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AVOD: The rise of ad-funded streaming

AVOD: The rise of ad-funded streaming

As consumers tighten their belts, ad-funded models are becoming a more tempting perspective for streamers. Meg Carter reports

Netflix’s announcement in April that it had hit an apparent subscriber wall sent out shock waves, prompting many to question how attractive and profitable the streaming model can be. But proposals for a streaming crash are too early. Rather, video streaming is growing. And as it develops, the shape and model change.

For years, subscription VOD (SVOD) services have dominated. Now, with the likes of HBO Max, Peacock and Disney-owned Hulu allowing subscribers to pay less or sometimes nothing to access select programs in return for viewing ads – and even Netflix is ​​finally considering an ad-funded level – ad-funded VOD (AVOD)) and free ad-supported streaming TV services (FAST) are on the rise.

For proof look no further than this summer’s launch of ITVX, the UK’s first integrated AVOD / SVOD platform, and the arrival of Paramount Plus, a premium subscription platform launched by Paramount last year to compete with Netflix and Amazon Prime Video and run alongside the ad. -supported free streaming service Pluto TV.

Meanwhile, following an agreement reached with You Tube in early May, Channel 4 will sell its own commercial around 1000 hours of full Channel 4 and E4 programming on the social platform by the end of this year.

Many have speculated about the current changes in the VOD streaming market.

News from Netflix that they had not only lost 200,000 subscribers globally in the first quarter of 2022 – the first fall in subscribers in a decade – but now expect to lose another two million in the second quarter, was seen by some as signaling a turnaround operation in SVOD’s assets. .

According to an Accenture survey in five regions, including the US and Europe, 63% of consumers agree that it is too expensive to pay for all the entertainment subscriptions they want.

Less time at home after the COVID-19 shutdown combined with the cost of living crisis seems to have triggered subscription fatigue, one argument reads. And in the UK, there is some evidence that this is the case.

In the first quarter of 2022, 1.51 million SVOD services were canceled by British households with more than half a million cancellations attributed to “money savings”, according to recent figures from Kantar. Only 3% of UK households signed up for a new video streaming subscription that quarter, down from 4.2% on an annual basis. Meanwhile, 58% of households – 16.9 million – had at least one paid subscription, a decrease of 215,000 households from quarter to quarter.

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Still, according to Dominic Sunnebo, Kantar Worldpanel Division’s Global Insight Director, the trend is far from black and white. “In developed markets such as the United States or the United Kingdom, it is clear that Netflix has reached, or is close to reaching, peak penetration – the vast majority of those who want Netflix already have it,” he explains.

“(But) it is not necessarily correct to compare Netflix with other, more recently launched SVOD platforms, such as Disney or Discovery +. For almost all other players in the SVOD area, there is still considerable room for growth – in the number of subscribers and also in increased revenues per user. “

So, what about the emergence and emergence of AVOD?

About 71% of people in six European countries, including the UK, now use AVOD platforms at least once a week and 31% use them daily, according to a study by FreeWheel, a video advertising software provider owned by Comcast.

Furthermore, only 29% of UK CTV households are willing to pay a premium for ad-free content, indicating significant potential for AVOD’s growth. In fact, global spending on AVOD series and movies is now projected to reach $ 70 billion in 2027 – up from $ 33 billion in 2021, according to a Digital TV Research report in May.

Without a doubt, one of AVOD’s biggest appeals is the cost – or rather the fact that it is subscription – free as it is ad supported. About 74% of UK CTV respondents in the FreeWheel survey state that free access is AVOD’s main concern.

Another important factor, however, is people’s hunger for variation – 38% in the same survey consider the large selection of content on AVOD available as the decisive factor. So when it comes to which VOD model now seems to work best, it’s not as simple as either or.

Dan Fahy, Paramount’s Senior Vice President of Streaming UK, highlights structural changes driven mainly by three major shifts. First, the steady move away from linear TV – an estimated seven million British homes are now ‘SVOD-first’ and another three million ‘streaming only’, he points out.

Second is the high penetration of high-end connected TVs. Then there is the fact that evidence shows that AVOD and SVOD are seen by many as complementary.

“In the US, around 80% of Pluto TV users are also SVOD subscribers,” he explains. “People still want a lot of variety – even when they are SVOD-first. And that’s exactly what AVOD, which tends to be based on famous shows packaged in a modern way, provides. “

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That said, as AVOD grows, AVOD platform owners’ investment in original content will also reflect the content consumption of SVOD streamers, albeit on a smaller scale. And AVOD services, which have invested the most in original content, have seen the greatest growth, according to Hannah Walsh, head of research at Ampere Analysis.

– The strategy for AVOD players in recent years has been to provide large amounts of content to increase the audience. For example, in March 2022, Tubi’s US catalog consisted of over 33,000 titles compared to Netflix’s catalog of over 7,000 titles, she explains.

“But only 47% of Tubi’s catalog was exclusive, compared to 88% of Netflix’s catalog.”

Typically, non-exclusive content will be of lower price and lower quality and therefore cheaper to buy, she points out.

“But as AVOD usage has grown, we have seen US players start investing in original programming with Roku producing the most originals so far with 103 originals available on the service in March 2022 due to the purchase of the original content catalog produced for Quibi for an estimated $ 100 million, she continues.

“AVOD platforms currently lack investment in content to compete directly with SVOD players. But as SVOD prices continue to grow, we can see the AVOD audience increase further, driving investment in original content.

“This means that AVOD players do not have to compete with SVOD platforms on a content basis, but provide consumers with a cheaper alternative and a wider library.”

The combination of subscriptions that reach the top and viewers’ acceptance of ad-funded models is good news for advertisers.

Premium video platforms – AVOD and the broadcaster’s environment – are seen as the most attention-grabbing channels for 63% of CTV users, which means they are likely to generate the most impact for advertisers, who are already waking up to AVOD’s potential, according to FreeWheel.

Digital video advertising – connected TV (CTV), social media and short format video – grew by 21% in 2021 and is expected to grow another 26% in 2022 to reach $ 49.2 billion globally, predicts Interactive Advertising Bureau (IAB) in its 2021 Video Ad Spend and 2022 Outlook.

However, CTV advertising spending is growing significantly faster – up 57% in 2021 to $ 15.2 billion, and forecast to grow a further 39% to $ 21.2 billion in 2022.

“One of the most exciting things CTV can offer advertisers is the incremental reach of new audiences they may not find on other platforms,” ​​said Dave Castell, general manager of Inventory Partnerships, at the digital media buying platform The Trade Desk.

SVOD players who introduce advertiser-funded levels are “inevitable”, he believes, but emphasizes that the success of AVOD will depend on the viewing experience.

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“To ensure that consumers do not reach for the remote control, advertisers and broadcasters must work together to optimize the advertising experience. First and foremost, this means limiting the number of ads, but ensuring that they are relevant, Castell explains.

“If the fantastic and often expensive content that drives this new golden age of television is to continue, relevant ads are the only way to fund and preserve it. Doing so will help avoid some of the pitfalls that led to consumer fatigue with linear advertising. TV. »

Content producers also have a lot to gain, others suggest. It is true that the ad-funded model does not support the large budgets that are available through subscription funding. But in the future, AVOD services are now expected to order more original content for a number of reasons.

First, it is a way to ensure that they have their own unlicensed content as their international footprint spreads. Second, the insurance against a decline in available third-party content as more studios launch their own VOD services. Third, because the streaming market is becoming increasingly competitive, exclusive content is becoming an increasingly important differentiator.

AVOD’s benefits for content creators lie in how complementary it is to SVOD, Fahy adds.

Ad-funded is an extra way for content creators to monetize their investments, and as such it is an exciting opportunity. It’s about windowing (content) in the right way – for example through premium SVOD first, and then, after a while, posting it on AVOD and FAST, he says.

“Others can create original content for FAST and AVOD and have revenue generation in SVOD afterwards.”

Expect a hybrid mix of business models across different streaming platforms, Fahy adds:

“We see a mixed model in the future, with a growing segment of AVOD along with a growing segment of SVOD and other models, as well as a healthy backbone of linear TV consumption.”

Castell agrees. “The streaming services that go over SVOD and AVOD will eventually come to the top,” he says. “The future is choice.”

This feature first appeared in the summer issue of the magazine Televisual – Out Now

Jon Creamer

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