Offering a free video service is nearly impossible today. Quite apart from substantial content delivery costs for such a high bandwidth application, getting rights to stream TV shows and movies is extremely expensive.
So anyone offering a video service needs to find a way to monetize it. Developing the right business model is often the key to success. And the "right" model is often a function of the kind of content you are offering, and the kind of audience you are trying to reach.
Telco Transformation has therefore put together a short list of business model types, and some thoughts around each model to help select the right approach for video service providers. But this can only be a starting point, as each business will have its own unique strengths and opportunities.
Subscription: This is the most widely used model, both in pay-TV and for over-the-top (OTT) services like Netflix Inc. (Nasdaq: NFLX). The greatest advantage is visibility: Pay-TV operators get a steady, predictable revenue stream and problems with subscriber losses can be recognized relatively early in the process.
There are many variants of this approach. For example, providers can select multiple subscription tiers, where premium content can be added for an additional charge. Or the opposite, as with the slimmed down pay-TV services being offered by some US pay-TV providers today. Pricing can also be dependent on the number of compatible devices or simultaneous streams, as with Netflix's service tiers. (See Will the 'Slim' TV Business Model Really Retain Cord-Cutters?)
Generally speaking, I would say this model is best suited to operators offering a large library of content with enough to keep subscribers engaged over the course of the month. The library should also have broad appeal, at least at the basic tier of service, and must be regularly refreshed so there is new content available for subscribers. Typically, the library would be a mix of high-value content, i.e., new, hit shows or movies, and other, less expensive content. This could include older shows and movies, niche or more specialized content and lower budget productions.
Transactional: This is the other widely adopted approach, but has some disadvantages compared with subscription. There is far less revenue visibility, and the service provider must live or die based on content selection. The transactional or pay-per-view model is built on high-value content. Libraries may feature a variety of content, but generally speaking 80% of revenues come from 20% of titles. Invariably, these are the most recent releases featuring the biggest stars. They are also the most expensive and contested titles to license. It's a high-risk strategy, but the transactional window for movies is often earlier than the subscription window, and early access is a major purchase driver in the movie business.
Typically, transaction-based services offer high-value content, have smaller libraries and less usage than subscription services and place great emphasis on new releases. There is also an opportunity to market niche content using this model, where small audiences who are very interested in a particular kind of content can get access to it.
Bundling: This is not generally popular, because it doesn't yield direct revenue. Still, some service providers have used it to add value to their broadband services. It's probably more practical when used tactically, for a fixed time period. For example, BT Group plc (NYSE: BT; London: BTA) used it effectively to drive broadband subscriptions by offering BT Sport (which included some very expensive soccer rights) to its broadband subscribers.
This is an expensive strategy but can be very effective in adding value to an existing subscription, reducing churn and driving new subscriber growth.
Partnership: One example of such a strategy would be integrating a popular OTT service into a pay-TV service, as Comcast Corp. (Nasdaq: CMCSA, CMCSK), Virgin Media Inc. (Nasdaq: VMED) and others have done with Netflix. For this to work, the brand has to be extremely powerful, otherwise it's not really worth it for the operator. High-value, unique content is also critical.
It can also work when the content is highly specialized. Even if it doesn't appeal to a broad audience, it can be very significant in attracting niche audiences. An example would be some of the ethnic content packages offered by pay-TV operators to various communities in the US.
Hybrid: Service providers can also use a combination of multiple business models for a single service. One example would be Hulu LLC which uses a combination of advertising and subscription revenue to fund its service. I would also include the so-called "Freemium" model under this heading, since the "free" part of most freemium services is often ad sponsored. Home Box Office Inc. (HBO) and Sky are also potentially part of this category, since they are both pay-TV services with a premium subscription model, but also have their own direct-to-consumer services (HBO Now and Now TV). And there's also HBO Go, which is a TV Everywhere bonus service that is offered in partnership with operator partners.
The advantage of a hybrid service is that it allows for subscription pricing to be kept comparatively low (or even free) for the base service. This provides more pricing flexibility, helping to build initial relationships and grow a subscriber base, while still allowing for a sustainable business.
QoE/SLAs: This is a reversed pricing approach, where the revenue is paid by the provider of the content and not the consumer. It allows the network operator to charge for the preferred use of its network assets by the content provider. This is a very contentious area, as it is seen by many to encroach on net neutrality concepts. It may not be a realistic approach in many countries based on regulatory attitudes. The key issue for this model is whether national regulation will permit it.
Advertising: The greatest advantage of this model is that consumer don't have to pay for it; so cost is no constraint to adoption. In practice, however, this has probably been the riskiest model. The key to success is having a very strong content brand with high value content. In addition, the right audiences must be delivered to advertisers. This requires the service to have a predictable viewership with the right demographics, and the ability to effectively measure viewer data.
There are two types of online video advertising models too. The first, premium or directly sold advertising is the more traditional model, where inventory is sold by the service to advertisers via a sales team or agency. This usually requires high-value content and a strong brand.
The other option is programmatic, or automated buying. Here, advertising inventory is bought by algorithms based on audience specifications provided by the advertiser. For online video distributors with niche audiences, or small providers that lack ad sales infrastructure and big brands, programmatic advertising can be a potential solution. In fact, video analytics company Ooyala found that the total number of programmatic transactions increased 160% between the third and fourth quarters of 2015 to 26.3 million transactions. It is increasingly being used for more premium content and even for TV advertising.
While I think this blog is a useful starting point, I don't flatter myself that I have listed all possible options for video monetization. And even within each of these headings there are potentially several variants that video service providers can exploit.
So I'll ask readers to add to, or challenge some of the conclusions here: What am I missing? Are there business model variants I haven't included? Are there completely different business models I've not mentioned? Monetization is a critical element for the development of video services, so it would be great to get more insight in this area.
— Aditya Kishore, Practice Leader, Video Transformation, Telco Transformation