Tuesday, August 22, 2017, 11:18 AM ET|Posted by Will Richmond
Advertising, subscriptions, or both? All video providers are currently grappling with the fundamental question of what business model to pursue. With the cost of producing high-quality video and the challenge of attracting and audience more daunting than ever, deciding which path to follow has taken on increasing urgency.
But if the stakes are higher, so too is the murkiness, especially when it comes to what consumers will pay for. Just because Netflix has 50 million U.S. subscribers doesn’t mean getting to a million is straightforward for an SVOD wannabe.
The critical context here is the broad industry realization that the best days are over for the ad-supported pay-TV model, in which networks received both monthly fees from distributors and ad revenue. The so-called “dual revenue” model (which was later emulated by broadcasters by adding retransmission consent fees) funded a lot of content over the years.
But multichannel subscriptions are now falling and skinny bundles are only partially offsetting the losses. And because skinny bundles must by definition limit their programming fees, not all networks will even make the cut. That’s a key driver of the M&A and consolidation happening around the industry too.
Multichannel losses are also happening at a time when more consumers than ever are watching great content without ads, thanks mainly to Netflix and Amazon. When we see ad-free services like FX+ and AMC Premiere launch, along with Disney’s OTT service, which will almost certainly be ad-free when it debuts in 2019, it’s a sign that traditionally ad-supported networks want to get a piece of the SVOD action.
Interestingly, these moves to diversify away from ads come at a time when huge investments are also being made to make ads more effective than ever. Data, in particular, is pushing to the forefront for all networks as they seek to help advertisers better target certain viewers. Automation is also playing a role in making transactions more efficient and optimized.
Meanwhile it’s hard to divine consumers’ preferences. Yes, Netflix has built a robust ad-free model. But both Hulu and CBS All Access, which offer viewers the option to pay extra to reduce or eliminate ads, have said repeatedly that most subscribers still opt to pay less and receive ads. And Facebook and YouTube are continuing to emphasize the ad-supported model even as they push deeper into premium video. Clearly they must be confident their users still have a willingness to watch ads.
Add it all up and it’s easy to understand why choosing a business model for video is not only harder than ever but will likely to remain so for a while to come.