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As the demands for online video services increase intensively, the selection of business models has drawn the great attention of online providers. Among them, pay-per-view mode and advertising mode are two important resource modes, where the reasonable fee charge and suitable volume of ads need to be determined. This paper establishes an analytical framework studying the optimal dynamic pricing and advertising strategies for online providers; it shows how the strategies are influenced by the videos available time and the viewers’ emotional factor. We create the two-stage strategy of revenue models involving a single fee mode and a mixed fee-free mode and find out the optimal fee charge and advertising level of online video services. According to the results, the optimal video price and ads volume dynamically vary over time. The viewer’s aversion level to advertising has direct effects on both the volume of ads and the number of viewers who have selected low-quality content. The optimal volume of ads decreases with the increase of ads-aversion coefficient, while increasing as the quality of videos increases. The results also indicate that, in the long run, a pure fee mode or free mode is the optimal strategy for online providers.

Apart from text and images, video is the most important form of online media, which has been widely regarded as the future of media on the Internet. According to Cisco Visual Networking Index 2015–2020 prediction, by 2020, 82% of viewer Internet traffic will be video and total global Internet traffic will increase at 22% per year. High-quality online video service brings not only profits but also reputation and user reliability to the companies. The latter is rather more important for company’s long term life cycle. For example, Youtube has attracted over a billion users all over world, because it offers free video services, selected advertising options, and a much faster streaming ability thanks to its great technologies such as Content Delivery Network (CDN) and Google File System (GFS). In other words, Youtube has paid a lot of attention to user experience and thus gains a large and stable user group, which makes Youtube one of the most famous video websites in the world. However, in 2014 Youtube annual revenue was posted at about $4 billion, which accounted for about 6% of Google’s overall sales, which increased to $9 billion in 2015. This indicates that there will be a large potentiality for Youtube to be more profitable. Not only does Youtube exist, but also there are various Internet video sites such as Vimeo (US), Hulu (US), Youku (China), Dailymotion (France), Niconico (Japan), and Pandora TV (South Korea), competing in the online video market all over the world.

As the online video service has a glorious future, it is attractive and important to investigate its business models. There are several profiting modes, which mainly include three patterns: sales or redistribution of copyrights for certain films, charges for video services, and advertising revenue. In this paper, we will discuss the two latter cases dealing with online video users. Many video websites adopt the strategy of providing free video services to maximize membership. The revenues of this mode mainly depend on advertising. However, recent studies report that, with only advertising revenue, it is not sufficient for Internet-based companies [

In order to deal with this trade-off, some video websites adopt strategy that allows viewers to preview samples before buying. It might be feasible, because online video is a sort of information goods as well as experience goods, which could be valued according to viewers’ perceived experience [

The papers mentioned above apply static models and optimize the maximum revenue using simple first-order and second-order conditions without considering the effect of time on the optimal strategy. However, a few papers do take into consideration the time periods in different ways and provide a dynamic analysis to study the optimal content price and the volume of ads in websites. For instance, Dewan et al. [

Consider that the online provider offers two types of Internet video contents: high-quality content without ads requiring a fee to access and low-quality content with ads but free of charge. There will be previews for viewers to have a general judge over the video service. Assume that for high-quality and low-quality video services, the viewer’s average perceived values are

In this paper, the price of online video services and the amount of ads are functions of time

In the following part, we will introduce the single fee mode and the mixed fee-free mode, where the optimal video price and ads volume are resolved to obtain the optimal business strategies for online video services.

At time

Let

In case I, it needs to find out the optimal price

This is a dynamic optimization problem, which can be solved by the modern control theory Hamiltonian Method. In the model, a dot above a variable is defined as the first derivative with respect to time. We formulate Hamiltonian function as follows:

We substitute the values of

In this case, there exists both fee and free modes in online video service market. Viewers could choose any mode as their willingness. Since the newly arriving video contents are more attractive, viewers prefer to pay for the new ones. With this consideration, introduce a critical time point

Here we make an assumption that the optimal solution for fee model is the same as case I. This assumption stands when

At time

If

If

It can be found that

Denote

Based on the hybrid business models discussed in the above section, we can draw the following conclusions on optimal strategies, which are useful to gain insights into factors affecting the optimal price and quantity.

In the single fee mode, it is optimal to set

Proposition

The optimal price

By taking the high-quality value and time partial derivatives of the optimal price, we obtain

Lemma

In the mixed fee-free mode of online video market, it is optimal for online providers to adopt a paid content strategy as

Proposition

The optimal number of ads

For the optimal number of ads

Through simple transform

The result of Lemma

The optimal number of ads with respect to time

The number of viewers who select low-quality content

In case II Stage

Lemma

To have a better understanding of parameters influence on

The optimal profit of case I with respect to time

The optimal profit of case II with different ads prices

According to the Hamiltonian principle and the previous analysis, we calculate the maximum profits taking into consideration the optimal strategies of fee charge and amount of ads. For case I fee mode, the optimal profit

Figure

Because the formulation is complicated, we investigate numerically the influence of critical time

It can be found that no matter how the unit ads income varies, the optimal profit strategy is to take into action only one business model, either the single fee mode or the mixed fee-free mode, as the profit reaches a maximum value at the ends of the interval. The optimal profit increases as

This paper has investigated the optimal strategy for online video service business. Considering the dynamic decisions in real video market, we divide the whole period into the single fee phase and mixed fee-free phase and then, respectively, create continuous time model for each. Our models have presented a straightforward way to study the provider’s pricing strategy and advertising decision based on viewers’ emotional factor. There is a significant influence among applied price, ads volume, and video content quantity. In the single fee mode, we have obtained the optimal time-varying price which maximizes the profit from video service within a certain time interval. The result implies that the optimal price of online video increases with high-quality value while decreasing with time. In the mixed fee-free mode, we have found out the optimal fee and ads volume. It is beneficial for online providers to choose higher charge fee and advertising intensity. Besides, the price and the number of ads decrease as ads-aversion coefficient increases. It has turned out that, in a long run period of time, taking one strategy either fee mode or free mode is optimal for the online providers.

For future research, the following subjects can be carried out in three aspects:

Accomplishment of the model: There are other factors which determine the revenue model. For example, in Ren et al. [

Model validation: our time-continuous model should fit the data collected in real world, identify model coefficients, and validate other sets of data. As mentioned in Walz et al. [

Another path to investigate online video services is predicting and analyzing based on a fitted nonparametric model. There are several advanced regression methods to be investigated, such as multivariate adaptive regression splines (MARS) or its alternative CMARS proposed by Weber et al. [

The authors declare that they have no conflicts of interest.