How is the rising popularity of advertising-based video-on-demand (AVOD) services shaping the future of in-home entertainment? Using survey experiments in four countries, we analyse consumer preferences between AVOD, traditional transactional video-on-demand (TVOD), and illegal streaming alternatives, uncovering a strong preference for AVOD and significant substitution from TVOD.
The popularity of advertising-based video-on-demand (AVOD) services is surging, evidenced by a 29% increase in the number of US households using AVOD platforms in 2022 compared to 2020. Following the successful launches of AVOD platforms such as Peacock (NBCUniversal), Tubi (Fox), and Pluto TV (ViacomCBS), key players including Netflix, Disney+, and Amazon Prime, have recently introduced ad-supported tiers. In its recent annual report, Netflix noted that AVOD now accounts for 30 per cent of all new sign-ups in countries where available.
In our study, published in the Journal of Cultural Economics, we investigate the potential impact of AVOD on incumbent formats. We focus on new-release in-home films – that is, films that have either just finished their theatrical release, or were released directly into the in-home market. The main incumbent format we consider is transactional-video-on-demand (TVOD), which essentially is the short-term online rental platform available on services such as Google Play, Amazon Prime, etc. In addition to TVOD, we also consider illegal platform alternatives to watch the same film (such as 123Movies, for example), including one where the consumers can conceal their activity from authorities by using a VPN service.
Ideally, to conduct such a study we would collect detailed information from AVOD and TVOD providers on the actual consumption of various new-release in-home films available on both formats. This would then be combined with data on illegal consumption of the same set of films, including those concealed via VPNs. For several reasons, however, such ideal data is, unfortunately, not available. First and foremost, at the current point in time, it is rare that new-release films into the in-home market are simultaneously released on both AVOD and TVOD platforms. Second, where such examples do exist, the data is likely to be commercially confidential and unavailable to researchers. Third, obtaining reliable data on illegal consumption of films is notoriously difficult to capture, which is further compounded when the activity is concealed with VPNs or similar technology.
To overcome these challenges, we use a stated-preference experimental setting, where we survey representative samples of the population in a controlled environment. The experiment simply asks individuals to choose between viewing alternatives for a new-release film that they expect to enjoy watching at home. We consider four alternatives, and each is associated with a particular attribute that only applies to that specific alternative. Specifically, these alternatives include:
1) TVOD, with ‘price’ as the attribute;
2) AVOD, with ‘ad time’ per movie as the attribute;
3) illegal option A, with ‘punishment probability’ as the attribute;
4) illegal option B, with ‘VPN price’ as the attribute.
Implicitly, each attribute not directly associated with an alternative takes the value zero.
We surveyed about 200 people in each of the following four countries: the US, the UK, France, and Germany. Each respondent completed 12 ‘choice tasks’, which involved them selecting one alternative from the four presented (as well as a ‘none of the above’ alternative in case none of the others appealed). Importantly, in each choice task, the attributes (i.e. price, ad-time, punishment probability, and VPN price) varied. This variation allows us to model the potential trade-offs between pairs of attributes, such as (TVOD) price and (AVOD) ad time; or (TVOD) price and (illegal option A) punishment probability. We can also use this data to model the potential disruption AVOD would make in the current market by simulating its entry based on the status quo where it is not commonly available.
The most striking feature of our results is how popular AVOD was among survey respondents. More than half of the responses (aggregated over choice tasks and across countries) were for the AVOD alternative. However, it was also evident that AVOD was notably more popular in the UK and European countries compared to the US. There was also evidence of clear substitution towards AVOD when prices for TVOD increased. To a lesser extent, a substitution towards AVOD also exists when illegal consumption punishment probability increases, as was the case for VPN price increases too. Finally, the results of the simulation exercise confirm the importance of AVOD, and we calculate how much platform operators would need to charge for ad time to offset potential declines in TVOD revenue. We find the numbers are not dramatically different to reported industry figures, which provides encouragement that AVOD could become a viable option to complement TVOD for new-release in-home films.
About this article
McKenzie, J., Crosby, P., Collins, A. et al. No such thing as a free movie? Cross-country evidence on the potential impact of AVOD streaming services. J Cult Econ (2024). https://doi.org/10.1007/s10824-024-09505-1
About the authors
Jordi McKenzie is an Associate Professor in the Department of Economics at the Macquarie Business School, Macquarie University.
Paul Crosby is a Senior Lecturer in Economics at the Macquarie Business School, Macquarie University.
Alan Collins serves as Head of the Department of Economics and Professor of Economics and Public Policy at Nottingham Business School.
Thorsten Chmura is a professor in Experimental and Behavioural Economics at Nottingham Business School.
About the image
Photo of Glenn Carstens-Peters su Unsplash
