[OTT and Disruptive Innovation] OTT Surpasses Pay TV and Targets Broadcast Advertising Market

OTT Giants Netflix and Disney Also Ponder Profitability... Considering Ad-Supported Plans
US Focuses on Ad-Based Free FAST

Representative OTT service 'Netflix' / Photo by Yonhap News

[Asia Economy Reporter Oh Su-yeon] "Users are flooding into streaming platforms. It is clear that the era of traditional TV will come to an end within the next 5 to 10 years." Reed Hastings, founder and CEO of Netflix, made this claim during the Q2 earnings announcement in July. Online Video Services (OTT), which brought the 'cord-cutting' trend (the phenomenon of canceling paid broadcasting due to the emergence of OTT, etc.) in the paid broadcasting market, have changed traditional media consumption habits from live broadcasting to streaming, and are now eyeing the broadcasting and online advertising markets as well.

OTT Captured Paid Broadcasting but Growth Slowed... Even No.1 Netflix 'Stalls'

According to U.S. media market research firm SNL Kagan, the U.S. paid broadcasting market revenue shrank from about $116.9 billion (approximately 159 trillion KRW) in 2016 to $91.1 billion (approximately 124 trillion KRW) last year. By 2025, it is expected to drop to $64.7 billion (approximately 88 trillion KRW), about half of the 2016 level. The shrinking paid broadcasting market has been filled by OTT services.

Following Netflix's success, latecomers such as Disney+, Amazon Prime, HBO Max, Peacock, and Paramount have emerged one after another. OTTs grew explosively by absorbing paid broadcasting subscribers, but as market competition intensified, subscriber stagnation appeared and growth slowed.

Netflix recently experienced a subscriber decline for the first time in 11 years. In Q1, subscribers decreased by 200,000, and in Q2, they dropped by 970,000, recording 220.7 million subscribers. Although the Q2 decline was significantly less than the 2 million decrease initially expected by the industry, the fact that the market leader Netflix's growth has been halted carries significant meaning in the market.

The combined subscribers of Walt Disney's OTT trio (Disney+, Hulu, ESPN+) reached 221.1 million, surpassing Netflix, but they cannot simply celebrate. In last month's Q3 fiscal results announcement, Disney revealed that the average revenue per Disney+ user decreased by 5%. Although subscribers increased, the rise in low-priced product users was the cause.

Consumers Tighten Wallets Amid Economic Downturn... Eyeing Free and Low-Cost Ad-Supported Plans

When OTT first emerged, U.S. consumers cut the cord due to expensive cable TV fees, but now the burden of subscribing to multiple OTT services simultaneously has increased subscription fee costs excessively. According to market research firm Parks Associates, as of Q1 this year, 50% of U.S. households with internet connections subscribe to four or more OTT services. Coupled with the global economic downturn, consumers are tightening their wallets.

Benjamin Swinburne, a Morgan Stanley analyst, recently stated in a report titled "Second Half Outlook - The First Recession for OTT Services" that "As the economy enters a recession, consumers will naturally reconsider their OTT usage habits and try to reduce related expenditures."

In a situation where continuous investment in content is necessary to maintain and expand subscribers, a business model relying solely on subscription fees carries great uncertainty. Therefore, major OTT companies have started exploring new revenue models based on ad-supported plans. The strategy is to expand paid subscribers with low-cost plans while generating advertising revenue.

No Chang-hee, a research fellow at the Digital Industry Policy Institute, said, "It is no longer as easy to secure OTT subscribers as before. Content investment is necessary, but increasing subscribers is difficult, and due to growth stagnation, they inevitably have to choose advertising. This is the major trend, and competition will inevitably become fiercer."

The U.S. Wall Street Journal (WSJ) recently reported, citing advertising industry insiders, that Netflix is expected to launch an ad-supported low-cost service around November. Earlier, Bloomberg revealed that Netflix is considering pricing the ad-included plan at $7 to $9 per month (approximately 9,478 to 12,186 KRW).

Disney will launch an ad-supported Disney+ plan at $7.99 per month (approximately 10,834 KRW) in December. The ad-free Disney+ will increase by $3 to $10.99 per month (approximately 14,902 KRW) compared to the existing price.

Paramount Plus, Peacock, and HBO Max have already introduced ad-supported plans. According to U.S. market research firm Insider Intelligence, advertising revenue from ad-inserted free OTTs is expected to reach $19 billion (approximately 26 trillion KRW) this year.

If ads are embedded in OTTs with high consumer preference, existing ads on legacy media such as TV may be lost, and the media market trend could tilt further toward OTT. U.S. market research firm eMarketer reported that over 50% of paid OTT users expressed willingness to choose an ad-supported model.

Domestic OTTs Also Contemplating Ads... Following Overseas OTT Trends?

If Netflix's ad-supported plan is introduced domestically, it is expected to bring changes to the media and advertising market environment. The industry atmosphere suggests that Netflix could absorb advertising demand from platforms like Naver as well as broadcasting ads.

Native OTTs such as TVING and Wavve are also considering whether to follow Netflix's path. With subscriber numbers still less than half of Netflix's, advertising sales are not easy, and there is a risk of cannibalizing the parent company's advertising revenue. According to Mobile Index, as of July, the monthly active users (MAU) of domestic OTT platforms are Netflix (12.12 million), Coupang Play (4.81 million), Wavve (4.24 million), TVING (4.12 million), Disney+ (1.65 million), and Watcha (1.05 million), in that order. Even if the same ads are placed, exposure effects are greater on Netflix. The advertising industry observes that ad sales are not as easy as expected.

A senior broadcasting industry official said, "Netflix, which has secured households with viewership, will generate revenue if it introduces an ad-supported plan, but domestic OTTs still have a long way to go," adding, "There is even a possibility of losing subscribers. We are discussing diversifying plans according to each country when expanding overseas."

Moreover, major shareholders of TVING and Wavve include terrestrial broadcasters (KBS, MBC, SBS) and paid broadcasting operators (CJ ENM, JTBC). If advertisers place ads on OTT programs, ads inserted into live broadcasts may decrease significantly. Ultimately, there is concern that the reduction of ads on broadcast channels and their insertion into OTT programs could cause more harm than good.

U.S. Media Market Also Embraces FAST Platforms

The U.S. media market is also paying attention to FAST (Free Ad-Supported Streaming TV) platforms. As Google, Facebook, and others dominate the digital advertising market, the advertising revenue for legacy media has been shrinking for over a decade. Now, OTT and FAST have joined this trend.

FAST platforms offer free real-time channels without subscription fees in exchange for watching ads. From the consumer's perspective, they can watch various channels such as dramas, entertainment, and news similar to paid broadcasting, but without separate subscription fees, which is their strength. Representative FAST platforms in the U.S. include Roku, Pluto TV, Fox's Tubi, and Amazon's Freevee.

In the U.S., as the burden of subscribing to multiple OTTs and paid broadcasting has increased, some consumers have canceled subscriptions and only watch FAST via internet connection.

Media market research firm Digital TV Research predicts that global FAST market revenue from content distribution will increase from $21.9 billion (approximately 30 trillion KRW) in 2018 to $56 billion (approximately 76 trillion KRW) in 2024.

Seong Gi-hyun, adjunct professor at Yonsei University, explained, "From the viewer's perspective, FAST is not much different from cable TV and is much cheaper. Viewers see no difference in content and have a cheaper and easier way to watch, so they move to FAST. Also, OTTs must continue investing in original content, but there are limits to subscriber recruitment. If subscriber growth does not rapidly occur as before, they have no choice but to move to low-cost plans. However, low-cost plans worsen profitability, so ads must be added."

He added, "The economy has recently entered a recession. Many experts agree that FAST will spread further. The combined cost of subscribing to multiple OTTs is considerable. It is highly likely that there will be a shift from high-priced plans to ad-supported low-cost plans."