MainConcept – Can ad-funded services reinstate the golden age of streaming?
Geoff Gordon, Vice President, Global Marketing, MainConcept
In the early days of streaming, subscription costs were low, and viewers were spoilt for choice by series after endless series of top-quality content – think House of Cards, Orange is the New Black and Stranger Things to name just a few. It was this promise of low costs and a seemingly never-ending stream of top-quality content that helped to entice consumers away from cable TV. The steady growth in subscriber numbers allowed for an unprecedented number of new shows to be ordered, which in turn helped to bolster growth. Many dubbed this the era of Peak TV. Streaming services reached record breaking subscriber numbers in 2020 as a result of the pandemic. Netflix reportedly added an extraordinary 36 million subscribers in that period which led it to pass the 200 million mark for the first time.
However, this fairy tale story of growth was not to continue. The bubble popped in the first quarter of 2021 when subscriber growth dramatically slowed and share prices dropped. Fast forward to 2023 and we’re looking at a completely different picture to those early days of streaming. Subscriber growth has significantly declined, churn has increased, less new content is being produced, streaming services have launched ad-funded tiers (not many saw that one coming), and streamers are all hiking up prices. As streaming services cut back and tighten their belts, is the golden age of streaming where viewers enjoy low fees and bucketloads of great content a thing of the past? Or can ad-funded packages reinvigorate the video industry by boosting profitability so that consumers can once again enjoy great new content without paying too much for it?
Less content in the pipeline
We know that production of new content declined in 2020 because of Covid lockdowns. Netflix announced that this was in part due to a natural contraction following such an expansion as was seen the previous year, but also because less content was available. S&P Global Market Intelligence reported last year that lack of content was often a more important factor in driving SVOD churn than household budget. Despite the clear connection between the availability of new content and churn, one way that service providers responded to slower growth and decreased revenue was to cut back on orders for new shows.
According to research by Ampere Analysis, the number of shows ordered in the US dropped significantly in the second half of 2022 and remained low in the early part of this year. Scripted content is the worst affected with commissions down by 24% year-over-year at the time the report was published. The WGA and SAG-AFTRA strikes will also add to the problem by significantly delaying the delivery of original programming. Although the impact of all of this hasn’t yet been felt by consumers, it’s likely that viewers will start to see the effects over the coming months. The question is whether the lack of new shows will drive more viewers to rethink their subscriptions.
Never ending price hikes
Another way that video services have responded to the changing market is to increase Average Revenue Per User (ARPU) by upping prices. In the early days, viewers could pick up a Netflix subscription for $8 a month, and now it’s closer to $11.99 for the basic plan, which is no longer available for new subscribers, while the premium plan comes in at a hefty $22.99. It’s a similar story with Disney+. When it first launched, it was just $6.99 per month, and now it’s pretty much double that at $13.99 a month.
It’s not yet clear what impact these price rises will have, but it’s possible that churn may increase, especially considering the economic pressures that have led consumers to cut back on paid streaming subscriptions in the first place. However, it seems unlikely that viewers will exit the paid streaming ecosystem altogether. A more likely outcome is that the increases will drive viewers to lower cost ad-supported packages or to increase their seasonal viewing choosing to turn on/off their subscriptions throughout the year.
Enter ad-supported services
While the idea of ads during streamed content was once met with resistance from viewers, it’s now becoming increasingly attractive because it provides a way to access content without such a big price tag. Circana’s TV Switching Study reported that the ad-free experience now costs consumers an average of $6 more per month than ad-funded services.
However, succeeding with ad-supported content will not be easy. The success of ad-supported video services hinges on the ability of providers to strike the right balance between maximizing ad revenue and delivering a great user experience. Ads need to resonate with viewers, be engaging, and not be intrusive or repetitive. Platforms are experimenting with various strategies, including limited ad interruptions, interactive ads, and improving personalization, to enhance the viewer experience and improve engagement. As technology advances, the potential for more seamless integration of ads and hyper-personalization will likely make the ad-funded experience more enjoyable for consumers.
Reviving the golden age
Revenue from advertising-based video on demand is forecast to reach $70 billion by 2027, so there’s little wonder that video services want a piece of the pie. Get it right, and they stand to substantially boost revenue, which would pave the way for an upturn in orders for original content once again.
Together with ad-funded packages which are much more affordable for consumers, there’s every possibility that this might pave the way for a new era where viewers can once again revel in a streaming landscape characterized by affordability and an abundance of top-notch content. The refinement of these ad-funded services coupled with advancements in ad-tech will be the deciding factors.
