So what are the IPTV and OTT business models? Read this article and learn. We can look into this question from the perspective of an operator toward the end user, or from a vendor/technology provider toward the operator.
IPTV and OTT – two approaches for video streaming services
The first IPTV projects started at the end of the last century. OTT video streaming popped up a decade later. Today, both approaches are still used for video streaming services. If ISP or Telco owns an access network usually it will still provide IPTV service, while content owners or other operators without their own network will typically offer OTT video streaming over the Internet.
Although these are two different things from the technical perspective, for end users it provides similar functionality. Also, the business models are similar.
IPTV and OTT Business Models
It started with subscription-based and transaction-based models
With the first IPTV services, the most common business model was subscription based. The telco would offer several different packages with a different number of channels and corresponding monthly fees. In addition to that, operators were offering some premium pay tv channels and video-on-demand content in a transaction-based model. This means that the user needs to pay a defined amount of money for each channel, tv show, or movie and this content is then available for a defined period of time, e.g. 5 hours, 2 days, etc.
Netflix makes subscription-based model most popular
This was a model that all IPTV services were following in the beginning. With Netflix entering the video streaming space, offering monthly subscription fees for an unlimited number of movies and without any restrictions on how much time or how many times a particular movie was watched, a subscription-based model was getting more and more popular. Some Telcos are still offering transactional models for VOD, but even in these cases, it is a combination of subscription and transaction.
OTT service started with similar models as explained above, primarily using a subscription model, but with some TVOD combinations in some cases. Today, there can be several other things offered in different subscription packages, such as Catch-up TV service with different numbers of days, the maximum number of registered devices or concurrent streaming sessions, or the amount of nPVR storage. So the operator can offer a basic subscription with a small number of channels and without other services and Catch-up TV service for additional channels or for a longer time for an additional fee.
Advertising-based models – free video streaming service but with ads
With the expansion of OTT services, other models popped up such as freemium, advertising-based models, or simply free services in order to quickly grow the number of users. The freemium model means that the service provider offers limited access to the service to everyone for free and charges for upgrading to a premium service. For example, anyone can register to a streaming service to check and search the content, TV guide, and movie catalog, but playout is not possible until a purchase is done.
Advertising models work on financing the service from paid ads. So content can be completely free, but users will need to watch ads from time to time. Operator counts on the fact that free service will attract enough users that will watch ads and generate enough revenue to create profit. There is also a scenario where an advertising-based model is offered for free and users can pay extra to get the same content without ads. In some cases, video services can even be completely free and without ads in order to get a large number of subscribers and benefit from it in the future, either with advertising or upselling some other products.
Subscription-based fatigue and the rise of advertising-based OTT business models
In the past couple of years there has been a significant rise in the number of global video streaming services. The majority of the services are subscription-based. Along Netflix, HBO Max, and Amazon Prime there were services like Paramount+, Apple TV+. Disney+, Peacock and others. Subscribers started subscribing to multiple services however it soon became obvious that most subscribers do not have more than 3 to 4 subscriptions.
The sharp rise in the competition for OTT video streaming services started to seriously affect their income forcing the service providers to find new ways of increasing revenue. They started turing toward another OTT business model that has existed just as long as other ones but has not reached the popularity of subscription-based model. That would be advertising-based model or AVOD (advertising video on demand) for watching video on demand with inserted ads and FAST (free ad-supported streaming television) that allows users to watch live channels for free but with ads.
Again, Netflix is the market trend-setter in OTT business models
Just like Netflix influenced subscription-based to become a main OTT business model now it did the same for the ad-based model. In the post-Covid 2022 combined with additional factors Netflix was faced with a more serious churn in the number of subscribers.
To counteract this trend and add additional they announced they would offer a cheaper plan that would be ad-based counting on the fact that the people won’t mind paying the lower price in exchange for watching a few ads.
When selecting a vendor for your OTT/IPTV platform you need to be careful that the platform supports the business models that you need for your video streaming service. It also needs to provide enough flexibility that you are not locked in but able to configure any future change in business model and adapt to the specifics of your market.
The business model between vendor and operator is important for the operator because, in the end, it defines the price of the video streaming service. It also needs to fit into the OTT/IPTV business plan of the operator and be aligned with the financial capabilities of the operator.
Traditionally, vendors were charging CAPEX-based parts including setup cost, cost of the HW, and part of the licenses, especially for transcoding and streaming. The main part of the SW cost is usually done per subscriber, charged as a perpetual SW license. Such a model allows pay-as-you-grow cost but there is quite a significant CAPEX cost required for setup and HW that needs to be purchased at the beginning. The cost of video headend can be quite high if you need to invest on your own.
For subscriber licenses, some vendors can offer you an OPEX-based model where you will be paying a monthly fee per subscriber. In a long run, this gets more expensive, but it lowers your initial investment. Another good thing to negotiate with your potential vendor is to have the cost of origin and streaming servers already in the subscriber license, so you don’t need to buy additional third-party equipment.
With cloud options, now you can significantly decrease your setup cost and convert HW cost into OPEX. With cloud solutions, it is most common that all other SW license costs and cloud infrastructure costs such as storage and bandwidth are charged monthly. An additional thing that you need to be aware of is how you will be charged per bandwidth as models with paying for each transferred GB can be very costly and can even break your business case.