Advertising, not pay model, likely to drive revenue for video business

Growth of online video depends on ability to attract audiences looking for free video, says Omdia research

After a brief period of rising pay revenue, the global video business is back to bundling and advertising in its quest to scale up. At over $200 billion in 2023, online video advertising is now the top source of revenue for the global media and entertainment business. It will remain so in 2028 when it will bring in $327 billion in revenue. By then, it will rise over either pay TV or subscription video on demand (SVoD). The number of SVoD services is now set. No new major streaming services are expected as growth grinds to a halt. For most major SVoD services a hybrid offering both advertising and pay tiers is the way to growth.

 

Netflix is leading that charge. Its recently launched ad tier (in 12 countries) drove 6 per cent of subscriptions, and 1 per cent of extra ad revenue in 2023. By end of 2024, all major SVoD services will have an ad-tier.

These are some of the key takeaways from 'P2F (paid to free) — The next market evolution in online video', a recent piece of research by London-based Omdia, a global analysis and advisory firm. “We’re currently in Phase-II of a broad trend from pay to free. Phase-I started with the radical shift of the likes of Netflix from the ad-free, paid streaming model to a hybrid AVOD (Advertising Video-on-Demand)-SVOD model,” says Tony Gunnarsson, principal analyst TV, video and advertising, Omdia.

“Phase-II will be characterised by an assessment of what works and how. At some point next year, we’re likely to see major streamers update terms and conditions as well as prices to push users more aggressively towards ad-supported tiers. Pay TV and telco bundles with streaming services are also likely to be firmly ad-centric. I’m predicting a new wave of standalone streaming bundles of rival services, all focused on the ad-tier with some degree of shared ad-tech. I’m also expecting more joint ventures between rival US streaming companies, particularly for international markets,” says Gunnarsson.

The move toward advertising is evident in the growth of YouTube and of FAST (Free advertising-supported streaming) channels. Much of this varies by market. For instance in India, Samsung TV offers 118 channels such as The Movie Club, Dangal TV, or South Station on its home page under Samsung TV Plus.  Add the huge growth in DD Freedish, a free DTH service that offers 189 free-to-air channels. Free and ad-supported video has been one of the fastest-growing segments of the business in India for over 3 years now. The US and Brazil have taken to FAST channels. Just two of the top ten video services in these markets — Netflix and Amazon Prime Video — follow a pay model. The US dominates the $6.4 billion (2024) FAST ad market and will continue to do so when it becomes a $12 billion one in 2028, according to the research. Europe, however, remains a strong pay TV market.

Globally there are 1.07 billion subscribers who pay for video (streaming or TV), a figure that has remained stable for two years now. The rise of the ad tier also shows some happy green shoots for pay. In the US and UK, where Netflix has added an ad tier, and cracked down on password sharing, net additions to subscriber numbers have grown tenfold or more, says the Omdia research. Funnily enough, subscriber growth comes from online video but more revenues come from pay TV even as its share in the overall pie declined.

In this round of evolution, bundling is playing a key role in online video. “Popular streaming services are now widely available via pay-tv packages, telco products and services. Television sets and video hardware are often sold with streaming services bundles. There is also a range of bundles through airlines, banks, grocery chains, and many other customer loyalty or membership programmes,” says Gunnarsson. This bid for scale does reduce the direct-to-consumer flavour that pay services had established. “Eventually streaming will evolve into something like the cable TV model of yesterday. Customers will pay one fixed cost per month and receive a bundle that consists of all the TV and video content with broadband and mobile connectivity,” reckons Gunnarsson.

The irony is unmissable. Streaming began by disrupting linear television, but is now going down that route as it tries to scale up and make money. Wait for the next round of disruptive video services, probably powered by AI.