OTT Advertising: What It Is and How It Works

Cable television is in serious decline, losing ground to streaming media on both convenience and reach. Video ad views on OTT (over-the-top) devices grew 63% year over year in Q3 2016, and the trajectory has continued upward ever since.

Traditional TV ads now reach a mere fraction of their former audience. Streaming content has become the new television, and OTT advertising may well mark the death knell for the traditional TV commercial.

Source: FreeWheel Q3 2016 Video Monetization Report

What Is OTT Advertising?

The term over-the-top refers to the service used to stream digital content to a TV or a similar display device. Devices commonly classified as OTT include:

• Streaming boxes (Apple TV, Amazon Fire TV, Android TV, Samsung Allshare Cast)
• HDMI sticks (Chromecast, Roku, Amazon Fire TV Stick)
• Smart TVs (through in-TV apps like Netflix or HBO Go)
• Game consoles
• DVR set-top boxes
• Internet-enabled smart Blu-ray/DVD players

OTT advertising is broadly analogous to TV advertising, but delivered through streaming media on OTT platforms. The technology is expected to mature quickly and give marketers the best of two worlds: the precision of programmatic and the growing reach of streaming services. With OTT ad revenue projected to increase from 45% to 60% over the next decade, early adopters of OTT advertising are well-positioned to benefit as the channel scales.

The Difference Between OTT and Connected TV (CTV)

Distinguishing OTT from CTV has historically been a source of confusion. The IAB Tech Lab has established concrete definitions for both terms:

OTT: Content streamed via popular services like Netflix and Hulu.

CTV: Video delivered via an internet connection on a large screen — a smart TV, for example. Other internet-enabled devices such as Roku, Fire Stick, Apple TV, and game consoles also fall into this category.

The practical distinction is worth keeping in mind: OTT describes the content and the service, while CTV describes the device and the screen. The two concepts overlap frequently but are not interchangeable.

Which Platforms Carry OTT Ads?

Premium subscription services like Netflix are — and will very likely remain — ad-free. OTT advertising is concentrated on free-to-watch, ad-supported platforms such as Crackle, Yahoo View, Cheddar, Newsy, and The Young Turks.

For audiences seeking film and series content rather than news, ad-supported streaming libraries like Tubi.TV and Roku Channel offer Hollywood titles at no cost to registered users, funded by advertising.

The commercial significance of this model is already evident. Hulu's ad revenue surpassed $1 billion for the first time, and Roku's ad business doubled in 2018. There are already many niche networks competing for advertising dollars, with more expected to emerge as the ecosystem matures.

This model also benefits device makers and platform operators. By monetizing ad-supported tiers, they can reduce hardware costs and subsidize free content, broadening their addressable audience beyond paying subscribers.

Why OTT Has Become an Attractive Advertising Channel

TV viewers are spending more time watching content through smart, internet-enabled TVs and OTT video services. The appeal of OTT as an advertising channel comes from several converging factors.

An Uncharted — and Currently Clean — Environment

The OTT ecosystem is fragmented but largely unspoiled. At present, there is no meaningful ad fraud because streaming platforms operate as closed, controlled systems. Viewers on OTT devices cannot simply close a window, switch tabs, or install an ad blocker to bypass advertising.

That said, many standard digital advertising metrics do not apply. Click-through rate (CTR) is essentially irrelevant — users cannot click a TV screen — and conventional completion-rate benchmarks from web video don't map cleanly to OTT behaviour. What OTT does deliver is significantly higher video completion rates than in-browser video, making it a strong format for brand storytelling.

The Interactive Advertising Bureau (IAB) has published web, video, and mobile advertising guidelines, but there are currently no equivalent industry-wide standards specifically for OTT advertising video.

The Only Viable Alternative to Traditional TV Commercials

The shift away from traditional TV has reached a point of no return. The cable audience is commonly described in three segments:

• Nevers — People for whom TV has never been a primary medium. They never subscribed to traditional pay television and access media exclusively through streaming services like Netflix, Hulu, Amazon Prime, or HBO Go.
• Cord shavers — People who still pay for subscription TV but have scaled back their plans, gradually switching to streaming services for an increasing share of their viewing.
• Cord cutters — People who have cancelled subscription TV entirely and rely on streaming services.

For TV advertisers, OTT is increasingly the only channel through which these groups can be reached at scale. A Pew Research Center survey found that 61% of Americans ages 18–29 watch television primarily through streaming services, while only 31% primarily use cable or satellite. A mere 5% rely mainly on a digital antenna. For the 50–64 age group, those figures shift significantly: 10% primarily stream, 70% use cable or satellite, and 15% use a digital antenna.

A Larger Screen and a More Diverse Audience

OTT advertising reaches viewers in the living room, where household members often watch together. Unlike in-browser video, OTT ads are typically displayed full-screen with limited controls to minimize or skip them. The audience is also more demographically diverse than on most digital platforms, and OTT enables targeting at the household level — a capability with no real equivalent in traditional digital advertising.

Programmatic Capabilities in a TV-Scale Environment

OTT advertising brings targeting, dynamic ad insertion, and advanced analytics to a TV-like setting. While many of these capabilities are still being fully implemented, the direction is clear: shorter, more personalized ads delivered with geolocation, demographic, and device-level data — capabilities that traditional TV simply cannot offer.

How OTT Ads Are Delivered

Delivering OTT ads requires decisions about two key technical dimensions: how the streaming platform communicates with OTT devices (typically via VAST or VPAID tags), and which ad-insertion method is used — client-side (CSAI) or server-side (SSAI).

The general delivery process works as follows:

1. Audience creation: An OTT audience is assembled from the platform's subscription data, and in many cases enriched with additional household information. This can include first- and third-party data — preferred content categories, specific shows watched, and similar signals.

2. Campaign distribution: Audience matching begins. The platform matches the audience against subscriber lists on OTT platforms, then the ads are pushed, downloaded, and buffered by the OTT devices.

3. Ad display via OTT platforms: Depending on the platform, OTT devices are communicated with using VAST or VPAID tags (covered in detail below).

4. Reporting: After the campaign, the OTT operator sends back ad-exposure results, and the platform generates reports for the advertiser, typically enriched with first- and third-party data.

Ad Insertion Methods: CSAI vs. SSAI

CSAI (Client-Side Ad Insertion)

Client-side ad insertion is the legacy method: ads are loaded within the OTT device itself before being displayed to the viewer. CSAI is susceptible to ad blockers and doesn't offer an ideal viewer experience, but it remains the leading ad-insertion method in the OTT industry today.

Client-side ad insertion (image adapted from theoplayer.com)

SSAI (Server-Side Ad Insertion) and Ad Stitching

In server-side ad insertion, ads are delivered as part of a seamless, unified stream. The process generates — in real time — a blend of ad content and programme content streamed to the client device frame-by-frame. Because ad blockers cannot distinguish ad frames from content frames, SSAI effectively neutralizes ad-blocking software.

Server-side ad insertion (image adapted from theoplayer.com)

SSAI enables a seamless viewing experience even for live feeds, "stitching" ads directly into the content stream and eliminating the buffering pauses that are common with client-side insertion. If clickable ads or viewability measurement are required (via VPAID tag support), those capabilities can be layered in on the client side — though doing so requires additional development effort from the OTT platform provider.

Advantages of Server-Side Ad Insertion

The benefits of SSAI over CSAI in the OTT context are well established:

• Ad fraud and ad blocking are effectively eliminated. SSAI makes it technically impractical for blockers to target ad content.
• No latency issues. CSAI requires sending a VAST request, waiting for a response, loading an asset, and then resuming playback — a sequence that frequently causes buffering, freezing, or blocking. SSAI removes this cycle entirely.
• Seamless asset transitions. Problems associated with switching from one playback asset to another — spinning wheels, resolution changes, loss of playback buffer — are eliminated.
• Simpler client-side development. Implementing CSAI requires developers to work with multiple software development kits on client devices. SSAI reduces that complexity considerably.
• Improved viewer engagement. The consistency and reliability of the SSAI experience improve overall platform quality and viewer retention.

Tags Used for Communicating With OTT Devices

VAST Tags

VAST (Video Ad Serving Template) tags provide the player with instructions for handling a video ad: how it should appear, how long it should run, whether users can skip it, and where the ad asset is located (ad server information).

VPAID Tags

VPAID (Video Player-Ad Interface Definition) tags extend VAST by enabling interactive ads and viewability measurement. However, VPAID tags do not support stitching — a limitation that means they bypass more than half of all video pre-rolls served in Europe. Despite this constraint, some agencies and advertisers still favour VPAID because of its viewability and interactivity capabilities.

Challenges Still Facing OTT Advertising

OTT advertising offers real advantages over traditional TV, but several technical and structural challenges remain before it can reach its full potential:

• Inventory access is fragmented. Much of the smart TV and OTT inventory available programmatically can only be accessed directly from smart TV manufacturers or OTT service providers. There is currently no support for third-party ad serving and measurement on most platforms.
• Lack of industry-wide standards. OTT advertising remains a fragmented landscape without unified guidelines comparable to those that govern web or mobile advertising.
• No cookies or Flash support. Most OTT devices lack capabilities that web browsers take for granted, including cookies and Flash. This limits advertisers' ability to target viewers and attribute conversions accurately. The closed nature of most OTT platforms can also cause incompatibilities with third-party tags and lead to measurement discrepancies.
• VAST-only communication constraints. Because OTT platforms are relatively limited execution environments, there is currently no possibility of implementing executable ad units. Communication between ad servers and devices is restricted to VAST advertising tags — the IAB's standardized format for video ad serving — which means the richer interactive capabilities of VPAID are largely off the table in pure OTT contexts.

The Future of OTT Advertising

Despite these challenges, the opportunities in OTT advertising are substantial. The IAB outlines two iterations of OTT capabilities that roughly parallel the evolution of programmatic advertising over the past two decades.

Current iteration: Brands buy directly from OTT content providers, using viewing information and the programme environment as a proxy for product interest. Campaigns are then executed programmatically. Because most streaming services are subscription-based, publishers have precise data on where their audiences live. Free OTT services without a subscriber database rely more heavily on external data sources, including Google's ad-targeting and matching services.

Next iteration: Ad targeting continues to leverage viewing information from OTT providers, but device matching across the household enriches that data with browsing and online shopping behaviour for more precise targeting. Audiences can then be built on open and private exchanges, applying the full range of digital video targeting capabilities. Viewers benefit as well, seeing ads that better match their demonstrated interests and intent.

The capabilities of OTT advertising, while still maturing, will continue to develop and present advertisers with new ways to reach audiences. As OTT's share of the overall advertising market grows in the coming years, unlocking its full potential will represent one of the more compelling opportunities in the media-buying landscape.