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Strategic Considerations for Video Services. SVOD and AVOD: Strategic Considerations (1 of 2). Previous discussions have evaluated the launch of a programmed video service as a standalone profit driver, key considerations include:
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SVOD and AVOD: Strategic Considerations (1 of 2) • Previous discussions have evaluated the launch of a programmed video service as a standalone profit driver, key considerations include: • Investment in content and programming required to compete with leading services • Number of customers likely to be acquired • Revenue per customer • Ongoing relationship with customers • If a service is intended to be a standalone profit driver, the SVOD vs. AVOD decision depends partly on appetite for investment and risk • SVOD can be a high risk, high reward proposition • Significant investment in content required given heavy investment by many competitors • Harder to secure customers for paid service • But SVOD offers the potential for higher revenue per customer (e.g. ~ $10/month of subscription revenue) and an ongoing relationship • AVOD can be a lower risk model, but with lower revenue per customer • Success is possible at a lower level of investment; despite numerous competitors, investment in exclusive content for AVOD services has been more modest • Easier to secure customers for AVOD services • But revenue per customer is lower (e.g., ~$0.03 of ad revenue per view), and programming expertise is required to keep customers coming back
SVOD and AVOD: Strategic Considerations (2 of 2) • Sony’s existing revenue-generating services and connected device footprint give us the opportunity to evaluate the SVOD vs. AVOD decision differently • If a programmed video service is viewed as a customer acquisition tool for other revenue generating services and hardware sales, strategic considerations change • Strategic considerations include: • Creating a compelling and competitive content offering with a reasonable investment • Acquiring the greatest number of customers for the service • Providing those customers with a reason to return on a regular basis • Monetize by cross-selling these customers on paid services (i.e., Music Unlimited, Video Unlimited, PlayStation Plus) and hardware • AVOD’s characteristics better satisfy these strategic considerations: • Lower investment in content is required to be competitive • Free-to-consumer positioning makes it easier to acquire customers • A well-programmed service provides a reason for customers to return on a regular basis • Service can be deeply integrated into other paid offerings, encouraging cross-selling and co-promotion
Despite Netflix’s highly publicized subscriber numbers, standalone SVOD services have attracted fewer customers than AVOD services “Bundled SVOD” Standalone SVOD AVOD • Includes “streaming only” customers and customers that subscribe to both streaming and physical rental per Q3 investor letter, released 10/11. • Source: Piper Jaffray research, 2011. • Source: Hulu Management Blog as of 10/5/11. • Source: Comscore Videometrix, 10/11.
And Competition for SVOD Services is Increasing… …but similar lessons are playing out again TV Everywhere • Source: Time Warner Q2 earnings call as of 8/3/11. • Source: Industry reports as of 8/12/11.
SVOD and AVOD: Content Investment • While the ability to attract customers to standalone SVOD services at $10 per month is still being tested, the required content investment in these services remains high: SVOD • By contrast, AVOD services initially drove significant viewership with little to no content cost. Investment is increasing, but still well below investment in SVOD AVOD • Source: company filings dated 2/18/11. • Source: company filings and press releases. Note: Specific valuation for Lovefilm not publicly disclosed. • Source: Hulu Management Blog as of 4/4/11.
