Advertising-based Video on-Demand (AVOD)

Advertising-based Video on-Demand (also known as AVOD) is a business model for streaming media where viewers can watch content for free, supported by advertisements shown before, during, or after the video. Think of it as the 21st-century evolution of traditional broadcast television, but with the massive advantage of being “on-demand”—you watch what you want, when you want. Instead of paying a monthly subscription fee as you would for services like the standard Netflix plan, you “pay” with your time and attention by watching commercials. This model has fueled the growth of major platforms like YouTube and dedicated free services such as Pluto TV and Tubi. In recent years, even subscription giants like Netflix and Disney+ have embraced the model by launching cheaper, ad-supported tiers, acknowledging the huge market of consumers willing to trade a few ad breaks for a lower price point. For an investor, understanding the AVOD model is crucial to analyzing a large and rapidly growing segment of the media industry.

The AVOD model is a classic two-sided market, beautifully simple in concept but complex in execution. It balances the needs of two distinct customers: the viewer and the advertiser.

At its heart, the business works on a straightforward exchange:

• The Platform: Offers a library of movies, TV shows, and other video content to attract a large audience.
• The Viewer: Gets to watch this content without paying a direct fee.
• The Advertiser: Pays the platform to insert commercials into the content, gaining access to the platform's audience.

The platform's profit is the revenue it collects from advertisers minus its costs, the largest of which is typically content acquisition and creation. A successful AVOD service is a master juggler, ensuring its content is compelling enough to keep viewers engaged while making sure the ad experience isn't so intrusive that it drives them away.

When analyzing a company operating in the AVOD space, looking beyond headline revenue is essential. Value investors should focus on the underlying drivers of the business.

• MAUs (Monthly Active Users): This is the total number of unique users who engaged with the service in a given month. It's the primary measure of a platform's reach and audience size. A consistently growing Monthly Active Users (MAUs) number is a healthy sign.
• ARPU (Average Revenue Per User): This is arguably the most important metric for monetization. It's calculated as total revenue divided by the number of users (Total Revenue / MAUs). A rising Average Revenue Per User (ARPU) indicates the platform is getting better at making money from each viewer, either by showing more effective ads, increasing the number of ads (known as “ad load”), or commanding higher prices from advertisers.
• Engagement: This measures how much content people are watching (e.g., total streaming hours). Higher engagement means more opportunities to show ads and collect valuable user data, which makes the platform more attractive to advertisers.

From a value investing perspective, the attractiveness of an AVOD company depends on its ability to build a sustainable competitive advantage, or what Warren Buffett calls an economic moat.

The streaming wars are fierce, so a durable moat is critical for long-term success. Potential moats for an AVOD business include:

• A Vast Content Library: Owning a deep and exclusive library of desirable content can lock in viewers. For example, a service that owns the exclusive streaming rights to a beloved, classic sitcom has a powerful asset that competitors cannot easily replicate.
• Network Effects: A strong network effect can emerge as a platform grows. More viewers attract more advertisers. More ad revenue allows the platform to acquire better content, which in turn attracts even more viewers. This virtuous cycle can create a formidable barrier to entry. YouTube is a prime example of this moat at work.
• Superior Technology and Data: An AVOD platform is also a technology company. A superior content recommendation engine keeps users watching longer, while sophisticated ad-targeting technology allows advertisers to reach their desired demographic more effectively, enabling the platform to charge higher ad rates (Cost Per Mille (CPM)).

Despite the opportunities, investors must be aware of the inherent risks:

• Economic Sensitivity: Advertising budgets are often the first to be cut during an economic downturn. This makes AVOD revenues more cyclical and less predictable than the recurring revenue from a Subscription-based Video on-Demand (SVOD) model.
• Intense Competition: AVOD services compete not just with each other but with SVOD, Transactional Video on-Demand (TVOD), linear TV, and social media platforms like TikTok for a finite amount of user attention.
• The Content Treadmill: The need to constantly license or produce fresh, engaging content is relentless and expensive. A few programming flops can quickly damage viewership and investor confidence.

To place AVOD in the broader media landscape, it's helpful to compare it directly with its main video-on-demand rivals:

• AVOD (Advertising-based): Free to the consumer, paid for by advertisers. The business model is focused on maximizing viewership and ad revenue. Example: Roku Channel, Freevee.
• SVOD (Subscription-based): Consumers pay a recurring monthly or annual fee for access to a library of content, typically ad-free. The business model is focused on acquiring and retaining subscribers. Example: The premium tiers of Netflix and Hulu.
• TVOD (Transactional): Consumers pay a one-time fee to rent or purchase a single piece of content. This is a pay-per-view model. Example: Renting a new movie release on Apple TV or Amazon Prime Video.