The Definitive Guide to OTT Monetization
Man with money coming out of his TV set, representing OTT monetization.
Which OTT monetization models are most popular? Which are most profitable? Which looks to dominate the OTT market over the next several years?
Monetization is what keeps the OTT industry afloat. There are five primary ways that OTT providers can generate revenue—and they each have their pros and cons.
There are five primary OTT monetization models: transactional video on demand (TVOD), premium video on demand (PVOD), subscription video on demand (SVOD), advertising-supported video on demand (AVOD), and hybrid video on demand (HVOD)
SVOD has long been the leading monetization model, but newer ad-supported services are challenging it
Many OTT providers are embracing a hybrid approach with both ad-supported and ad-free subscription tiers
OTT revenue models.
TVOD: Transactional Video on Demand
Transactional video on demand (TVOD) is one of the oldest revenue generation models for both OTT and traditional pay TV providers. Cable and satellite services have long offered their viewers premium content on demand (sometimes dubbed pay-per-view or PPV), initially big sporting events and eventually offering fresh-out-of-the-theater movies. Early Internet-based services, such as Amazon, Apple, and Google, embraced this model by offering streaming movies and TV shows for purchase or rental from their online stores.
TVOD is strictly a transactional model. Viewers typically pay a few dollars to rent a program and have access to it for several days. Alternately, some services offer content for a higher purchase price, which lets viewers have unlimited access to the program.
One of the chief advantages of the TVOD model is that it's simple and easy to understand. Customers are used to buying and renting movies on DVDs and Blu-ray discs, so buying and renting similar content online is familiar and convenient. For OTT providers, it's an immediate source of revenue for high-profile content.
PVOD: Premium Video on Demand
During the COVID-19 crisis, a new wrinkle for on-demand video developed. Faced with the closure of movie theaters, several big studios opted to debut first-run movies on their streaming video services. These premium movies commanded a premium price, often $20 or more for a weekend rental, thus prompting the label of premium video on demand or PVOD.
For example, in September 2020, Disney premiered its live-action movie Mulan on its Disney+ streaming service for $29.99. Two years later, in June 2022, Disney offered Doctor Strange in the Multiverse of Madness as a PVOD release on Disney+ for $19.99. In both cases, the content came several months later for free to the service's subscribers.
SVOD: Subscription Video on Demand
The highest-grossing OTT revenue model today is subscription video on demand or SVOD. Examples of this model include services such as Netflix and Paramount+ that offer viewers ad-free programming for a monthly subscription price. SVOD pricing ranges from a low of $4.99 for Apple TV+ to a high of $19.99 for Netflix's Premium tier.
The primary advantage of the SVOD model is that it creates a large base of steady and predictable monthly revenue. A service with several million subscribers paying $10 or more a month can generate tens of millions of dollars every single month. That's a good business model, at long as the service can hold onto its subscribers.
Subscribers like SVOD services because they get a lot of content—including original programming—for a relatively low monthly price, and all commercial-free. This is how Netflix managed to dominate the market for years before real competition began to erode their base.
AVOD: Advertising-Supported Video on Demand
While viewers like watching programs without commercials, they also like getting content for free. That's the advantage of the advertising-supported video-on-demand (AVOD) model—lots of content for no monthly subscription fees. Viewers will put up with some number of ads if they get free content in return.
OTT providers like the AVOD model because it's a return of sorts to the traditional ad-supported programming behind broadcast television. The nature of streaming video and internet analytics puts a new spin on the old approach, however, letting providers insert ads that target specific viewers. This lets OTT providers charge premium ad rates and gives advertisers a bigger return on their ad spend.
It's no surprise, then, that AVOD services such as Pluto TV, The Roku Channel, and Tubi are drawing an increasing number of viewers from SVOD services. It's also worth noting that the biggest streaming video service of them all, YouTube, is built on the AVOD model.
HVOD: Hybrid Video on Demand
The newest OTT monetization model is a mix of several older models. Hybrid video on demand (HVOD) offers ad-free content for a set monthly subscription price and ad-supported content for a lower price—or, in some instances, free. Some HVOD services also offer TVOD and PVOD content, giving consumers a real choice in terms of programming and pricing.
Hulu is a good example of the HVOD model, offering a $6.99/month ad-supported tier and a $12.99/month ad-free tier. Peacock offers its ad-supported tier for free and an ad-free tier for $9.99/month. HBO Max also offers hybrid plans, and Netflix has announced it's adding a lower-priced ad-supported tier to its traditional ad-free subscription plans.
Which Monetization Model is Best?
At present, OTT monetization is in flux. SVOD remains the leader in the number of viewers, with 82% of consumers subscribing to one or more subscription services. However, upstart AVOD and HVOD services are strongly challenging that dominance. According to Deloitte, more than half of all consumers are now watching ad-supported services—and that number is growing fast.
Percent of consumers who use various digital media.
SVOD services had several years of solid subscription growth, especially during the COVID pandemic, when captive viewers flocked to new services such as Apple TV+, Disney+, HBO Max, and Paramount+. Post-COVID, consumers appear to be suffering from subscription overload and are reluctant to continue multiple high-priced monthly subscriptions. The high amount of churn among subscribers shows this strain, which according to Deloitte, averages 37% in the U.S.
Each OTT revenue model has its pros and cons, of course. Consider the following:
SVOD has the advantage of a predictable monthly revenue stream
AVOD attracts advertisers willing to pay a higher rate for highly-targeted viewers
TVOD and PVOD provide quick monetization of premium content
HVOD lets providers offer a mix of revenue models for different types of viewers and content
The appeal of the tried-and-true advertising model has contributed to AVOD's growth in recent years. It has also inspired many formerly pure-SVOD services to consider adding free or lower-cost ad-supported tiers. According to Applicaster's The State of OTT Revenue 2021 report, 76% of OTT providers are considering changes in their business models, with two-thirds transitioning to an HVOD model. Whether it's pure AVOD or an HVOD mix that includes an ad-supported tier, advertising appears to be a significant component of the future of OTT video monetization.
(In the following video, three industry veterans discuss what monetization model they'd choose for a new OTT service.)
How to position and monetize a new OTT service.
Bottom Line: How to Make the Most Money from OTT Video
How can an OTT provider maximize its revenue potential? The key appears to be offering different types of services for different consumers. Some OTT providers do this within a single service, as with Hulu's dual ad-supported and ad-free tiers. Other companies prefer to offer multiple services, such as Amazon's SVOD-driven Prime Video and AVOD-based Freevee service.
However you do it, remember that it's all about serving customer needs. As viewer preferences shift, you need to be able to adapt quickly. That might mean adding new tiers with different pricing to an existing service or launching an entirely new service to create a separate customer base. Just make sure that you deliver a high-quality viewing experience with minimal downtime and issues—something that all viewers appreciate.
Contact Penthera today to learn more about our solutions for improving the streaming viewing experience.