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Treading softly: Netflix wooing Microsoft to implement AVoD in bid to stop churn and regain customers

By Shirish Nadkarni

The recent industry-shaking announcement by the world’s largest subscriber video-on-demand (SVoD) platform, Netflix, that it was joining hands with software behemoth, Microsoft, to implement a cheaper, advertising-supported version of its video-on-demand (AVoD) services has really shaken the broadcast industry, which had arguably shown some degree of complacency in embracing the unbridled growth of streaming.

Netflix’s AVoD service was first announced in April 2022, with the company planning to introduce a lower priced ad-supported subscription plan, in addition to its existing ads-free basic, standard and premium plans, so that consumers will have more options to access Netflix’s content.

With SVoD, users must pay a recurring fee to watch the content. By introducing advertisements, Netflix will be able to adjust its subscription rates and thereby reduce churn and retain customers while generating higher average revenue per user (ARPU). Potentially, it is a win-win situation for both end-users and the streaming platform.

There were strong reasons for Netflix taking the call to woo Microsoft, despite comments to the contrary made by the company barely a month earlier. Netflix’s co-founder and CEO Reed Hastings lost nearly US$648 million of investment in his own company in mid-April as his 5.16 million shares suffered a freefall after Netflix announced a loss of nearly one million subscribers in the first quarter of 2022.

While Hastings has said for years that he does not want advertising and is fine with password sharing, the company is changing course after losing 970,000 subscribers in the first quarter and forecasting that two million more could leave soon. It said it would introduce a cheaper, ad-supported option in coming years, and will start cracking down on people circulating their login information.

Google and NBCUniversal had previously been touted as potential ad-tech partners for Netflix, but Microsoft’s acquisition, in late-2021, of Xandr – formerly owned by AT&T – evidently gave the Xbox-maker the edge that the global streaming leader was looking for.

The crux of the issue was the fact that Netflix’s subscriber base had registered a humongous fall, from a level of 77 million subscribers at the end of Q1-2021 to 47 million for the quarter ending June 30, 2022. In other words, this steep fall took place within 15 months of AT&T handing control of Warner Media to Discovery, which has its own streaming ambitions, including a merged HBO Max-Discovery+ offering.

Analysts had predicted that Netflix would go for growth of around 1.8 million. The company announced earnings per share (EPS) of $3.20 on revenue of $7.97 billion. The analysts had earlier anticipated EPS of $2.94 on revenue of $8.035 billion. Revenue grew 23% in the Asia-Pacific region, where the company actually added 1.1 million subscribers. In Latin America, subscriptions stayed flat, but revenue increased 19% from a year earlier.

However, Netflix has confidently said it expects net additions to reach 1 million in the third quarter (July to September 2022), reversing some of the losses seen during the first half of the year. The company has said it has 73.28 million paid subscribers in the US and Canada, out of 220.67 million worldwide.

The company is presently in the early stages of its paid sharing plan. This is an effort mentioned earlier this year, that it would upcharge some members for sharing their subscription with family members or friends that live outside their homes. The company is also looking at two different approaches in test cases in Latin America that could see a wider rollout in 2023.

But Netflix’s struggle with the SVoD model has induced other industry heavyweights to now give greater importance to AVoD. Speaking in May this year, Disney CFO Christine McCarthy said, “Based on our Hulu experience, we actually have more AVoD than SVoD subscribers. We expect about the same percentage for both Disney+ and Hulu, just based on the experience curve that we have witnessed.”

Content viewing has come a long way from the days of satellite television. Today, viewers choose what they want to watch, and forego pre-scheduled shows. Video-on-demand (VoD) and over-the-top (OTT) have been a great boon as viewers do not have to miss out on the broadcasts of their favourite shows, games, movies and more. 

However, with inflation on the rise and disposable incomes shrinking, this may lead to more consumers doing away with SVoD completely or turning to AVoD.

Stefan Lederer, CEO and co-founder of Bitmovin, a US-based company providing cloud-based OTT video software solutions, said, “Netflix-style VoD with high-quality adaptive streaming has already come to the masses, levelling the playing field for consumer expectations. Per-title-encoding, where encoding parameters are automatically determined by the type of content, was once only available for big names in the industry. 

“As for the consumer, although many people still subscribe to traditional cable channels, OTT streaming is poised to become the default method of video delivery by 2024. With a growing number of people streaming video worldwide, it is no surprise that providers are getting more creative and varied in their video distribution models.”

It is also worth noting that OTT and VoD are not the same; they are different streaming services. OTT and VoD streaming services have been used so interchangeably over the years that it has become hard to differentiate between the two. Some OTT applications and VoD software switch between VoD and OTT. The top VoD platforms allow viewers to watch videos at their own pace from anywhere. 

Basically, digital distribution provides multiple options. There are plenty of combinations of AVoD and SVoD; having an AVoD share enables operators to have a lower entry point for the SVoD service, according to Michael Gamboa, Senior Director at California’s Roku.

“If you look at someone like Netflix, who have been extremely successful, it is because they do one thing, and one thing only – they are the best-in-class in all aspects with respect to SVoD,” said Gamboa. “But even they are being forced to innovate and introduce the AVoD element in their offering because consumers are finding their subscription rates far too high, and are switching off.”

Mark Young, a senior business strategist at Fandango Media that owns Vudu, which claims to be the first on-demand platform to offer digital movies in high definition, declares that AVoD has a role for driving more time spent within the overall ecosystem that the company operates.

“Whether it is long-form or short-form content in AVoD, there is an opportunity to entertain consumers,” he said. “In some cases, if you look at our movie club content, it is short-form content for engagement, but also to drive people into consideration for purchase and rental.

“You need to be very sophisticated in the way you look at your first-party data – both browsing and consumption data, and have a good customer relationship management (CRM system). It all boils down to how the consumers want to pay and what they want to pay with, whether it is PayPal or a more traditional form of banking.

“We have to understand every consumer’s need. We think we offer more choices for consumers as they come into our network, and we have an advertising model to complement that time spent. So, we have a multi-revenue stream that has allowed us to get a very good business model.”

Other content providers are experimenting with hybrid approaches to increase revenue and improve engagement. There are several monetisation models which are leveraged by many broadcasters, where most efforts fall under these primary categories: AVoD, SVoD and TVoD (transactional video-on-demand), which charges its users on a pay-per-view system for content that is unique and not available elsewhere on the Internet. Many artists and professionals use this to monetise their video content.

A prominent example for AVoD is YouTube. Videos can be viewed under the stipulation that sponsored ads are part of the experience. Other than this, viewers are not required to spend any money unless they opt for an ad-free experience. It helps broadcasters to earn money without the hassle of dealing with subscriptions or paywalls.

While knowing that different systems of monetising video content have their own set of pros and cons, a streaming company’s business life cycle may change over time, depending upon the nature of business, circumstances led by the progression of the video OTT industry, and many other factors.

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