Desperate for streaming profits, media giants look to a soft ad market for help

After spending years amassing streaming subscribers at great cost, media companies now need to make some profits. And they’re increasingly leaning on advertising as the answer.

Look no further for proof of that than the most recent annual Upfronts, the events where media companies like Fox Corp., Warner Bros. Discovery, Disney and Comcast’s NBCUniversal, made their pitches to advertisers.

With the absence of stars and talent due to the ongoing Hollywood writers’ strike, NBCUniversal kicked off its event with an animated video of Ted, the foul-mouthed teddy bear created by Seth MacFarlane who has landed a series on the company’s Peacock streaming service, singing and dancing to a tune that included the refrain “We need ads.”

“We were all dreamers to think that the streamers were anything but fads,” the animated teddy bear sang to the audience. “Now, we’re all begging for ads.”

The ad push comes not only as subscriber growth slows and customers drop in and out of services — commonly known as churn in the media business — but as the advertising market has softened and been slow to recover.

During Disney’s earnings call earlier this month, CEO Bob Iger put new emphasis on ad-supported streaming. And Paramount Global and NBCUniversal have touted that they’ve had cheaper ad tiers since the get-go. Warner Bros. Discovery also has added such options for consumers.

“Despite the near-term macro headwinds of the overall marketplace today, the advertising potential of this combined platform is incredibly exciting,” Iger said after announcing Hulu content would join Disney+, a move that would be a positive for advertisers.

Even Netflix, which was against advertising for years, entered the game. The 800-pound gorilla in the streaming room for the first time this past week held a virtual presentation for advertisers, unveiling information about its ad-supported tier that gave a boost to its stock.

Still, it’s early in the game, and it’s unclear whether advertising will fill the gaps of unstable subscriber growth for streaming.

‘We need ads’

There’s been an uptick of consumers signing up for ad-supported streaming subscriptions. In the U.S., they grew nearly 25% year over year to 55.2 million in the first quarter of this year from 44.3 million in the year-earlier period, according to data firm Antenna. Growth in ad-supported tiers was on the rise last year, too. Ad-supported plan tiers accounted for 32% sign-ups in 2022, up from 18% in 2020.

When Netflix said it lost subscribers earlier last year, it sent the streaming world into a spiral, weighing on stock prices and pushing executives to find other ways to bring in revenue. By the end of the year, Netflix had launched a cheaper, ad-supported tier. Rival Disney+ did as well.

Media companies are returning to the initial business models that long propped up their businesses — generating revenue off of content in multiple ways rather than relying on one route, a subscription business.

Netflix, while noting it was still “in early days,” said this week it had 5 million monthly active users for its cheaper, ad-supported option and 25% of its new subscribers were signing up for the tier in areas where it’s available.

But media companies are struggling with the question of whether ad-tier subscriptions make up for other losses.

“I don’t think we know that answer fully yet,” said Jonathan Miller, a former Hulu board member and current CEO of Integrated Media, which specializes in digital media investments. “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.”

Disney, which is also the majority owner of Hulu, has the greatest number of ad-supported subscriptions, followed by Peacock, Paramount+, Warner Bros. Discovery — which has the soon-to-be-merged Max and Discovery+ — and Netflix, according to Antenna. Hulu and Peacock are the two streamers with a majority of subscribers on ad-supported tiers, the data provider said.

FAST lane

Another way of padding streaming businesses with revenue is through free, ad-supported, or FAST, channels.

The new streaming model is looking more like the previous TV model. FAST channels are like broadcast TV; cheaper ad-supported streaming tiers are akin to cable-TV networks; and the premium, ad-free options are similar to HBO and Showtime.

“I see FAST as a replacement for the old syndication business. There are multiple ways to monetize television,” said Bill Rouhana, CEO of Chicken Soup for the Soul Entertainment, which owns ad-supported streaming services including Crackle and Redbox, as well as FAST channels.

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