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How ad-supported options are shaping the future of video streaming

June 6, 2022 | By Suzanne S. LaPierre – Independent Media Reporter @Bookmouser

Everyone grumbles about ads. Yet when it comes to video streaming services, Americans across all age groups, races, and ethnicities prefer ad-sponsored content to paying more for ad-free options. Lower monthly bills are of paramount importance to users. And, as concerns about an economic downturn mount, that’s unlikely to change anytime soon. Grumbling aside, people don’t hate ads as much as they hate higher bills. While this may sound like a significant roadblock for subscription growth, people’s willingness to view ads in exchange for free or lower cost access to content actually offers companies another subscriber on ramp and revenue stream.

All demographics prefer lower cost options

Recent Morning Consult survey results confirm that both Gen X and Gen Z adults decidedly prefer ad-supported content, with 59% of both groups indicating that preference over higher priced content. Baby boomers and Millennials concurred, with 61% of Baby boomers and 51% of Millennials stating the same preference.

Gen Z adults tend to be the most cost-averse when it comes to monthly subscription fees, according to the Morning Consult poll. Only 16% of the Gen Z adults surveyed spend more than $30 a month on streaming services, compared to 31% of Millennials.

New free and low cost ad-supported offerings are sprouting up quickly. Major platforms like Disney, Netflix, and HBO Max that have long been ad-free are now adding- or actively planning to add- more affordable ad-supported tiers.

What might this mean for the future of video streaming?

  • Cheaper bundles. More companies are likely to follow the lead of Paramount, which started offering Showtime bundles including both ad-supported and ad-free content. Less expensive bundles may attract more Gen Z consumers.
  • Staggered releases. Companies may capitalize on the hype surrounding new releases of popular material by staggering the release of new content between ad-sponsored and premium subscription tiers.
  • More long-term viewers. Because lifetime viewers peak within the first month of a new series release, this kind of staggered release could reap long-term increases in viewership.
  • Shifting spending. Ad spending that might otherwise have gone to major social media platforms could instead be directed towards ad-supported streaming services, due to increasing concerns over user-generated content impacting brand image.
  • Rising average revenue per user (ARPU) from ad-sponsored streaming may eventually surpass that of subscription tiers. Some companies are already reporting revenue from their ad-supported tiers exceeding that of their ad-free tiers.

Still, premium subscriptions will remain a linchpin for streaming services. While ad-supported tiers are rising in popularity, there remains a significant percentage of consumers who prefer the ad-free viewing option. And some consumers will join at a low-cost tier and later upgrade to premium versions. That said, premium streamers—even the once immutably premium Netflix—are reconsidering their options.

Trouble for Netflix?

With declining interest in higher-cost video streaming, it’s no wonder that Netflix has been losing subscribers, as reported by Digital News Daily, citing data from Antenna and Windstream.

  • Overall cancellations rose to 3.6 million in the first quarter of 2022, compared to about 2.5 million in each of the past five quarters, according to data from Antenna.
  • Short term subscribers (under a year) accounted for 70% of cancellations in the first quarter of 2021, but just 60% in the first quarter of 2022, indicating that more long-term subscribers are leaving the platform.

Customers’ unhappiness with recent price increases as well as perceived decline in the quality of content are driving cancellations, according to a survey of 1,000 Americans by Windstream:

  • 39% of customers cited unhappiness with the latest price increase, which drove the Netflix standard plan cost to the industry’s highest.
  • 35% of customers cited declining quality of content.

Among the 23% who reported having cancelled their Netflix subscriptions, 35% reported switching to Hulu, 22% to Amazon Prime, and 11% to HBO Max. It seems significant that the largest share of those defectors went to Hulu, which has long offered a low-cost, ad-supported tier.

Reassuring news for Netflix

But even with these rumbles of discontent clouding the forecast, Windstream’s survey indicated customers still have overall positive opinions about Netflix:

  • 40% of all respondents named Netflix as their favorite streaming service.
  • 63% of subscribers report they still enjoy Netflix content options.
  • 74% of subscribers said they plan to stick with Netflix, even if the provider enacts measures to suppress password sharing (26% said they would drop Netflix if that happened).

Winds of change

Despite its continued popularity among consumers, the company faces stalled subscriber numbers and a need to create new revenue streams. Thus, it is no surprise that Netflix plans to launch a lower-priced ad-supported tier by the end of 2022, according to information obtained by The New York Times. They will join other previously premium-only streamers HBO Max, which launched an ad-supported tier in June 2021, and Disney +, which announced plans to release an ad tier for its service later this year.

The appeal of premium content environments to advertisers is clear. So is the wisdom of revenue diversification in the media business. Undoubtedly, certain consumers will remain willing to pay for ad-free options. But the ability to attract new audiences and ad revenue bolsters long-term prospects for tiered offerings in the streaming industry.

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