Why Ads Are Good for Streaming
This may be a bit contentious to say, but I think ads are a necessary part of the television experience. First, let’s put this to bed: whether you are streaming or watching OTA or through a cable provider, it’s all television. And ever since the mid-’50s, when the installed base of TV sets reached critical mass in American homes, television’s business model hasn’t been based on selling sets. It’s based on selling advertising.
But advertising revenue isn’t just for the network owners. It’s also shared with the content owner. So, better content, which the networks put in primetime, when more viewers are watching (according to Nielsen), captures greater advertising revenue. So the quality of content is directly related to the value of advertising. If logic prevails, studios would be willing to invest more money in content development if the result is better quality content that commands higher advertising revenue.
Only the current streaming business model seems to veer away from this. At least initially, it was all about subscriptions. But that model ultimately has a ceiling unless you keep raising the subscription prices which, unfortunately, can drive away a large chunk of consumers in a market that has a lot of subscription services. So many streaming services began to include an “ad-based” tier where they could get some advertising revenue while lowering the cost of the subscription. And it’s working. According to a Parks and Associates study, 57% of subscribers to the 8 major streaming services opt for an ad-subsidized subscription.
So let’s get back to the first sentence of this column and pour some gas on it: I think that all streaming services should be, first and foremost, ad-based. The focus shouldn’t be on “how many subscribers can we get” but about “how many ad views can we get.” That means that the ad-free tier (and maybe there is no such thing) is not just a few dollars more per month but maybe double, or even triple. Why? Because by focusing on those ad dollars, the streaming services will have more capital to create more, higher-quality content.
Remember, back in the broadcast television days, the network (like NBC), owned the ad slots and licensed the content. Now the streaming service is both the studio and the network. They are in total control of all ad dollars. In this environment, they can use data to determine what shows attract what viewership and the threshold advertisers will be willing to pay for slots.
This can help niche content. Let’s say you have a show that appeals to 300,000 subscribers (a number that is less than 1% of all Netflix subscribers). If the ad dollars for that show work out, it could be a break-even show. Remember that streaming services don’t have the time constraints of linear broadcast television. So there is an infinite number of timeslots available. It’s all about when an audience wants to view it. That niche show then could continue to exist even if it doesn’t generate significant revenue as long as the cost of producing, supporting, and delivering it is subsidized by the advertising.
And we are starting to see this in action. As Jan Ozer writes in a new article called The New Face of FAST, FAST services like Tubi and Roku are investing heavily in original content. Why? Because they understand that ad revenue can support new content which brings in more viewers and more advertisers.
The streaming business model must change. Services that rely solely on subscriptions are going to plateau. They will have to continually return to their subscriber base and “milk” them for additional revenue via fee hikes. But by taking the plunge and embracing advertising as the primary part of creating and supporting quality television, streaming services will meet the ultimate need of their viewers: getting to see the content they want.
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