The streaming landscape is evolving rapidly due to intense competition, changing consumer preferences, and a growing need for profitability. Two dominant business models have emerged for monetizing video-on-demand services: Subscription Video on Demand (SVOD) and Ad-Supported Video on Demand (AVOD). To meet consumer demands and optimize revenue, many platforms blend these models or experiment with hybrid approaches. This article explores the current state of SVOD versus AVOD, the challenges each faces, and the strategies platforms use to drive growth.
The Current State of SVOD
SVOD operates on a subscription-based model where users pay a recurring fee for unlimited access to a content library. Platforms like Netflix, Amazon Prime Video, and Hulu have popularized this model by offering ad-free experiences that attract subscribers looking for uninterrupted viewing.
Benefits of SVOD
- Revenue Stability: Recurring payments provide predictable income, essential for long-term financial planning and investment.
- Enhanced User Experience: Ad-free viewing attracts subscribers willing to pay for a seamless entertainment experience.
- Content Investment: SVOD platforms invest heavily in exclusive original content, driving subscriber growth through must-see programming.
- Global Reach: The scalability of SVOD models allows platforms to tap into global markets and tailor content to various regions.
Challenges of SVOD
- Subscriber Saturation: With so many platforms competing, market saturation is a growing concern, limiting subscriber growth potential.
- High Content Costs: Constant investment in new content strains profitability.
Examples
- Netflix: Spends billions on original shows, squeezing its margins. In Q2 2023, Netflix saw a 17% increase in sales, largely due to cracking down on password sharing, adding 8 million subscribers. However, growth may have peaked, especially in the U.S.
- Disney+ Faces profitability challenges from heavy investments in Star Wars and Marvel content. Despite the $11.6 billion generated since acquiring Star Wars, the franchise has yet to fully recoup its cost.
- Amazon Prime Video: Invested $465 million for The Rings of Power and $8.45 billion for MGM in 2021. Amazon spent $18.9 billion on content in 2023, a 14% increase from the previous year.
- Hulu: High production costs, like The Handmaid’s Tale at $10 million per episode, impact Hulu’s profitability. Hulu’s total content spend reached $4 billion in 2021.
- Apple TV+: As of 2022, increased content costs have reached $6.5 billion. High-profile projects like Ted Lasso have contributed to its growing expenses, making it harder for Apple TV+ to maintain profitability.
Managing Churn in SVOD
Subscriber retention is a significant challenge for SVOD platforms, as users can easily switch between services.
Examples
- Netflix: Maintains a low churn rate of 2.4% due to its recommendation algorithm, diverse content, and effective marketing.
- Disney+: Due to rising subscription costs and competition, it faces a churn rate of 4.8%. Despite bundling Disney+ with Hulu and ESPN+, it has not fully curbed subscriber losses.
- Hulu: Combats churn by offering exclusive bundles at discounted rates, such as its partnership with Disney+ and Max.
- Amazon Prime Video: Bundling with other Prime benefits has reduced its churn rate to 8%, one of the lowest in the industry.
- Apple TV+: Faces high churn, especially after free trials expire, with 39% of new subscribers citing free trials as the reason for signing up.
Ad-Supported Video on Demand (AVOD)
AVOD offers users free or reduced-cost access to content supported by advertisements. Platforms like YouTube, Pluto TV, and Peacock use this model, relying on ads for revenue.
Benefits of AVOD
- Broader Audience: Appeals to users unwilling to pay for subscriptions, especially in price-sensitive markets.
- Revenue Diversification: Ad revenue diversifies income streams and taps into the growing digital ad market.
- Consumer Flexibility: AVOD lowers the barrier to entry, attracting more users.
- Targeted Advertising: Data analytics enable more relevant, personalized ads, boosting viewer engagement.
Challenges of AVOD
- Lower Revenue Per User: Compared to SVOD, AVOD generates less revenue per user.
- Ad Fatigue: Too many ads frustrate viewers and reduce engagement.
- Limited Content Budgets: AVOD platforms typically have smaller content budgets, making it difficult to compete with SVOD giants.
ARPU Differences Between SVOD and AVOD Platforms
SVOD Platforms
- Netflix: $10–$15 per month.
- Disney+: $7–$8 per month.
- Amazon Prime Video: $12–$15 per month.
- Hulu: $6–$12 monthly (depending on the subscription tier).
AVOD Platforms
- YouTube: $5–$10 per month in ad revenue.
- Pluto TV: $2–$5 per month.
- Tubi: $1–$3 per month.
- Peacock: $3–$6 per month for the free tier.
Hybrid Models: The Best of Both Worlds
Many platforms adopt hybrid models, combining subscription and ad-supported tiers to cater to a wider audience. Hulu, Disney+, and Max are key platforms offering this flexibility.
Benefits of Hybrid Models
- Flexibility: Hybrid models attract cost-sensitive viewers while offering premium experiences for those who prefer ad-free content.
- Revenue Optimization: Platforms can maximize revenue through both subscriptions and advertising.
- User Retention: Lower-cost ad-supported tiers bring in new users who may upgrade to ad-free subscriptions later.
- Balanced Ad Load: Platforms can limit ad pods to maintain a high-quality viewing experience. This will also include more native experiences in content!
The Future of SVOD and AVOD: Blurring the Lines
As the streaming market continues to evolve, the line between SVOD and AVOD is becoming less distinct. New models like Free Ad-Supported Streaming TV (FAST) blend linear and on-demand content with ads. Advances in programmatic advertising are also refining the AVOD experience, making ads more personalized and less intrusive.
The future of streaming will likely revolve around hybrid models that offer consumers flexibility while maximizing revenue potential. Platforms that successfully balance subscription-based and ad-supported content will thrive in this increasingly competitive landscape.
