Can online advertising be profitable for small to midsized OTT video players?
The rapid rise of internet users in the past decade has paved the way for online advertising to flourish. It's predicted that online ad spending will eclipse 200 B USD globally sometime in 2017, marking the first time it surpasses TV ad spending. A large proportion of OTT video players all over the world are looking to capitalize on this trend by using online advertising models to generate revenue from their content. By providing compelling content in a free ad-supported model, some of these players have successfully attracted impressive user numbers in short periods of time. Hotstar in India, for example, managed to acquire 140 M users in less than two years from launch.
However, in recent years a number of established OTT players have started moving away from online advertising as the model has not proven profitable. Earlier this year, the management of both Spuul (India) and iQIYI (China) stated that online advertising has not generated profits for them, and thus both are shifting focus towards a subscription service model. This despite the latter claiming 481 M monthly active free users, a figure which many might assume is profit generating.
However, the subscription service model has its own challenges, the foremost being customer acquisition given that many consumers in Asia are not accustomed to paying for content, have limited funds and limited ways to pay for online content. Spuul managed to increase its total user base from only 2 M users at end 2015 to 24 M users by Q2 2017. In the same period, its number of paid subscriptions only increased from 0.5 to 0.7 M, highlighting the challenge of getting paid subscribers. Even in Singapore, a highly developed market with high incomes, respondents in a consumer behaviour survey PCA conducted preferred to watch free ad-supported content rather than to pay a monthly subscription fee. These challenges suggest that the subscription model might not be a panacea for these OTT players after all.
But have these players exhausted all the options available in an attempt to make the online advertising model profitable?
We think not.
OTT players should tap into emerging ad technologies and also explore innovative business models to increase yields from advertising.
On the technology front, poor ad integration in video content has been a major issue for the industry. This is now being addressed by services such as Amagi, which delivers ads seamlessly without any buffering through server-side placement replicating the linear ad viewing experience but more targeted i.e. different viewers are shown different ads. This enables more ads to be watched and attracts more advertisers.
On the business model front, OTT providers can consider the following options:
To command higher CPM prices for their inventory, OTT players should explore new online advertising marketplaces. A new marketplace called ‘AMP’ was launched in August 2017 in Malaysia, and is expected to expand to other Southeast Asian countries in the near future. It promises fairer prices for publishers, as a direct result of the efficiency and effectiveness of the platform.
OTT players have experimented with other business models of online advertising. Snapchat sells a number of its ad spaces on a fixed-price basis and leverages the viral component of its platform to ensure wide exposure for its clients. The company states that this model contributes a significant amount to its total ad revenue.
Commissions on affiliate sales, where the OTT players get a commission on the sales revenue earned when customers purchase items advertised or seen in the content.