AVOD (Advertising-Based Video on Demand)

AVOD, short for Advertising-Based Video on Demand, is a business model that lets you stream movies and TV shows for free. Think of it as the modern, on-demand version of old-school broadcast television. Instead of paying a monthly fee, you “pay” with your time by watching advertisements that are inserted before, during, and after the content. It’s the business model that powers giants like YouTube and has given rise to popular free streaming services like Pluto TV, Tubi, and The Roku Channel. For viewers, the appeal is obvious: a library of content without a subscription cost. For companies, it’s a way to tap into a massive audience that may be unwilling or unable to pay for yet another subscription, generating revenue by selling ad space to brands that want to reach those viewers. This model stands in contrast to SVOD (Subscription Video on Demand), where users pay a recurring fee for ad-free access, like on the standard tiers of Netflix or Disney+.

The AVOD model is a three-way street connecting viewers, content owners, and advertisers. It’s a simple but powerful loop.

1. Step 1: Get the Content. An AVOD platform either licenses movies and shows from studios or creates its own original content. This library is the bait to attract viewers.
2. Step 2: Attract the Eyeballs. The platform offers this content to the public for free. The more compelling the library, the more people will tune in. The key metrics here are MAU (Monthly Active Users) and total viewing hours.
3. Step 3: Sell the Ads. The platform then sells ad slots to companies who want to reach this engaged audience. The more viewers a platform has, and the more it knows about them, the more it can charge for these ads.
4. Step 4: Share the Revenue. The money generated from advertising is the platform's primary source of revenue. A portion of this revenue is often shared with the content creators or studios who licensed their content to the platform, creating a cycle that funds new content acquisition.

The ultimate goal for an AVOD business is to grow its user base and viewing hours faster than its content and operational costs, turning a large, free-to-watch audience into a profitable enterprise.

From a value investing standpoint, the AVOD model presents a fascinating mix of high potential and significant risk. It’s crucial to understand both sides of the coin before investing in a company that relies on this strategy.

• Huge Addressable Market: “Free” is a powerful word. AVOD services can attract a massive audience, including budget-conscious consumers suffering from “subscription fatigue.” This gives AVOD a much lower barrier to entry for new users compared to paid services.
• Economic Resilience: When times get tough and households tighten their belts, expensive subscriptions are often the first to go. Free, ad-supported services can actually thrive during economic downturns as consumers look for cheaper entertainment options.
• Data-Driven Ad Targeting: Unlike traditional TV, AVOD platforms can collect valuable data on viewing habits. This allows for highly targeted advertising, which is far more valuable to advertisers than the scattergun approach of broadcast television. Better targeting means higher ad prices and more revenue.

• Cyclical Ad Market: AVOD revenue is directly tied to the health of the advertising market. During a recession, companies slash their ad budgets, which can cause an AVOD platform's revenue to plummet, even if its viewership is growing.
• Lower Revenue Per User: The ARPU (Average Revenue Per User) for AVOD is significantly lower than for SVOD. It takes a colossal number of users and viewing hours to generate the same revenue as a subscription service. Profitability is a game of immense scale.
• Intense Competition: The battle for eyeballs is fierce. AVOD platforms compete not only with each other but also with SVOD, linear TV, video games, and social media. This constant fight for attention requires massive and continuous spending on content.
• High Content Costs: Whether licensed or produced in-house, content is expensive. An AVOD platform is on a perpetual treadmill of acquiring new content to attract and retain users, which can be a major drain on cash flow. Without a strong, differentiated library, a platform has no competitive moat.