In OTT market, subscriptions beat ads

The reason is simple: “Subscription services offer consumers what they’ve been wanting for years, which is broad-based access to large catalogs of content without ad interruptions,”said Erick Opeka, evp of digital networks at Cinedigm. It’s a model that also works for businesses that benefit from recurring revenue that grows month over month.

“Advertising will never be able to support great content,” said Fahad Khan, CEO of Tube Centrex. He noted that the high cost of content creation (HBO’s “Game of Thrones” reportedly runs $6 million an episode) prevents video from surviving on ad rates alone.

Online, the one major exception is Hulu, which uses a hybrid model of subscriptions and advertisements. According to a page in Hulu’s Help Center, “many shows on the Hulu subscription include commercials in order to reduce the monthly subscription price of the service.”

All the other major players in OTT are subscription-based. It’s an industry that’s expected to grow between $4 billion and $8 billion in revenue over the next four years, according to a new report by Ooyala and Vindicia.

“The prospects for growth are in subscriptions,” said Paula Minardi, digital TV marketing manager at Ooyala, though she believes more hybrids could develop. It comes down to introducing ads in a way that doesn’t annoy the customer. For Opeka, that goes against the value proposition of most of these sites. Providing ad-supported content is better used as a customer-acquisition tool to drive subscriptions.

Netflix has used a similar strategy, although without ads, in its one-month free-trial program, allowing users to sample the service with the aim of converting them into paying subscribers. And it’s been working — Wednesday the service reported that it added 3.3 million subscribers during the second quarter of the year for a total of 65.5 million customers across the globe.

But it’s also possible to have too much of a good thing. On average, U.S. consumers are willing to pay $38 per month for a la carte TV content, according to Digitalsmiths Q1 2015 Video Trends Report. With more mass-market (like Netflix) and niche services (like Cinedigm’s Con TV) entering the field, that monthly bill could creep upward.

That’s where the risk of what Opeka called “subscription fatigue” begins. The only way to combat it is through a unique selling proposition: “The content and the benefit to the subscriber will be the deciding factor,” he said. The saturation of services may also lead to rebundling of channels.

“Pricing is going to be the king,” said Khan, and whoever can offer the most valuable services for the lowest price will come out on top.