To Ad or Not To Ad: Strong Case for OTT Ad Monetization

With cost of content on the rise, should OTT players shift towards more ad based digital models?

While hyper-scaled players like Netflix and Amazon could have the capital to maintain a pure subscription based model, rest of the ecosystem will find it difficult to fund content investments by subscriptions alone

Let's discuss a few basic terminologies. What are CTV and VOD? 

Connected TV (CTV) refers to any TV that can be connected to the internet to access content via tech that comes in two basic forms:

• Any non-smart TV connected to a CTV streaming device (Roku stick, Fire TV stick, Apple TV, Chromecast, Playstation or Xbox)
• Smart TVs with embedded OSs (TCL+Roku, Toshiba+Fire TV, Sony+Android TV, Samsung Smart TVs, etc.) 

Video on Demand (VOD) allows the viewer to access video content outside the constraints of a linear/static broadcasting schedule. (i.e., consumers watch what/when they want)

CTV penetration has exploded (up 4x since 2010), due to adoption of streaming devices and smart TVs...

but most households use CTV as a supplement today and not necessarily as a replacement for traditional linear cable/satellite

The ad-supported CTV market is still in its infancy, but wall street views it as the next big secular trend in media. Experts believe that the proliferation of streaming TV capabilities (devices + smart TVs), streaming content options, and emergent Adtech will drive rapid growth.

Shift towards more increased ads mix

Over time, due to rising content costs and other economic reasons, the digital TV model to shift more toward ad supported. As evidenced by Netflix’s (NFLX) last year massive debt raises, the cost of content is only increasing and competition from traditional and internet focused players should continue to drive up content costs.

Consumers have already shown willingness to accept ads in digital TV content, as evidenced by Hulu’s two tier offering and ESPN and other players’ digital models. Ultimately, it is expected that digital TV will gradually transition to a more ad supported model similar to the mix between ad supported and subscription content on linear TV.

While hyper-scaled players like Netflix and Amazon could have the capital to maintain a pure subscription based model, rest of the ecosystem will find it difficult to fund content investments by subscriptions alone

Case study of Roku: How can OTT providers generate money from advertisement

"Bringing customer engagement to a new level using a ad based digital model"

Serial entrepreneur Anthony Wood named his California-headquartered streaming device company ‘Roku’, meaning six in Japanese, as a nod to his half-dozen business ventures.

He also worked briefly at Netflix, directly under its co-founder Reed Hastings. But Wood’s latest pivot, in the midst of the streaming media revolution, has been to bet the future of his streaming device company on the very thing consumers are said to loathe: Advertising.

• Roku's revenue consists of revenue from advertising, along with subscription and transactional rev shares, sales of branded channel buttons on remote controls, and licensing arrangements with TV brands and service operators. Advertising revenue is the most important from a growth and profitability standpoint. 
• Roku offers multiple different advertising opportunities but derives the majority of its ad revenue from video advertisement slots placed within streaming content, viewed as equivalent to linear TV ad placements.

• Ad inventory spans the full spectrum from leading content publishers to niche longer tail content providers. Just because a user sees an ad while consuming content on Roku does not mean Roku has sold the inventory or realizes meaningful economics from the advertising. For example, Hulu holds the majority of its inventory for direct sale with its own salesforce, whether the ad is served to a user via the Hulu app on Roku on any other platform is irrelevant.
• Advertisers and agencies primarily purchase Roku advertising inventory via direct deals, whether upfront or spot. Previously, Roku was a more open marketplace, allowing demand side players more direct access to inventory, but as Roku has increased user scale and built out its adtech stack, Roku has taken more of a walled garden approach.

• Why do advertisers want to buy Roku advertising inventory? As shown in the figure below, linear TV viewership has steadily declined over the past several years, but linear TV CPMs have increased in-kind. As such, linear TV is becoming a less appealing channel fo advertisers and agencies to reach new and existing customers.

• Better data and targeting relative to linear TV, Roku aggregates the data on viewing habits and interests for its ~27m active accounts and is able to leverage this data and subsequent learnings to deliver highly relevant and targeted advertising. Because of its data capabilities, Roku is able to drive competitive CPMs and revenue for its content providers, and deliver more effective advertising for agencies and advertisers.

Conclusion: What lies ahead for the stakeholders

With no single dependency on subscription based models, OTT platforms would evolve and simplify the buying process and drive greater reach and incremental audience that advertisers would not be able to get by limiting simply to specific pieces of content.

On the content provider side, they would all compete on equal footing for monetization. This unbiased model makes content providers more willing to partner with the platforms.

Finally, on the user side, advertising would more targeted and relevant, creating a better viewing experience, and the unbiased monetization allows for a greater breadth and depth of content.

Did you find the article interesting? Do drop in your opinions on the article. Step forward to an interesting conversation.                 

#ekamoira #step-forward #OTT #monetization