The last week has demonstrated that some of the biggest Internet players are now facing financial, or at least stock-price, challenges. For many, the problem is in their revenue model. We’re seeing, in the aftermath of the pandemic, both the strength and the weakness in the “free ad-sponsored” vision of OTT services. The questions to be considered now are what happens next, what technologies might be impacted, and what vendors might benefit, or suffer, from the shifts.
One problem with ad sponsorship, a problem I’ve mentioned in prior blogs, is that ad spending tends to be fairly static, and at best tends to grow at the rate of GDP growth over time. There’s probably no OTT on the planet that would be satisfied with that level of growth, so everyone is depending on gaining market share. That, of course, means that some will lose it. Online services have been stealing share from other forms of advertising, but eventually the industry would have to reach an equilibrium, at which point share growth will be difficult and major gains in revenue without share growth would be possible only outside the model.
The pandemic created a shift in the steady-state picture, because it kept people at home and unable to exercise the traditional strategy of looking around stores for something to buy. We saw growth in online product searches and research, which of course created growth in online ads and ad revenues. The major players like Alphabet/Google, ByteDance/TikTok, Meta/Facebook, and Twitter all benefited from this, and all are seeing a slowing of growth because people are getting out more…or so classical wisdom says.
There may be more to it. One impact of the pandemic was to reduce in-store shopping, and while that impacted advertising focus it also shifted buyers to online retail fulfillment. Which raises a critical question; if I’m going to buy online from Amazon or BestBuy or eBay or Walmart, would I not start my search for a product by searching their sites? Yes, this would miss some of the smaller online sources, but with all the fear of online scams, many people are reluctant to buy from somebody they don’t know and trust. Direct retailer search, of course, bypasses ad influence, and it could actually reduce adspend.
Having a retail product isn’t a guarantee of continuous profit growth, as Amazon’s earnings last week illustrated. The shift back to “going to the store” will inevitably impact online sales, but every time people increase their dependence on online shopping versus storefront, there’s a group that doesn’t come back, at least not all the way, and there are some indicators that even those who are willing to go out and buy, or can’t wait for delivery, will do online price shopping, reducing the influence of advertising.
This isn’t the only problem for the OTTs either. Every OTT ad conduit is impacted by the bad behavior of some people, companies, organizations, or all of the above. The bad behavior is obviously in the eye of the beholder, but some users and advertisers are offended, and angst there can impact regulators, as it has in Europe.
Social media has never been good at self-policing because people aren’t good at it, and because their own revenue interests are often contrary to public good and regulatory policy. In recent years, there’s been so much outcry against bad behavior and misinformation that some platforms have started to work harder, but that isn’t enough for some regulators and is too much for some specific interest groups and investors, like Elon Musk, who has acquired (subject to approval) Twitter. Musk has advocated a mixture of more and less with respect to behavioral constraints, and the “less” part collides with the upcoming EU regulations.
Controversy feeds views, no matter whether we’re talking about news networks or social media. It also feeds disengagement and regulation, and the question now is whether people in general will adjust to a polarizing set of “facts” and learn to dismiss a lot of it, or whether the economic and political impacts will be dire enough to force remediation through government intervention. It’s hard to see how either outcome favors ad sponsorship.
I think all the ad-centric OTTs see this, though they’d not be likely to admit it publicly. I think Meta’s interest in the metaverse arises in part from the realization that they need to find a new revenue model, and that the best model might be one it would be difficult to apply retroactively to an established community like Facebook. I also think that these OTTs see a truth that content producers also see, which is that the best model for revenue gain is to sell something. Networks have been offering (or, in the case of CNN, trying to offer) streaming subscription services. Some existing streaming players, like Netflix, are starting to offer ad-sponsored services at a lower or zero cost, of course, but all that means is that nobody wants to leave any market segment or revenue model uncovered.
The sell-or-sponsor dilemma isn’t going to be resolved immediately in favor of “sell” but I think it’s inevitable that more and more “new” services will be focusing on a subscription model because the upside in ad sponsorship is small, and the potential regulatory impact (and the associated monitoring costs) are large.
The impact of this shift on tech overall is best presented as the contrast between Web3 and the metaverse. Web3 is all about decentralization, which means it’s about “un-empowering” the major OTTs. It’s hard for me to see how that would be favored in the kind of revenue-focus shift we’re talking about. It’s very difficult to see how the problem of revenue is solved by Web3, even if you assume that somehow Web3 had a lock on cryptocurrency payments, which it would not. The metaverse, on the other hand, is potentially at the heart of the shift.
A metaverse is first and foremost a new kind of experience, which is attractive for its novelty alone, and also for the fact that since it is new, there’s an opportunity to frame a metaverse as a subscription service. In fact, it would be pretty easy to establish a metaverse revenue model that included both user subscriptions and ad revenues, making a metaverse a bridge between ad sponsorship and subscription revenue for players like Meta.
Since a metaverse could also host collaboration, customer support, user communities built around products, and other business-related, semi-social, activities, it’s also likely that a lot of different players with a lot of different metaverse targets will emerge. That’s already happening to an extent.
Going down a layer in terms of technology, the impact of a shift toward a subscription revenue model would depend largely on who does the shifting and what their own primary service architecture looks like. The metaverse, as I’ve noted in past blogs, would tend to foster edge computing and a metro-mesh network model. Both would obviously be metro-centric, and thus a metaverse shift would track the general trends I outlined in the referenced blog.
It’s possible that a shift toward subscription services could encourage the network operators to think about getting into higher-level services themselves, either as a retail offering or by creating wholesale components designed to encourage OTTs to frame new services on these operator-created elements, as AT&T has proposed. A few operators hope this could even create an opportunity to offer “billing-as-a-service” to OTTs, particularly if some of the new services were usage priced rather than flat-rate.
The interest of content producers in direct subscription services might also create an opportunity for operators. A few giant OTTs could be expected to create their own software/hosting framework, but if the market fragments, many of the potential players are too small to make the investment, and the total competitive overbuild would be too high to bear. Could operators use this as an opportunity to build up mid-layer features for composition into services like streaming? Yes. Will they? That’s a question we may see answered in 2022.