Despite what Netflix’s success may lead you to believe, the road to riches in streaming isn’t all about subscriptions.
As the shift to digital causes the audience for linear TV to shrink, companies in the media space are increasingly looking to generate revenue via advertising-based video on demand (AVOD) services.
• NBCUniversal announced last week it plans to launch a streaming service with an ad-supported and ad-free tier in 2020. And during Comcast’s Q4 2018 earnings call on Wednesday, NBCUniversal CEO Steve Burke said the company thinks it “should start and try to gain as much scale as possible with an ad-supported free streaming service,” implying the company is prioritizing the growth of its new streaming service’s free tier over its paid tier.
• Viacom on Tuesday announced that it agreed to purchase Pluto TV, an AVOD service, for $340 million. Viacom’s ad business will be bolstered by the 12 million monthly active users and additional commercial inventory that Pluto TV offers.
• Hulu lowered the bar for entry to the ad-supported portion of its own subscription plans to $6, revealing new pricing Wednesday that also included a hike to its pay-TV bundle.
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It makes sense for media players to chase revenue on streaming services via ads, rather than subscriptions, because the SVOD market is getting saturated from super aggregators like Netflix to more niche players.
The average U.S. consumer is subscribed to between 2-3 streaming services, and one of those is “almost always” Netflix, according to Lab42 founder Jonathan Pirc, citing an October 2018 survey by Lab42.
Netflix has the highest retention rate when compared to its rivals, so this means companies late to the streaming game are more directly competing against other services like Hulu and HBO Now for wallet share when they launch.
Even so, some companies new to the streaming game may find it hard to find footing in the SVOD market, as companies like Hulu further lure customers with its award-winning originals. New-to-market services in 2019 with buzzy content like Disney+ will make it even more difficult for companies like NBCU to win wallet share in the SVOD marketplace. This helps explain why during NBCU’s research, the company found most consumers indicated they’d rather endure 3-5 minutes of ads for free access to its service than pay $10 per month.
Moreover, companies entering the AVOD game have the opportunity to attract viewers that haven’t signed up for Netflix, which puts itself further out of reach of that segment of the audience by announcing last week its own subscription price hike. Netflix’s service doesn’t show ads, and the company in the past has expressed much hesitation in introducing commercials to its service.
And if Comcast and Viacom are lucky, their new streaming offerings will appeal to existing Netflix subscribers looking to maximize their content options, too, particularly for the segment of the population open to paying for 3+ subscriptions.
And if Netflix ever flipped on its no-ads policy, its subscriber base would likely shrink as a result — 23% of current Netflix subs said they’d definitely drop the service if it started running commercials, per Hub Entertainment Research. This implies that companies launching or acquiring AVOD services don’t need to worry about competing with an ad-supported Netflix any time soon.
The reward for launching a successful AVOD service is becoming increasingly lucrative for players like NBCUniversal and Viacom. Magna predicted ad spend on OTT TV content to grow 40% year-over-year to $2 billion in 2018, for example. Meanwhjle, NBCUniversal projects they can generate nearly $5 per user per month with its 3-to-5 minute per hour ad load on its service, per Variety.
This implies that even if just 10% of the 52 million consumers Comcast and Sky reach become regular users of NBCU’s service, NBCU could still see additional ad revenue somewhere in the ballpark of nearly $26 million per month. Building out a new source of ad revenue is especially significant for companies like NBCU and Viacom as brands’ ad dollars follow eyeballs from traditional TV to digital platforms in the future.