, Tubi TV, Pluto, Big Star Movies, Bumblebee TV, and countless others are generating substantial revenue exclusively through ads.  The math is simple for these brands – rising CPM’s and fill rates on OTT produce stronger revenue and growth opportunities than if they were to place a subscription paywall in front of their content.  These services are well positioned to capitalize on the anticipated increase in advertising spend by establishing an audience early.

 

AVOD not only often brings in more dollars but also has several major advantages in areas that SVOD falls short.

 

Putting a subscription in front of content creates a tremendous amount of friction in the conversion funnel. It is an obstacle that free services simply do not have to deal with. Marketing campaigns that aim to convince consumers to try an AVOD streaming service have such a considerable advantage because they can utilize the most powerful word in the English language — FREE.  The value proposition is short and easy to spoon feed to target audiences. The fact that an AVOD streaming service has no direct financial costs to consumers also means that users will churn at a much lower rate than on subscription-based services.  This absence of cost for users means factors such as economic status and perceived value of an updating content library have a lessened impact on stickiness.

 

When a streaming service has no financial costs to users, they are more likely to try it, and less likely to terminate.

 

In contrast to AVOD’s rising forecast, SVOD services have begun experiencing significant pitfalls of late.  It all starts with increased competition. Many viewers on OTT are there to save money over a cable subscription.  Simply put, these users are extremely price sensitive. As more and more SVOD streaming services pop up, offering exclusive content, pricing competition has to increase, piracy grows, and account sharing abuses spread.   This boils down to a decreasing number of consumers, paying less for fewer streaming services.

 

Both subscription and advertising monetization models have merits.  The once greener pastures of SVOD have caused a swarm of new services to crowd the space, hurting one another in the process.  On the other hand, AVOD streaming services have a clearer path to growth and can be less concerned with competition. Add in the extreme increase in advertiser spend expected in the immediate future, and it becomes less a question about whether ads can carry a streaming service at scale, and rather a matter of how can a streaming service optimize ads to ride the coming wave of promotional dollars?  Check out the next post in our series ” The Future is AVOD,” to find out why it is currently so difficult for a streaming service to optimize for ads, and how Unreel has engineered a solution to overcome the current shortcomings of the AVOD ecosystem today and capitalize on its expected growth. 

 

This is the Second installment of a multi-part blog series “The Future is AVOD” where we will explore:

Part 1: Why advertisers love OTT.
Part 2: Can streaming services scale on ads alone?
Part 3 & 4: Why AVOD is Hard and How Unreel Has Solved it

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