Here's a piece written nearly two years ago, before the Netflix streaming service became this popular, and before Hulu Plus was launched and LoveFilm flourished. As the Pay OTT TV blog launches, it seemed interesting to spotlight, in retrospect, the transition in the industry: today there are incredible pay-OTT success stories, and service providers planning 2011's OTT TV services are considering paid content as an essential part of it, often complemented with an ads based offering. What used to be a vision has turned into reality…

Web TV's main source of revenues has been video adverting since day one. The vast majority of video aggregators, service providers and web TV technology providers have structured their business model almost solely around video ads revenues. Ads revenues keep on increasing, and in fact on a historic day in June, 'The Simpsons' and 'CSI' were even reported to get higher advertising rates on the web than on prime-time TV! It shouldn't be surprising that broadcasters, publishers and aggregators of content continue to rely on video ads as their main revenue source. Nevertheless, video ads are not where most of web TV's potential revenues await.

In spite of the exceptional rates paid for 'The Simpsons', as a rule, video ads represent merely a small fraction of traditional broadcast's ads revenues. Indeed, as eye-balls move from traditional TV to the PC and other connected devices these gaps will slowly shrink. Yet, the gaps are too big to cover for the tremendous costs associated with the production of premium content and its distribution, which is much less scalable than that of traditional broadcast. In addition, ads-to-content-ratio is significantly lower on the web: online TV shows have 70%-90% less advertising minutes than broadcast. It follows that advertising will represent less than 1/4 (about 1.6 Billion) of $7 Billion in revenues from online video in the US by 2012 (according to UBS research).

The model will have to evolve by factoring direct spending from the consumer, either in the form of subscription or à la carte. Personally, I believe the potential success of the pay per view model will rely particularly on full features and live sports events, simply because viewers don't tend to pay on the web for other types of content. But I am a believer when it comes to subscription models, which are based on existing subscriptions to the operator. Subscription is an efficient way to charge for a wider variety of content, which may also include attractive sports events and movies, depending on the type of package chosen by the subscriber. I believe this is where the biggest revenue potential lays and gladly for network operators, especially those providing mobile or pay TV services, this is where they enjoy a huge advantage. In summary, in spite of video ads current dominance as a business model, paid content (in its various forms) will be the source for most of future online video revenues, and it's up for grabs for mobile and pay TV operators more than anyone else. The next post will discuss some of the ways in which operators can leverage their current business in this context.

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