OTT video providers in the US are most likely to pick a subscription-based business model, according to recent research from Parks Associates. It found that 55% were offering their services on a subscription-only basis. Canadian providers were in the same approximate range, with 50% selecting a subscription model.
The Parks Associates research did find that OTT services were experimenting with different business models, including transactional, "freemium," advertising and a hybrid model that combines subscription and transaction. But advertising-based models are in decline due to low revenues and dwindling viewership. Some ad-sponsored providers have exited the market while others have added a subscription tier and moved into the freemium category.
I'm not sure I would categorize Hulu as having a subscription-only model, as Parks does. I believe there is still some free content on the site, although users are directed towards the subscription options. And even on the subscription side, there is a "Limited Commercials" tier and a "No Commercials" tier (which still has some advertising). So I would say it is at least partly ad-sponsored, or a hybrid model.
It does seem that advertising-based approaches are struggling, though I wonder if that is because the best content is being offered by the largest players in the US:
Netflix Inc. (Nasdaq: NFLX), Hulu LLC and Amazon Video.
It is always going to be difficult for emerging players to develop a sizable audience and attract advertisers. Nevertheless, the Internet Advertising Bureau (IAB) estimated that $4.2 billion was spent on online video advertising in 2015 in the US. And the growth of programmatic advertising (using automated systems to buy and sell advertising inventory) should make it easier for smaller players to build an ad-sponsored business, especially if they can deliver a niche audience. AOL estimates that 38% of all online video ad spend will be traded programmatically in 2016.
Still, the research does suggest that a simple, monthly all-you-can-eat Netflix-type model is the best approach for pure OTT providers. However, operators extending pay-TV to other platforms may find better alternatives through experimentation. Simply adding a multiscreen premium on top of a pay-TV service could frustrate subscribers already in danger of cord-cutting.
Video is almost never free; operators have to pay to license the content they distribute. And video is a demanding and unforgiving service, with significant demands on network capacity. So developing the right business model to generate a clear return on their investment is critical for operators.
In the coming weeks, this will be an area of focus for Telco Transformation. We are going to delve into video delivery business models in more depth. We will look at the different business models available to operators and evaluate the best approaches to generating revenue for OTT services. We'll also profile some operators who are exploring innovative models for multiscreen and pay-TV delivery, to offer more insight and help determine the right approach to monetizing OTT.
— Aditya Kishore, Practice Leader, Video Transformation, Telco Transformation