Monetizing OTT: Ads, a la Carte, and Subscriptions

Streaming video to TVs has clearly become a viable way to distribute and access content. While it has not yet reached mainstream adoption, it’s certainly moving in that direction…particularly given the huge push behind smart TVs at this year’s Consumer Electronics Show (CES). So with the technology making streaming video possible largely settled (and amid today’s ramp-up in marketing efforts), we must now turn our attention to the third leg of the stool holding all this up – monetization.

Like any other kind of content, there are three ways to monetize streaming video delivered to smart TVs: subscription, a la carte (aka on-demand), and advertising. And all have an impact on consumer adoption. However, to date, we’ve primarily only seen mostly the first two. Netflix and Hulu Plus are subscription services. Xbox Video and iTunes Video are a la carte services. It’s time to layer in more ad-supported models to bring this activity mainstream.

Here’s why: Only the most loyal and active user will take the subscription route. These are viewers who “get it.” They understand the value of streaming video. They’ve converted to the model. Many of them are cord-cutters. But they’re just a fraction of the mass market. Netflix reported huge subscriber gains for the fourth quarter last year, with 33.4 million. That’s fantastic, but more than 100 million are still paying for either cable or satellite TV (many of whom are also Netflix subscribers).

In contrast, there are the a la carte users…those who cherry-pick the individual shows and movies they want at the moment and pay a one-off rental fee. These viewers are more interested in paying for just the content they want, rather than experiment with something new.

Both models are seeing increasing revenues. According to the Digital Entertainment Group, U.S. streaming subscription revenues increased more than 30 percent in 2013 to $3.1 billion, while video-on-demand (VOD) revenue increased 5 percent to $2.1 billion. And according to an ABI Research report, subscription and on-demand streaming activity combined contributed to the worldwide over-the-top content (OTT) market reaching $11 billion last year.

Adding an advertising model to this mix can play a huge role in driving this figure upward, both by establishing an additional revenue stream and by serving as a path to new users. But there’s also a user acquisition play here. A free, ad-supported service tier would allow new customers who are currently unsure of the OTT model to try it out on a limited basis. Without the immediate upfront barrier of a monthly fee, these users can experiment with streaming video with zero commitment on their end.

Just look at the music space. That’s an industry moving toward a streaming consumption model as well. Streaming services like Spotify have a free, ad-supported tier that lets users listen to music with ads. The pitch to converting free users to a paid subscription is 1) the promise of no ads, and 2) added features. Spotify, for instance, limits the functionality of its service on mobile phones, requiring a paid subscription to get the full experience.

There’s no reason the same strategy can’t apply to streaming video on TV. Consumers are accustomed to ads on radio between their music choices, and they’re just as familiar with ads on TV during programming. Users willing to pay today are already doing so, so there’s little risk involved with adding an ad-supported free tier in hopes of drawing more users into the mix.

Image via Shutterstock.

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