What content owners need to consider when choosing between ad-based and subscription-based models

Not too long ago, people used to have all of their music stored on massive hard drives, or on their iPod Classics. Then, Spotify came in and completely changed the game, making endless music libraries available to all for a monthly fee.

The need to purchase song by song from platforms like iTunes quickly disappeared and people now get to enjoy millions of songs without having to worry about how much space they have left on their devices.

Spotify and other music streaming services operate on a combination of ad revenue and user subscriptions and have created their own medium which attracts consumers. In the world of video, content owners have also noticed that there is a similar demand for infinite content libraries, rather than purchasing content on an individual basis (also known as transaction video-on-demand, or TVOD). Video platforms typically fall into one of two categories: Subscription Video on Demand (SVOD) or Advertising Video on Demand (AVOD).

For video content owners, these types of over-the-top (OTT) streaming services have become the holy grail of audience reach as revenues are expected to reach $129 billion by 2023. Keeping in mind the OTT explosion, content owners must understand the differences between AVOD and SVOD in order to choose which service best suits their needs.

Creating the right user experience

It’s important for content owners to understand the difference between AVOD and SVOD. On SVOD, users pay a monthly fee for complete access (think Netflix). Through AVOD, users can view all videos for free, at the expense of watching advertisements before, during, or between videos (pre-roll, mid-roll, and post-roll).

Both AVOD and SVOD can provide user tracking capabilities, albeit in different ways. Subscriptions require users to log into a profile to track which creates more effective viewing recommendations. AVOD services don’t usually require a user to log in to watch content, but can track user data by app install if the user is not signed in, or by encouraging users to sign up and sign in to an account.

Users know exactly what they are getting into when it comes to AVOD. There is very little friction to acquire users because there is no paywall. Furthermore, marketing is easier because the customer acquisition cost is lower. Without a cost to use the service, there is less friction for someone to try it. In general, it’s easier to get people to watch AVOD.

Understanding content curation

SVOD and AVOD platforms can have different approaches when it comes to curating the content offered — depending on whether they are trying to create a specialized experience, or offering a broad, expansive library that appeals to the masses.

A big collection works since it’s the best wait to attain the biggest reach. Users would simply hop on the platform and have almost everything they would want to watch at their disposal. These kinds of collections are beneficial for AVOD because a wider appeal can attract larger audiences. This, in turn, means more people watching advertisements, and consequently increasing revenue. Considering that 46% of viewers act after they view a video ad, the wider the reach, the better.

The drawback? Discovering new content becomes challenging because the content is too diverse — mostly due to its large volume. Viewers won’t be able to find and consume everything within a lifetime. What’s more, it is also more difficult to target audiences because content owners are covering every demographic.

With SVOD, owners know exactly who their users are and how to cater messages to them. It’s also easier to acquire and create specialized content because they know their audience, so they can engineer the content to be of interest. And, the impact goes way beyond showing users content they like. A recent HubSpot study concluded that 83% of users consider sharing video content which appeals to their specific interests.

Unpacking the values offered to content owners

It’s important for content owners to understand that they get paid for the content they sell, whether they work with AVOD or SVOD.

From a financial standpoint, subscription services better predict how much money content owners will make. The individual user value also tends to be better because SVOD services have a more predictable revenue projection, and thus more budget can be spent on content creation.

SVOD makes it easier to understand marketing budget since the lifetime value of the user is more clear, as well as the ability to calculate how long users stay with the service or how much they pay per month. Knowing these factors creates an avenue for understanding what customer acquisition price is worth paying in a marketing campaign.

So, if content owners can make SVOD work for them, it is superior. The challenge is getting it recognized and having enough of the right content to get people to pay. There are many competitors such as Netflix, Amazon Prime, Hulu, and DirecTV.

What’s more, 2019 will see more competition than ever before, as the demand for OTT has convinced other global players such as AT&T, Disney, and WarnerMedia to join the streaming game. These changes in market players will continue to make it difficult to get recognized. This is why the more niche the SVOD service, the less competition there is. And with less competition, the more likely content owners can make the subscription model work.

AVOD, on the other hand, has a more difficult time deploying a marketing budget. Revenue is based off watch time, so content owners could theoretically max out watch time and make more money than they would with subscription models. Yet, the difficulty lies in predicting usership.

On a month-to-month basis, there can be significant variation in how much content a user watches, which means that the revenue from said user also varies. AVOD platforms have the potential to grow faster due to more opportunity and a larger audience to target, and revenue can spike because the cost per acquisition is lower.

In the end, it’s clear that both models have their advantages and disadvantages. The key to success lies not in trying to define a clear winner, but rather understanding the benefits and drawbacks of both AVOD and SVOD. Then, content owners can tailor their video marketing strategy accordingly, and select the service that best works for them. As long as they keep these differences in mind, they will be able to narrow down their preferred model.

This article was written by a client of an Espacio portfolio company.