Media Giants Rely on Advertising for Streaming Profits Amid Soft Ad Market

The quest for profitability in the streaming industry brings focus back to advertising as subscriber growth wanes.

Media giants including NBCUniversal, Fox, and Warner Bros. Discovery are returning to advertising-supported models to boost profits in their streaming businesses. This move is primarily driven by a slowdown in subscriber growth and the challenges presented by the soft ad market.

Explore the evolving landscape of streaming services as media giants shift towards ad-supported models for profitability amidst an uncertain economy.

Media Giants in the Race for Advertising Profitability

In an era of prolific streaming subscriptions, major media conglomerates are keen to optimize profitability from these ventures. The key ingredient to this plan? Advertising.

NBCUniversal, Fox, and Warner Bros. Discovery, alongside others, recently made compelling pitches to advertisers during their annual Upfronts events. With stars and talent conspicuously absent due to the Hollywood writers’ strike, NBCUniversal set the stage with an animated video of Ted, Seth MacFarlane’s irreverent teddy bear character, featured in the Peacock streaming service.

The animation featured Ted singing and dancing to a tune bearing the refrain “We need ads.” The performance set the tone for the event, encapsulating the growing consensus among streamers: “We were all dreamers to think that the streamers were anything but fads. Now, we’re all begging for ads.”

The Strategic Shift Towards Ad-Supported Streaming

The transition towards ad-supported streaming comes amid a slowdown in subscriber growth and a slower-than-expected recovery of the advertising market. During Disney’s recent earnings call, CEO Bob Iger emphasized the potential of ad-supported streaming. He further announced that Hulu content would join Disney+, marking a positive turn for advertisers.

This strategic shift isn’t exclusive to Disney. NBCUniversal and Paramount Global have long touted their affordable ad tiers. Moreover, Warner Bros. Discovery is now offering similar options to consumers. Iger encapsulated the sentiment perfectly: “Despite the near-term macro headwinds of the overall marketplace today, the advertising potential of this combined platform is incredibly exciting.”

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Netflix Enters the Advertising Fray

Previously reluctant to venture into advertising, even Netflix has entered the game. In an unprecedented move, Netflix held a virtual presentation for advertisers last week. The presentation detailed the company’s new ad-supported tier, consequently boosting its stock prices.

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Despite these promising early moves, the question remains: Will advertising fill the gaps left by unstable subscriber growth for streaming services?

‘We Need Ads’: A Growing Call

Statistics show an uptick in consumers signing up for ad-supported streaming subscriptions. Antenna, a data firm, reports that in the U.S., these subscriptions grew nearly 25% YoY to 55.2 million in Q1 2023 from 44.3 million in the previous year.

When Netflix announced a drop in subscribers last year, it triggered a domino effect, resulting in falling stock prices and executives scrambling to find alternative revenue sources. Consequently, by the end of the year, Netflix had launched a cheaper, ad-supported tier. Disney+ followed suit shortly after.

The lesson learned? Media companies are reverting to initial business models, seeking to generate revenue from content in diverse ways rather than relying solely on subscriptions.

Are Ad-Tier Subscriptions Enough?

As companies like Netflix report encouraging initial figures for ad-supported options, there is still uncertainty over whether ad-tier subscriptions can compensate for other losses.

Jonathan Miller, a former Hulu board member and current CEO of Integrated Media, admitted: “I don’t think we know that answer fully yet. But I think we’ll learn that a [subscription, ad-free] customer that doesn’t churn will be the most valuable. There’s math to be learned over time as the playing field settles.”

The Rise of FAST Channels

In addition to ad-supported tiers, media companies are also generating revenue through free, ad-supported, or FAST, channels. With this, the new streaming model bears a striking resemblance to traditional TV models.

The success of this model is evident in the acquisitions of Tubi and Pluto by Fox and Paramount, respectively. Furthermore, these free streaming services have seen explosive growth in recent years, primarily driven by subscription fatigue and economic constraints.

The Impact of Rising Streaming Prices

While advertising plays a crucial role, companies are also hiking streaming prices to mitigate losses. During Disney’s recent earnings call, Iger mentioned that a combination of price hikes and advertising revenue formed the planned path to profitability.

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However, with consumers grappling with inflation in food and other essential goods, there are concerns about how sustainable price increases can be in the long run. As Miller of Integrated Media observed, “It’s not clear to me that you can continue to raise prices on the subscription side given the nature of the macro economy. To me, it’s having the combination of things right that will optimize the business.”

Overall, media giants are adapting their strategies to navigate the complex streaming landscape. As they rely more heavily on advertising for profitability, only time will tell whether these shifts are sustainable in the long run.

Streaming Ecosystem and the Role of Content Syndication

In a landscape dominated by streaming, syndication strategies play an integral role in companies’ business models. Many media giants, such as Warner Bros. Discovery, have shown a willingness to syndicate their content through FAST channels, creating strategic value in addition to cash flows.

For instance, Warner Bros. Discovery has licensed content from HBO Max to Tubi and Roku. “To also syndicate your content through FAST channels, that’s probably wisest. It could create strategic value in addition to just cash,” opined Bill Rouhana, CEO of Chicken Soup for the Soul Entertainment.

Media Giants’ Approach to FAST Channels

Fox and Paramount have found significant value in their acquisitions of Tubi and Pluto, respectively. For these companies, the platforms serve as a showcase for their libraries. Notably, Pluto features earlier episodes of the highly successful “Yellowstone” series, which has spawned multiple spin-offs, thereby boosting Paramount+.

Tubi, Fox’s answer to streaming, made its mark by featuring on Nielsen’s streaming gauge report for the first time, a milestone celebrated by Fox executives during their recent Upfront presentation.

Streaming services, media giants, ad-supported streaming, advertising revenue, FAST channels, streaming prices, content syndication, subscriber churn, price hikes, streaming profitability

The Future of Streaming Prices

The pricing model of streaming services is under scrutiny as companies face the challenge of balancing price hikes with customer retention. Executives at media companies, including Disney, Warner Bros. Discovery, and Paramount, are carefully assessing the potential for growth in ad-free streaming options.

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HBO Max, Disney, and Paramount have all raised the prices of their streaming services in the past year. However, the risk of churn increases with higher prices, leading to uncertainties about this strategy’s sustainability.

Conclusion

As the streaming industry grapples with the challenge of achieving profitability, media giants are increasingly turning to advertising as a key revenue driver. Coupled with the rise of ad-supported tiers and FAST channels, the streaming landscape is beginning to mirror traditional TV models.

However, uncertainties remain. Will advertising be enough to offset the challenges of subscriber churn and price sensitivity? The industry awaits the answer.

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FAQs

1. Why are media companies returning to an ad-supported model?

The rise in ad-supported streaming comes amid a slowdown in subscriber growth and the need for sustainable revenue models in the streaming industry.

2. How has Netflix responded to this shift towards advertising?

Netflix, traditionally opposed to advertising, recently held a virtual presentation detailing a new ad-supported tier, demonstrating their shift towards this model.

3. Are ad-tier subscriptions enough to compensate for other losses?

The effectiveness of ad-tier subscriptions in compensating for other losses remains to be seen, as the landscape is still evolving.

4. What is the role of FAST channels in the streaming industry?

FAST channels, or free, ad-supported channels, offer an additional revenue source for media companies. They have grown in popularity due to their resemblance to traditional TV models.

5. Can streaming companies continue to increase prices given the state of the economy?

The sustainability of continuous price increases in streaming services remains uncertain. With consumers grappling with economic pressures, there are concerns about churn and the ability to retain subscribers.