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AVOD is inevitable, but what’s the big deal?

Fears of ‘subscription saturation’ in the crowded streaming market, and price-conscious audiences cutting non-essentials in a cost-of-living crisis, creates the conditions for AVOD to flourish. It may even be an option to fund the BBC in future. In the rest of the streaming market, SVOD platforms will explore AVOD and AVOD platforms will explore SVOD, and the lines between the two will blur until few streaming providers, if any, offer a single monetisation model.

Liz Salway, Principal, Business Consulting, EPAM Continuum
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Since Gibbs SR toothpaste featured in the first advert on ITV in 1955, audiences have understood the value exchange of watching ads in order to enjoy free content. Outside of TV, ads might even sit alongside paid-for content, as anyone familiar with glossy fashion magazines knows. Audiences accepted this implicit exchange until the Internet era, when the expectation arose that content can and should be available without any such trade-offs.

The industry only has itself to blame for the early online generation’s negative attitudes towards adverts. Pop-ups, spyware and other annoying and/or malicious inconveniences plagued the Internet in the nineties and noughties, driving many to install ad blockers and, in general, seek a more peaceful online experience. Netflix tapped into this widespread anti-ad sentiment and desire for convenience to launch their content subscription, to status quo-shattering success.

Fast-forward to 2022, and after years of rival streaming platforms jostling to be the “next Netflix”, advertising-based Video on Demand (AVOD) is on the rise to reintroduce TV audiences to the traditional exchange of ads for content. With Netflix appearing to reach peak subscriber numbers, fears of “subscription saturation” in the crowded streaming market, and price-conscious audiences cutting non-essentials to weather the cost-of-living crisis, we are living through the perfect storm for AVOD’s success.

SVOD platforms turn to AVOD to solve subscriber slump

AVOD has been quietly on the rise, with new platforms launching at a steady pace, but when Netflix announced its plans to launch ad-supported membership tiers, everyone sat up and paid attention. Disney has similar plans for its streaming service, despite its still-rising subscriber numbers, though it will be limited to adult profiles. HBO Max launched in the U.S. with an ad-supported option, while YouTube has traditionally been ad-funded – although it offers an ad-free paid premium membership.

Today’s consumers expect choice and that is how the SVOD giants are presenting their ad-supported options. People can either pay to access content or watch ads, and with so many competing platforms we can expect audiences to take a pick-and-mix approach – paying for favoured platforms while opting to watch ads for the rest.

Advertisers will benefit, too, with platforms using their wealth of first-party viewing data to build detailed audience profiles for relevant ad targeting and campaign monitoring. The new challenge will be navigating dozens of walled gardens and gaining access to the data within them without platforms handing over the keys to their most valuable asset. Data clean rooms have been posited as one solution here, though measurement remains something of a mystery.


BVOD platforms turn to AVOD to rescue revenue

Broadcaster Video on Demand (BVOD) platforms are immensely popular, but looming changes to the way both the BBC and Channel 4 are funded may see a shift in mindset from fulfilling a public service remit to a need for profitability. If they are looking for inspiration, then ITV has enjoyed record revenue growth thanks to its AVOD exploits.

While we don’t yet know what will replace the BBC’s current TV licence fee model in 2027, one possible scenario is a rebrand to a more consumer-friendly content subscription. Netflix may get the credit for popularising paid content subscriptions, but the TV licence fee introduced a similar concept decades before. Audiences get to enjoy content ad-free in exchange for ongoing, regular payments; although the confusing name (it is, in fact, a content licence) and the legal requirement for every TV owner to have one, meant audiences perceive the fee much less charitably than a Netflix-like subscription.

The BBC’s content still needs to be paid for and audiences are clearly accepting of monthly fees in exchange for content. Monetising terrestrial broadcasts remains a challenge, but one that loses relevance by the day. By 2027 audiences will be fully accustomed to AVOD, too — such a model seems unlikely for the BBC, but five years is plenty of time for attitudes to change, especially if ITV’s AVOD revenue growth continues its upwards trend.

While ITV’s VOD service – ITV Hub – is ad-supported, it also offers an ad-free subscription version  – Hub+ – that sits alongside, which could serve as a model for other broadcasters. As mentioned above, today’s audiences expect choice in how they access the content and not catering to those who prefer subscriptions simply leaves revenue on the table.


What happens once SVOD is AVOD and AVOD is SVOD?

As SVOD platforms explore AVOD and AVOD platforms explore SVOD, the lines between the two will blur and few, if any, will offer a single monetisation model. Connected TV (CTV) users will expect choice and will be spoiled by it, while streaming platforms big and small will continue to battle for their attention.

What will differentiate streaming platforms will be the desirability of the content, the elegance of the user experience and the quality of the advertisements. It’s here that platforms and advertisers must make the most of the CTV ad experience to reach and retain audiences. To go back to the analogy of fashion magazines, audiences are happy to see ads, but their quality and relevance must be worthy of the content they accompany.

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