"On TV And Video" is a column exploring opportunities and challenges in advanced TV and video.
Today’s column is written by Francis Turner, co-founder, US general manager and chief revenue officer at Adyoulike.
Though subscription video services are signing customers fast, spiraling costs may soon force them to rethink how they make their money.
Take Netflix, for example. In January, it described its last-reported quarter to investors as “beautiful,” lauding how 24 million new memberships through 2017 helped annual streaming revenue rocket 36% to more than $11 billion. Look further down the balance sheet, however, and there is a problem.
The company plans to increase spending on content, technology and marketing this year to a combined $11.3 billion. Netflix is taking on more debt – $6.5 billion last year alone. It’s not just Netflix. Amazon Prime Video, too, is considered to be significantly loss-making, though deep-pocketed Amazon likely sustains it through ancillary purchases.
The US is a world leader in subscription video. Subscription VOD penetration hit 84% of households as early as 2016. But to keep growing and sustain their growth in the face of heavy outlay, services need to diversify their revenue streams.
Thus far, these streaming services have been an ad-free experience, with nothing getting in the way of quality content. That is fine for consumers with the means to pay. But once the providers reach the ceiling of that addressable market, where will their growth come from?
Many other content services, like Spotify for music, manage to balance both ad-funded and subscription offerings.
Today, advertising may be anathema to subscription video providers and their consumers. But Netflix could make up to $270 million per quarter from pre-rolls or $2 billion a quarter from a TV-style ad experience, according to numbers from Ampere Analysis in 2016, when the Netflix viewer base was far smaller.
They don’t have to jam interruptive ads into their programming, like TV networks before them. There is another way. In fact, there are three other ways.
Simply weaving products into programming is much less intrusive than most ad experiences.
Remember all the chatter stirred up around product placement inside Netflix's “House of Cards”? Many times, product placements are the most natural and relatable way of aligning brands with content.
Infusing brands into the storyline – when and where relevant, of course – is a low-friction way of culling brand marketing dollars without relying on ad breaks. These days, producers are using digital solutions to scan scenes for low-impact brand placement opportunities, even after the content has already been shot.
As the story goes, if you own the content, channel and talent, you have everything you need to create incredibly impactful native ad experiences. That's what “Saturday Night Live” did a few years ago, when it cut two ad pods from its 90-minute show, replacing them with comedian skits written for sponsors, perfectly aligned with the main show.
Native advertising has also benefited from artificial intelligence to create Netflix-grade content recommendations and channels based on user preferences. This helps marketers create and deliver better campaigns that increase brand engagement through more targeted storytelling.
Last year, Fox Sports began a new era in seamless brand-content synergy when, during a World Series game, it cut not to commercial breaks, but instead to its studio pundits. In place of the usual commercials, the guests provided in-game analysis in front of their usual desk, now superimposed with T-Mobile branding. It is a tactic that I – and many other ad-weary viewers – would like to see more of.
Summer movie blockbusters are purpose-built for merchandising. And subscription video providers need to get better about branding products based on characters and items from popular series, too.
When they start working with brands to develop and produce products that are distributed by retailers, they will be able to achieve another level of revenue. We have been here before, of course. What was “Transformers” if not a synergy between Hasbro and TV networks to sell more toys?
Today, you could even create a native ad experience for these products that is truly aligned with a subscription video show's content. SVOD platforms that own the rights to their shows also have an opportunity to create additional income streams that are derived from products, not streams.
As companies like Nielsen improve their ability to track viewership of subscription video shows, brands will begin to take notice and ask for ways to incorporate these tactics.
The case for a dual revenue stream for subscription video services is becoming clearer. If done sensitively, it will be a win-win for providers, consumers and advertisers alike. Brands are calling for it, and OTT operators can surely benefit from it.