Seven Factors to Consider When Pricing Online TV Video

Hulu, which distributes TV and movie video content, has experienced a 265 percent increase in streams over the past year, making it the second largest online video site, according to Nielsen data. Although the number of video viewers is increasing, comScore’s Tania Yuki believes the more important trend is the growth in viewing engagement and intensity, where the same viewers become more engaged and spend more time watching quality long-form video content. This has fueled speculation that traditional television content business models will experience serious damage, similar to that experienced over recent years by the newspaper and music industries. Increasingly consumers are looking to watch long-form television shows on their favorite electronic device wherever they are and whenever they want.

A deeper look at viewer behavior showed a 32 percent increase in time-shifted television viewing, based on Nielsen research. While attributable to increased penetration and use of DVRs including TiVo and fee-based services, viewers can view shows on their schedule and reduce time spent seeing ads. In addition, the June 2009 Nielsen results revealed that 57 percent of viewers simultaneously watched television and surfed the Internet. Some Internet usage is obviously related to the shows and advertising they are watching, but for many viewers, who already multitask while the television is playing, Internet surfing is just another activity.

Where television branded video is having a huge impact is mobile devices. According to Nielsen’s report, the number of people viewing video on mobile phones has increased 70 percent since 2008, showing there’s a percentage of television content viewers who are willing to put up with limitations of a small screen device to get the convenience of on-the-go viewing. While this only accounted for over 15 million Americans in Q2 2009, most of this content was branded television video. This trend will continue to grow based on MRI’s August 2009 research; it found that one in five phone owners is interested in viewing television content on their mobile phones. From a revenue perspective, while 70 percent thought that ads on their mobile devices were annoying, one in 10 would pay for a monthly subscription.

Seven Pricing Factors to Consider

As more television content goes digital, one of the biggest marketing challenges is to figure out the right way to price it. While content producers are worried about hurting the revenue streams from their existing distribution models, they must price their offering for digital devices without creating artificial barriers. Otherwise, consumers will find other content from other suppliers to watch. Here are seven factors to take into account when determining pricing:

• Cost. One method of pricing is to cover costs plus a profit margin. To this end, assess the variable, fully loaded cost of the content. Among the cost components to include are creative development and related royalties, production costs (e.g., a download doesn’t require producing and packaging like a DVD), distribution costs such as Web site and bandwidth versus television networks and cable providers, marketing, overhead, and a reasonable profit margin.
• Competitive products. Look at direct substitute products, such as broadcast, cable, and premium television; time-shifted DVR or TiVo; and full-season DVD options, as well as other long-format television show and movie content. Think about the potential for offering a paid subscription to entice consumers to buy an entire season of a show or another large grouping of your offering. Depending on availability, consumers may consider a wider set of less obvious options, including reruns and content that originates outside of the United States.
• Relative value. Look at how consumers make their cost and attention tradeoffs among available options. What is the television-branded video worth? In terms of similar products, a music download costs $0.99 or $1.29 on iTunes, a video-on-demand or DVD rental costs about $4.99, and a monthly subscription to Audible costs $14.95. Regardless of how this pricing has been arrived at, it’s what consumers are used to and what they have shown a willingness to pay for.
• Advertising’s role. Despite the fact that many television viewers don’t like advertising, few consumers, as other online media have shown, are willing to pay for advertising-free content, although movie DVD rentals and purchases are a notable exception. One issue: consumers are used to having advertising subsidize the cost of television content. Therefore, revenue can be generated through advertising on long-format television content. As the marketplace grows, product placement and sponsored video options should be explored.
• Channel conflict. Because television content yields the greatest revenue when viewed on a television set, consideration should be given to the timing of the online release, especially when compared with other formats. While it’s important to assess the impact on other revenue streams, it’s better to cannibalize your own audience than to lose it to another provider.
• Test pricing. Regardless of where you set your original pricing, it’s important to continue testing pricing alternatives to determine the level that maximizes total profits.
• Long-term impact. Despite online television video still being a market in the early stages of development, you must make assumptions about the future and how usage of your content will evolve to project usage, revenues, costs, and profitability. Make sure that you detail your assumptions and react if the market moves in directions you weren’t expecting.

Remember, the online television video market will continue to change rapidly. With portable devices like iPhones and netbooks, consumers will continue to time-shift television viewing to fit into pockets of time where they’re bored and want to be entertained. It’s critical to be proactive in assessing how to price your high-value video content to ensure that it contributes to your bottom line.

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