YouTube May Give Netflix a Run for Its Money in Video Streaming
Ad-supported or ad-free?
The popularity of pure-play OTT (over-the-top) providers such as Netflix (NFLX) is increasing. Cord-cutters or cord-nevers are moving more to OTT providers, and advertising dollars are moving away from pay-TV to OTT.
Netflix, the leading OTT provider in the United States, provides ad-free streaming. Hulu offers two options to its subscribers: ad-supported or ad-free. The launch of Alphabet’s (GOOG) YouTube Red has also signaled that YouTube is going the Hulu way, offering ad-supported and ad-free versions.
Let’s take a look at the rationale behind OTT providers like Hulu and YouTube offering ad-supported and ad-free versions of their streaming services.
According to a December 7, 2015, report by eMarketer, citing research by FreeWheel, most digital video ads are viewed on devices like smartphones, tablets, and laptops or desktops. These are short-form content less than 20 minutes long. As you can see in the graph below, about 61% of digital video ads are viewed while watching live events on OTT devices such as the Apple TV (AAPL).
What does this mean for OTT providers?
As the above graph shows, the preference by viewers for video ads while watching short-form content is that OTT viewers are more receptive to ads in short-form content rather than long-form content. It means that pay-TV operators such as Comcast (CMCSA) and OTT providers such as Hulu can lose out on subscribers as a result of more ads in long-form content such as movies and TV shows.
This has also led to media companies such as Viacom (VIAB) reducing commercials on networks such as Comedy Central and MTV early last month.
The dislike for ads in long-form content could also have led YouTube to offer YouTube Red, a subscription-based streaming service, along with its free ad-supported version. For companies like YouTube and Hulu, offering ad-supported and ad-free versions could result in OTT providers not losing out on subscribers or advertising revenues in the long run.
Alphabet makes up 2.2% of the iShares S&P 500 Growth Index (IVW). For an investor interested in getting exposure to the application software sector, IVW has an exposure of 12.5% to the sector.
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