According to Parks Associates, OTT video business models are in a state of flux, with subscription-only models tending to dominate. The research house says 55% of OTT services in the United States have a subscription-only business model, such as Netflix (NASDAQ:NFLX) or Hulu. In Canada, 50% of OTT services offer subscription-only services.
"There is an enormous amount of change going on in the OTT space right now, with new OTT video services entering the market each month. Many of these services have subscription as at least part of their business model," said Brett Sappington, Parks' senior director of research. "The recent ruling of the U.S. Court of Appeals for the 9th Circuit is not likely to affect OTT video service business models. An OTT video service is unlikely to pursue legal action against someone who pays less than $10 per month unless they are doing something that disrupts the service."
Earlier this month, the U.S. Court of Appeals for the 9th Circuit ruled that sharing passwords without the authorization of the system's owner is a crime that can be prosecuted under the U.S. Computer Fraud and Abuse Act. Last year, Parks estimated total losses of more than $500 million in revenue in 2015 from password sharing. At the end of 2015, approximately 20% of U.S. broadband households had cancelled at least one OTT video service in the past 12 months. In 2Q 2015, 18% had done so.
"In a time of heavy experimentation by consumers, OTT video services want to generate interest in their offerings. Most would be glad to have consumers take a peek using a friend's credentials, so long as they subscribe eventually," Sappington said. "Services are far less concerned by someone sharing with a friend or family member. They are far more concerned with individuals posting credentials online or trying to profit by re-selling credentials in a violation of their EULA. Those OTT services with blended subscription/advertising business models will fare the best, generating revenue even from those who borrow credentials from others."
Other business models for the OTT space include transactional, freemium, advertising, and a mix of subscription and transactional. The number of services with advertising-reliant models has also declined, due to low ad revenues and lack of viewership. Services such as Yahoo! Screen have dropped out of the market, and other services, such as DramaFever, have added subscription tiers to transition into the freemium category.
"Services are experimenting with a variety of business models in order to differentiate themselves in this crowded market dominated by Netflix, Hulu, and Amazon. Smaller OTT companies are experimenting with the freemium model in particular," said Ruby-Ren Bond, Parks research analyst. "The subscription services with smaller bases are increasingly partnering with other players, such as Amazon, Hulu and Roku, which allows them to remain viable in a crowded market dominated by the top players."