How to Choose the Right Pricing Model for OTT Video Content
As viewing habits continue to shift from traditional Pay TV to Over-The-Top (OTT) streaming platforms, content owners are increasingly searching for ways to monetize their television and film assets via OTT distribution.
Today’s leading OTT streaming services have been around for just 15 years – but in that time, we’ve witnessed the emergence of new distribution strategies and new OTT pricing models designed to maximize revenue for every type of video content.
The emergence of innovative pricing models means that content owners now have more options to consider when it comes to OTT monetization, including which OTT pricing model offers the greatest potential for revenue generation.
In this week’s blog post, we’re taking a closer look at pricing models in OTT video streaming. We’ll explore how OTT streaming providers make money, the most common OTT business models used by today’s popular streaming services to monetize content, and how content owners can choose the right OTT pricing model to maximize revenue.
Understanding Operating Costs for OTT Providers
OTT video streaming is a high-scale technology business where mainstream platforms serve hundreds of millions of viewers and earn billions of dollars in annual revenue. But that revenue comes at a cost, and there are five major types of expenses that OTT providers need to budget for:
- Technology and Development Expenses, including the cost of building, maintaining, and upgrading the OTT provider’s website, mobile OTT apps and Smart TV apps, and technological back-end, as well as adding new features to improve the user experience for audiences and open new revenue streams.
- Content Production & Licensing Costs, including all costs associated with creating new content for the platform, or licensing content assets from existing content owners.
- Fulfillment Expenses, which covers all of the variable costs associated with operating the service. OTT streaming services generally host video content in the public cloud and pay a small fee to their public cloud service provider each time a video is accessed.
- Marketing Costs, which includes all costs associated with marketing the platform and its content to attract new viewers, and
- Administrative Expenses, which covers the basic administrative overhead of operating a business.
How Do OTT Providers Make Money?
To cover ongoing costs and continue investing in technology, new content, and UX improvements, OTT streaming providers need to monetize the content on their platforms by generating revenue from audiences, or from advertisers.
An OTT platform’s ability to generate revenue is fundamentally linked to the desirability of the content it offers, the size of the audience it attracts as a result, and its ability to monetize and retain that audience.
OTT providers have three basic ways of monetizing their platforms:
- Subscriptions – OTT streaming providers can charge audiences a monthly or annual subscription fee in exchange for unlimited access to OTT content streaming on their platform.
- Transactions – OTT streaming providers can charge audiences a one-time fee to purchase or rent access to a specific piece of video content on their platform.
- Advertising – OTT streaming providers can earn money from advertisers by presenting targeted advertisements to their audiences as part of the content viewing experience on their platform.
With these three options in mind, let’s take a look at the OTT pricing models used by some of the most successful platforms.
Source: Antenna Q1’22 Premium SVOD Growth Report
What OTT Pricing Models are Used by the Most Popular Streaming Platforms?
Netflix is the largest and most successful SVOD streaming service, with a viewership of 220 million subscribers in 2022. Netflix uses a subscription-based pricing model where audiences can choose between three service tiers: Basic, Standard, and Premium.
The Basic plan allows unlimited video streaming on one screen while the Standard plan supports two screens, and the Premium plan allows streaming on four screens. Subscribers to the Netflix Premium plan can also benefit from high-quality HD and Ultra HD video streams.
With subscriber-growth appearing to slow down for Netflix, the company recently announced that it would bring advertisements to its streaming platform to help supplement revenues sometime in early 2023.
Disney+ is an SVOD service with two basic subscription options. Audiences can pay for unlimited access to the Disney Plus library, or they can purchase the Disney Plus Bundle that includes access to ad-free Hulu and ESPN+.
At the time of writing, Disney claims it has surpassed Netflix in total subscriptions.
YouTube is one of the world’s most popular OTT streaming services, with 122+ million daily active users streaming more than a billion hours of content each day. YouTube became one of the world’s first AVOD services when it began showing ads on its platform in 2009.
Today, YouTube monetizes video content using a variety of OTT pricing models. Audiences can watch ad-supported content for free (AVOD), or subscribe to YouTube Premium for an ad-free video experience (SVOD). There’s also YouTube Movies & Shows, where audiences can buy or rent access to licensed television and video content (TVOD), and YouTube TV, a subscription-based virtual Pay TV service (also known as a vMVPD) with 85+ linear TV channels.
Hulu is an OTT streaming platform with 41 million subscribers that monetizes its content in a two-tier hybridized pricing model. Audiences can purchase access to Hulu’s ad-supported streaming library or pay more to access the same television and video content without advertisements.
Disney owns a controlling interest in Hulu, and offers ad-free access to the streaming service, as well as ESPN+ and Disney Plus, as part of its Disney Plus Bundle.
Audiences can also purchase a premium subscription which also includes ad-free access to Hulu + Live TV, along with the Disney+ and ESPN+ streaming services.
5) HBO Max
HBO Max is another SVOD service operating with a hybrid OTT pricing model. Audiences can subscribe to the ad-supported HBO Max service or choose to pay for a premium ad-free viewing experience.
6) Amazon Prime Video
Amazon Prime Video has more than 175 million subscribers in the United States and around the world. By bundling its video streaming and eCommerce subscriptions, Amazon has been able to draw a growing number of consumers into its ecosystem of web-based services.
Audiences can purchase a streaming subscription to Prime Video. The full Amazon Prime membership includes access to Prime Video, as well as free shipping and discounts on Amazon.com.
In addition to its SVOD streaming library, Amazon also features third-party content on Prime Video which may be monetized with advertisements (AVOD). There’s also the on-demand Amazon Video Store where audiences can rent or purchase access to video content (TVOD). A rental grants 48 hours of access for a one-time fee while purchasing a title grants the user unlimited access for a one-time fee.
What about FAST?
The most successful streaming platforms generate revenue using a combination of SVOD, AVOD, and TVOD pricing models, but there’s another OTT pricing model that’s growing quickly and threatening to disrupt the status quo: Free Ad-supported Streaming Television, or FAST.
FAST streaming services are ad-supported like AVOD, but video content is presented in a linear format with pre-programmed channels instead of on-demand. FAST provides a casual viewing experience that’s similar to traditional Pay TV, but with no monthly subscription fee, fewer commercials, convenient OTT delivery, and access to a bigger variety of niche and nostalgic content. We will continue to watch this competition of FAST vs Pay TV.
FAST generates far less revenue today than SVOD, but current trend data shows that FAST services are gaining subscribers and increasing revenue rapidly while SVOD services are losing subscribers and seeing a decline in market share for the first time. A report from Comcast found that household penetration of FAST services more than doubled from 8% in Q4 2020 to 18% in Q4 2021.
In addition to providing advertising revenue, FAST is enabling content owners to reach new audiences and generate top-of-funnel leads for more lucrative SVOD services. One example is the NFL, whose FAST channel is available on four different services and helps promote paid services like NFL Plus (SVOD) and NFL Sunday Ticket (Pay TV).
As audience preferences shift toward FAST, we expect to see more media companies launching proprietary FAST services to win more viewers and more content owners launching FAST channels for niche audiences.
Which OTT Pricing Model Generates the Most Revenue?
Now let’s take a closer look at five OTT pricing models and how much revenue they’re generating for video streaming providers.
1) Subscription Video on Demand (SVOD)
In the subscription model, audiences pay a monthly or annual subscription for unlimited on-demand access to the streaming provider’s content library of films and TV shows.
SVOD is a lucrative pricing model for OTT providers, with an estimated (annual) ARPU of just under $70 USD and global revenues expected to top $80 billion in 2022. The most successful subscription-based VOD platforms include Netflix, Amazon Prime Video, Disney+, and HBO Max.
2) Advertising Video on Demand (AVOD)
In the AVOD model, audiences access on-demand video content for free and OTT providers earn money by displaying advertisements as part of the viewing experience. The global AVOD market is projected to earn more than $35 billion in 2022.
The most successful AVOD platforms include social video-sharing platforms like YouTube and Facebook Watch, as well as platforms like Tubi TV, Hulu, and Paramount+ that monetize traditional film and TV content with paid advertising.
3) Transactional Video on Demand (TVOD)
In the TVOD model, similar to traditional pay-per-view, audiences pay a one-time fee to rent (limited access) or purchase (unlimited access) a piece of video content in the OTT provider’s library. The global TVOD market is expected to generate around $9 billion in 2022. Leading TVOD services include the Prime Video Store, Disney Premium Access, iTunes, the Google Play Store, and Vudu.
4) Free Ad-Supported Streaming TV (FAST)
In the FAST model, audiences can view free content presented in a linear format and monetized with advertisements. The global FAST market is expected to generate around $3 billion in 2022 and sustain a high rate of growth over the next 5-10 years. Today’s leading FAST services include Peacock TV, the Roku Channel, Xumo, and Freevee.
5) Hybrid/Freemium Models
Many of the largest OTT streaming providers today use hybrid models that incorporate two or more of the OTT pricing models described above. Amazon Prime Video and YouTube are both examples of OTT providers that monetize content using SVOD, AVOD, and TVOD pricing.
Freemium is a hybrid OTT pricing model where the streaming provider offers two versions of its platform to audiences: a free version that’s monetized with paid advertisements, and a premium version that’s ad-free.
Freemium monetization helps OTT providers capitalize on users willing to pay subscription fees for a premium viewing experience, while continuing to make content accessible for consumers on a tighter budget.
Choosing the Right OTT Platform and Pricing Model for Your Content Assets
Choosing the right OTT platform to monetize your content depends on a variety of factors, including the specific content assets you own, the demographics of your target audience, and your overall brand strategy. To find the best option for your content, you’ll need to answer questions like:
- What content assets do I own?
- Are my content assets in high demand?
- Which platform has the greatest demand for my content?
- Would my assets be considered “Premium Content” by a mainstream audience?
- Is my content mainstream with a wide potential audience, or is it niche with a small, but highly engaged audience?
- What is the target demographic for my content?
- Which OTT streaming services have the largest audiences that fit my target demographic?
- How does my audience prefer to consume content?
When you enter into a licensing agreement(s) with an OTT platform(s), the amount of revenue you can earn depends significantly on the video monetization techniques and pricing strategy of your distribution partner(s), as well as the licensing terms you negotiate.
- Content owners licensing assets to an SVOD video platform will typically be offered either a flat-fee for unlimited streaming rights, or a royalty fee for each view of the content. Netflix is rumored to prefer flat-fee licensing deals where it retains future streaming rights, while Amazon Prime Video is confirmed to pay content owners between 4 and 10 cents per hour streamed.
- Content owners licensing video assets to AVOD or FAST streaming services will usually get a percentage share of the advertising revenue generated through user engagement with the content. On ad-driven streaming platforms like YouTube and Twitch, content creators receive around 50-55% of ad revenue.
- Content owners licensing video assets to a TVOD platform will usually get a percentage share of rental or purchase revenues generated by their content. Amazon pays content owners 50% of net revenue on TVOD transactions through the Prime Video Store, while Apple reportedly offers content owners 70% of revenue from TVOD sales and 60% from rentals through iTunes.
TVOD platforms offer the highest revenue per content view, but your content will reach a smaller audience than if it were monetized through SVOD or AVOD. SVOD and AVOD platforms may not pay as well as TVOD services on a per-view basis, but they can bring your content to a much wider audience.
The challenge for content owners is to determine which platform and OTT pricing models are likely to drive the most revenue and brand equity for a given content asset. That means answering questions like:
- Should I enter a flat-fee licensing agreement with an SVOD platform, or would a share of advertising revenues from an AVOD platform eventually be worth more?
- Should I monetize a television series by selling/renting seasons on a TVOD service, or by setting up a FAST channel? Could I do both?
- How would distributing a content asset on one platform impact its performance or marketability on another platform?
- Can I use AVOD or FAST as a lead-generation mechanism for a premium or subscription-based OTT service?
To find the answers, content owners need new data-driven methods for measuring content performance across multiple distributors and predicting the performance of their assets in the available OTT pricing models.
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