"On TV And Video" is a column exploring opportunities and challenges in advanced TV and video.
Today’s column is written by Mark Popkiewicz, CEO at Mirriad.
A generational shift is taking hold of the Asian media landscape as new online video services challenge incumbent TV operators in the largest media market on the planet.
But what started as waves may soon become a tsunami. As China’s new digital video services choose ad funding over a subscription model, they risk stuffing their content with enough ads to drown the world’s most exciting new audience.
In China, video-on-demand (VOD) ad load is going to be a big deal.
China’s ad-first VOD future
If you thought Western over-the-top (OTT) was hot, you should look east. The Chinese online video market could quadruple from about $3.43 billion (22 billion yuan) in 2015 to $15 billion (96.2 billion yuan) by 2020, according to IHS Markit.
The market has consolidated around three main online players: Baidu’s iQiyi, Alibaba’s Youku Tudou and Tencent Video, which together boast nearly 1.3 billion monthly active users, each operating both subscription and free offerings.
While the market is large enough to support a lucrative subscription video (SVOD) business, only 37% of Chinese digital video viewers were expected to be subscribers to such a service this year, according to eMarketer. As in the US and Europe, it is ad-supported VOD that will first grow the overall market, providing a future opportunity to upsell subscriptions.
A tricky balance
For Chinese VOD operators to realize their opportunity, they must responsibly steer the advertising ship.
Today, they are sailing it into choppy waters because, in their rush to monetize ads, they risk breaking the user experience. In China, it is not uncommon to suffer between eight and 12 pre-rolls before a show actually starts. No wonder video ad spend is forecast by eMarketer overtake TV ad spend in China by 2021.
Excessive ad load is a problem around the world. That is why Turner and other broadcasters are experimenting with offering fewer ads in commercial breaks.
China, perhaps surprisingly, has widespread societal tolerance toward advertising. But that doesn’t mean platforms should load up with impunity. On the one hand, unlike their Western peers, ad-free SVOD penetration is not so great that it puts pressure on the ad-supported experience. On the other, if they spoil the ad-funded experience so early in the game, they risk strangling both ad-derived gains and the subscription upsell opportunities that will naturally flow.
Competition will clean up experience
In China, there is an additional dynamic at play.
In the West the video market has consolidated around a few key players, but in China the race is still on. Baidu, Alibaba and Tencent, commonly referred to as BAT, may be the leaders in the pack with online-native platforms iQiyi, Youku Tudou and Tencent Video. But state broadcasters in more than 20 provinces also make shows available through their own on-demand services.
If they were confident enough at the head of the pack, BAT could probably stand to thrust more ads at their users. But, in a hypercompetitive market that is so early in its growth trajectory, doing so could be incredibly destructive.
The main risk is churn. When the user experience is broken by advertising clutter, China has a plethora of alternative video service available instead to consumers who can go anywhere they please.
High-stakes video game
What happens next will be fascinating to watch. BAT are not Turner, and so far suggestions to cut ad load have not been well received by Chinese video and TV operators. But like their peers across the ocean, Chinese operators will soon find themselves searching for the right balance of commercial and consumer payments.
One solution may be branded content. From A+E to Vice Media, video publishers in the United States are now used to selling advertisers on the opportunity to create messages as though they were content.
When it comes to VOD, however, Chinese companies appear just as guilty of overstuffing as they are with conventional pre-rolls. It is now common to see a dozen crude brand overlays on a single frame of shows from Chinese platforms. That may seem to fit within consumers’ tolerance threshold today, but as competition forces a more focused user experience, the new trend will be toward fewer ads that are more naturally aligned with entertainment content.
The prize is big: With an increasingly affluent population of 1.3 billion, China’s VOD market has the most potential of any around the world. But so are the stakes: None of the country’s main video platforms are profitable.
At this scale, that simply can’t continue. The waves are about to break.
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