Streaming video services may encounter pricing difficulties

Over-the-top (OTT) video streaming services like Netflix have been doing extremely well during the past few years. While there are many reasons for this, one of the key factors is that many of these OTT services require customers to pay smaller recurring payments via a subscription model, rather than large upfront fees.

By using subscription business models, OTT video services are able to customize offerings for different users. This makes customers feel more important and noticed, while simultaneously requiring them to pay less for often better quality on-demand television.

This was highlighted in a recent study by Parks Associates, which found Netflix users are more satisfied with the online service than with traditional on-demand offerings.

“Consumers can pay for a month of Netflix for about the same amount as for two pay-TV movies,” said Brett Sappington, director of research at Parks Associates. “Parks Associates research shows consumers know the quality of the OTT service is not comparable to pay-TV quality but the cost-benefit comparison is enough to affect their purchase decisions.”

However, a new study by IHS iSuppli suggests that OTT services may need to change their business model going forward if they want to remain competitive.

OTT services may need to change delivery model
Pundits have long said subscription OTT services like Netflix will outperform traditional cable TV offerings by providing a wider variety of programming, platform ubiquity and technological superiority, iSuppli said. The research firm’s new report, on the other hand, may suggest otherwise.

The study said that when OTT services are scaled up for the average television public, their prices are likely to increase, causing the services to lose their long-standing competitive edge. As a result, platform-agnostic providers may have to change the way they provide their services to customers as the video industry continues to develop.

“To serve the viewing needs of a mass-market audience, the content delivery network costs for OTT streaming services would have to fall by a factor of as much as 25,000 just to reach parity with the most efficient broadcast technologies,” said Guy Bisson, research director for television at IHS.

Rather than eliminate the successful subscription model, IHS noted that OTT providers may benefit from developing their own distribution platforms. As a result, OTT video services won’t need to charge excessive prices.

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The Forrester Wave: Subscription Billing Platforms, Q4 2015

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