No need to be a Wall-Street veteran to analyze the performance of OTT companies. The current situation is that Netflix is struggling with the studios about content costs making it very difficult to maintain high margins as the studios raise prices time after time. Hulu, the super-group of the content business is not profitable, and not to mention YouTube which still loses hundreds of millions. And still, everyone is trying to jump on the bandwagon.
The inevitable question is why we see such a gold-rush when there are no evidence for gold?
General Patton said once “If everyone is thinking alike, then somebody isn’t thinking.”, is that the case? As of now, it sure is.
Let’s take a look at the four monetization models available today:
1. Subscription: this classic model being long-used by traditional cable/satellite operators, and in the past years, Netflix is using the same model but slashing down the price due to two main reasons:
I. Netflix does not have the pipe costs like the cable/DBS operators have, and therefore they are not paying for maintaining the infrastructure. Netflix does bear a cost which is not part of the traditional world and this is the streaming costs.
II. The content deals Netflix did in the past were based on extending the DVD sales business, and therefore, received really great prices for the content. However, now when the studios understand that they are actually injuring their cash-cow, the relationship with the cable guys, the studios are either canceling the previous contracts or negotiating new contracts at much higher prices, which makes the business pretty shaky for Netflix.
2. Ad-Based Model: Another classic model taken from the free-to-air networks, and performing very badly on the intenrnet, cuasing all major payers such as YouTube and Hulu to lose tons of money, and to add various different models in order to support the Ad model. Hulu has added the Hulu+ model (see clause No. 1), while YouTube is adding sponsorships and banner placements. As of now, the bottom line is not changing and both companies still lose money.
3. Pay-Per-View: Yet another model taken from the old-world at the times we physically went to a video store to rent a movie. The reason why Blockbuster went out of business is that this model was always too expensive and worked only when we had no alternatives. Today when you can have an all-you-can-eat package either from Netflix or from Hulu for $7.99, it just doesn’t make any sense to rent a single chapter of ”Dexter” for $1, as in 8 days of watching only a single chapter a night is less worthy, and as we know we have on average 30 nights to spend with our TV…
4. Buy the Video: This format will surely disappear or will become very rare. Unlike music where you tend to listen to a song for a million times, I can’t see many people watching movies which are not “The Godfather” or “Pulp Fiction” more than once. To pay $15 for the pleasure of watching a movie once when you can rent it for $1 (and rent it again and again for 15 times) just doesn’t make any sense.
So where does it leave us? Confused, I guess.
It just doesn’t make any sense that TV ads on a broadcast channel is a great business and when it comes to the internet it is worth only a fraction of it. The ads on a broadcast channel are not fragmented, not to mention personal whereas the options on the web in regards to personalization and content enrichment are truly endless.
The reason why all the media companies are putting so much efforts in penetrating the new platforms is because they understand that this gap will be filled in the near future.
And still the big question remains open – Will the future for OTT be bright?
There are many answers and predictions about the future for online video and OTT but there is no magic solution to the conflict between the ceaseless greediness of the studios versus the desire of the viewers to get the content for free.
There is however, one solution which I find very interesting as it addresses the biggest challenge of online video ads – how to gain more CPM per ad, or in other words how to earn more money!
It is called Real-Time Bidding or RTB.
So what exactly is RTB?
Real-time bidding (RTB) is a new advertising technology that enables online advertising to be purchased in realtime. This is a major difference from the old-days when advertisers were buying inventory and paying in advance for it.
Why bidding? just like a stock, advertisers bid on each ad impression. The impression goes to the highest bidder and their ad is served on the page.
And why is this new concept is so interesting for TV? Personal data is being collected by the serving site/platform about the users/viewers and being forwarded to the real-time bidding platform, giving the advertisers a value information about the target audience and the chances that the ad will become relevant to them.
And this is a real value! No more Kotex ads for men, but rather a specific ad for men from Omega while watching a James Bond movie in the Hamptons. If someone else would watch the same movie for that matter in a less established suburb, the same ad could be purchased by Dominos Pizza for example.
How hot is the trend? Check out the numbers:
In 2011, US online video RTB spending accounted for $190 million, in 2012 Forrester predicts RTB spending will increase to $387 million and by 2013, RTB spending will increase to $667 million. We’re talking here about a 251% growth over two years!
So is RTB going to save the OTT industry? I wouldn’t count on that as the absolute numbers are still fairly low compared with the revenues made by the pay TV industry, and I believe that hybrid models of ads combined with subscription are the future of this industry (similar to the offering of Hulu together with the Hulu+), but there is no doubt that the biggest space for innovation is in ad targeting based on personal preferences. This way the CPM will go much higher and the viewer might continue with a real-time transaction of an Omega watch or a pizza and won’t take a toilet break while the ad is running.