Indepth: Will AVOD deliver the eyeballs for OTT? It’s not as simple, say experts

Ad-supported video on demand or AVOD is the new hot thing in the streaming ecosystem, with major streaming services considering the option. Some of the key advantages of offering AVOD option are expanding the user base, building and reaching a wider audience, etc. Even ad-averse premium SVOD platforms like Netflix have started adopting the AVOD model. So, is AVOD the way going forward? What are the key things that OTT platforms need to keep in mind for a robust and sustainable AVOD system in the long run? Adgully attempts to find answers to these questions and much more with insights from industry experts.

The SVoD streaming wars have reached a new stage, where it is getting increasingly difficult to grow subscribers in many markets and penetration reaching a high level, such as in the US, UK and some markets in Western Europe, points out Orina Zhao, Senior Analyst, Ampere Analysis.

Therefore, she adds, amidst the context of inflation, cost of living crisis and low economic growth rate, Netflix’s previous strategy of raising subscription price to fund its content investment, which, in turn, brings new subscriptions and justifies its next price hike, no longer works.

“Thus, Netflix has decided to launch a new ad-funded subscription model, which is aimed at reducing churn and finding new subscribers with a lower option for consumers with less consuming capacity or under the pressure of spending. Similarly, Disney+ and other nascent OTT streaming services such as Peacock have all started to offer an ad-funded subscription tier to give an extra option to maintain growth. However, such hybrid tier is complementary to the services’ subscription tier, allowing consumers the choice of whether or not to see advertisements in return for a reduction in subscription cost. Netflix also suggested that its hybrid tier was “neutral to positive” in revenue terms compared to its ad-free basic tier,” Zhao explains.

Offering a complementary ad-funded subscription tier provides a new and cheaper option for consumers to get access to the same amount of content catalogue with a lower price, she notes, adding, “It is launched to reduce churn so consumers that were considering leaving because of cost-of-living pressure, stagnated disposable income or SVoD price hike might stay on board. It's also for finding new subscribers by providing this extra cheaper option so as to lower the access threshold and potentially expand user base, who might upgrade to the higher-ARPU ad-free tier at a later stage.”

Meanwhile, Karan Taurani, Senior Analyst at Elara Capital, maintains that AVOD is not the way going forward, as I have always been saying. According to him, premium is the way ahead. “Since the market is quite large for a country like India, you’ve got a diverse set of customers and diverse set of OTT platforms. So, I don’t think AVOD is the only way going forward,” he says.

Will AVOD and SVOD co-exist?

Will AVOD supplant SVOD? Or will both the models co-exist, with OTT platforms opting for a hybrid model in markets like India?

Experts feel that both the models will co-exist. “Both models will continue to co-exist. While AVOD works very well for a library or non-premium content, SVOD has found success with Original and more premium content,” notes Vivek Lath, Managing Director, GoQuest Media Ventures.

According to Orina Zhao, an ad-funded subscription tier will supplement rather than supplant the ad-free subscription tier of major streaming services such as Netflix or Disney+.

“The new AVoD tier is to give an extra option so as to reduce churn and find new subscribers, but not replace the central subscription model. However, India is a unique case, as pure ad-funded free video services are prevalent, and a large number of consumers get access to the premium tier of video-on-demand services for free or via a bundle with a nominal fee. Given mobile or telco partnership is the most popular access approach of video-on-demand services in India, I don’t think a hybrid ad-funded tier with subscription fee will be introduced in India because SVoD penetration in India is still relatively low (around 25% of total households) and paying mentality for content is still generally under-developed (let alone a paid with-ads tier). Major SVoD services in India will continue working to drive up direct subscription with a higher ARPU while strengthening mobile partnership to consolidate user base,” she says.

AVOD will always have a more extensive user base if offered free of cost to the viewer, says Vivek Lath. “Long tail can be monetised using AVOD. Unlike Pay TV, where regulatory and operational costs constrain the competition to corporates, competition for the advertisements budgets on AVOD will include individual creators on platforms such as YouTube. Advertisers will have more choices to allocate budget,” he adds. 

Freemium model is the way ahead, according to Karan Taurani, as he sees both co-existing. Detailing the key advantages of AVOD, Taurani says, “The user base is very high for AVOD. The SVOD platform is expensive as a proposition. AVOD helps you build a very large user base and the reach is phenomenally high.”

“In terms of growth numbers and size, AVOD will always dominate SVOD, because of the price sensitivity. SVOD in India today doesn’t have driver in terms of ARPUs, because customer willingness to pay higher price for OTT platforms is very low. For SVOD, there is only one driver, which is the increase in the number of subscribers. But for the AVOD, the triggers are two-fold: you got increase in terms of number of viewers, advertising budgets, and the pricing. AVOD will dominate the video OTT market. But SVOD will also gain traction. The market dynamics in India will be 60 to 40 per cent in favour of AVOD,” Taurani says. 

However, there are pitfalls that OTT platforms need to watch out for. “I don’t foresee large monetisation opportunities for AVOD. So, you won’t see the pricing of TV matching up to the pricing of AVOD, at least in the near term. It will take some amount of time. TV will co-exist with digital, and within that both AVOD and SVOD will co-exist and will move towards a freemium model,” says Taurani. 

According to senior analyst Paritosh Joshi, all three models will co-exist. “Nobody thinks of it like that. We forget that the original OTT platform is, in fact, YouTube, which has been advertising-led. But for the last several years, they have offered a premium subscription model. In fact, there is a fourth model. In countries like the UK, you have the license fee model. BBC player is funded by the license fee. It is a small model, but it exists. AVOD model has wider user base than a pure subscription play can have. Even within YouTube, there are layers of paywalls. Today, Amazon Prime is the aggregator of many other services. Hoichoi has also done the same thing. The main pitfall of AVOD is the amount of advertising inventory you offer. You have to be careful as to how much is reasonable.”

According to Joshi, Netflix is not the big daddy. The big elephants in the room, he says, are going to be Alphabet and Meta. “If you don’t have these in your calculations, then a very large portion of what constitutes Internet video is not being covered.”

The emergence of ad-funded offerings, including FAST (free ad-supported streaming TV services) channels, is gathering pace, says tech, media and telco analyst Paolo Pescatore.

During a recessionary period, he adds, users will be forced to make some tough decisions regarding the need to keep on paying or signing up to a slew of services. “Inevitably, users will also consider downgrading as well. Rising costs will fuel switching and in some cases drive more premium offerings at affordable prices. A diversified business model offering a range of pricing options (subscription, a la carte and increasingly advertising) will resonate with a broad range of users. However, as underlined by recent earnings, it is not all plain sailing with lower ad sales.”

All models will co-exist as a pure play provider will struggle to compete in a diversified and competitive landscape, says Pescatore. According to him, adding an ad tier will help retain customers for those that want to downgrade and entice users to sign up. Fully expect some users to be frustrated and cancel altogether or even move up the pricing tiers. Managing expectations will be important by ensuring the right ads are served; otherwise users will cancel.”

Ultimately, he asserts, the shift towards streaming will negatively impact linear TV networks and free-to-air broadcasters, who are heavily reliant on advertising as the main revenue source. This could prove to be the final nail in the coffin for these players.

Lack of a measurement system

In the UK, Netflix has joined UK TV rating agency BARB for audience measurement. But in India, there is no measurement system for streaming platforms currently. Should there be such a system here in India also for a thriving AVOD ecosystem?

According to Orina Zhao, Netflix signing up to BARB in the UK is significant as it shows Netflix is already accounting for a share of viewing as large as linear broadcasters. It also shows that subscription numbers are no longer the only barometer of its performance, but revenue and viewing time are getting increasingly critical, as BARB data can somewhat serve as a currency within discussions with ad buyers.

“Currently in India, the regulator BARC only measures viewing time for linear TV channels, instead of SVoD platforms. Therefore, it will definitely help measure the traction of the SVoDs services if there is a synchronised measuring system in India to compare linear and SVoDs. However, it does require efforts and actions from the whole industry or state-level efforts to materialise such cross-sector synergetic viewing measurement,” she asserts.

It is in the platform’s best interest to provide more transparency to advertisers, says Vivek Lath. “The industry will need trusted third parties to define standard measurement guidelines and verify numbers.”

Karan Taurani, too, notes that in India there is a lack of a streaming measurement system. “In India, the digital advertising market is driven by social media, search, Google, FB, Instagram, etc. They drive 60-65% of overall search. Within this, there is no need or way you can have a measurement system, because these are large companies; they don’t share too much information in terms of viewers’ eyeball data.”

The pressure for independent platform-agnostic measurement system will grow in the future, feels Paritosh Joshi. “But these platforms have successfully maintained their wall gardens. They don’t let you look into their wall gardens. Now, Elon Musk has clearly said that Twitter is an advertising platform; he has not minced his words. If one of the big guys decides to embrace agnostic measurement, slowly other people will have to fall in line,” he says.

According to Taurani, the OTT market in India is fragmented. “You could actually have some kind of measurement system. Major SVOD platforms are not in favour of sharing data. If Netflix has associated with BARB, you might see other SVOD platforms opening up for measurement systems. You get a clearer and better picture when every platform is willing to share their data,” he adds.

Paritosh Joshi asserts that for any VOD platform to succeed, certain things need to be taken care of, primary one being the quality of content. “If your content is rubbish you don’t have a hope. If you can have high quality content on your platform, people will come. But it is expensive. There will be niche OTTs as well; they will have to figure out how to survive. May be they will become part of OTT aggregation platforms. Today, Prime is essentially an OTT aggregation platform, apart from their own content. You will see very interesting innovations coming through over a period of time. But fundamentally it is about content. The survival of an OTT depends on how many repeat visits you make. You need to be content-rich and have all types of content – short-form as well as long-form.”

According to Vivek Lath, the platforms need to enable long-tail advertisers to use self-serve ad-buying systems like Google Adwords. They also need to provide in-depth analytics to advertisers for greater transparency.