As with calculating costs, figuring out the potential ROI of any given investment is also about weighing variables. For OTT services, returns can vary widely depending on a number of factors including:
- Subscriber base: the more subscribers a service has, the more revenue it can generate from SVOD and SVOD-lite (with some ads) tiers
- Content costs: Premium content, like live sports and original shows/movies, can be expensive to produce or acquire, while library content may be less costly but may not be as attractive to viewers
- Other revenue streams e.g. AVOD, FAST, pay-per-view and licensing deals
- User engagement: a highly engaged audience is more likely to renew subscriptions, watch ads and generate revenue from other sources like merchandise and events
- And Competition: current market conditions (driven, as they are, by a crowded OTT space, cost of living and inflation) may mean that it takes longer to see gains
On that score, what timelines, if any, have OTT service providers expressed (tacitly if not overtly) for achieving profitability?
Three case studies:
- Netflix, famously, spends huge amounts on content production: $13.9bn in 2019, $11.8bn in 2020 (a slowdown caused by the COVID pandemic), $17.7bn in 2021 and $16.8bn last year. The company’s technology and development budget has gone from $163m in 2010 to a whopping $1.83bn ten years later.
These huge investments, however, have paid off. Netflix’s net profits have increased from £1.87bn in 2019 to a high of $5.12bn in 2021 (falling to $4.5bn in 2022).
- When ITV announced that it was planning a new streaming service, ITVX, it said that it would invest £80m on the product over two years, with a further £180m spent specifically on exclusive digital-first content to lure viewers and subscribers.
At the same time, the targets that the broadcaster wants to hit are ambitious: 20m monthly active users, 2 billion streaming hours, two and a half million subscribers and 2 x digital revenues by 2026.
“Double, double, double, double,” was how ITVX’s Chief Product Officer, Deep Bagchee, articulated it at the OTT Question Time Live event in February.
(Interestingly, but unsurprisingly, when asked who was more profitable for ITV – AVOD viewers or SVOD subscribers – Bagchee declined to answer!)
- Matt Westrup, SVP Technology & Operations at A+E Networks EMEA, didn’t offer precise numeric ROI targets but instead told us during an interview in December 2022, apropos of the company’s Crime + Investigation D2C service that:
“We didn’t start the process [the business plan] with “if we do x,”, that is take, a certain approach, “then it needs to be profitable by y,”. But we do now know what our ROI inflection point is – a period when it needs to start to deliver. Otherwise it falls into, is this a vanity project? Is it a marketing project? Are we doing it because we should do, not because we want?”
For broadcasters, especially, the ROI on OTT services can be part of a larger transition from broadcast to IP delivery. For this group then, OTT services aren’t just nice-to-have additional channels but almost existential if they want to retain their linear audiences in a digital future.
This blog marks the fourth blog post of a five-part series. Keep an eye out for future posts covering the ins and outs of planning and constructing D2C services!