Why some streaming companies are leaning into adverts and raising prices

When streaming services initially hit the market, part of their allure was eliminating the advert experience. Many consumers ditched linear television so they could watch programmes uninterrupted, subscribing to services including Netflix. It revolutionised the media business landscape – and gave consumers a totally new, on-demand experience. 

Now, however, eager to boost revenue, streaming companies are pumping adverts into their products. In late September, for example, Amazon announced it'd be integrating ads into its Prime Video service in at least 10 global markets come 2024, joining many other streamers who've already made the move. 

Streaming consumers will be back to square one – stuck with the commercial breaks they were eager to jettison, and likely subscribed to multiple streaming outlets at collective prices that rival cable TV packages.

This shift comes as many streaming services are facing massive amounts of debt, says Anthony Palomba, a professor at University of Virginia Darden School of Business, US. This is due to the cost of content investments, licensing fees and other expenditures these companies have made to expand their libraries and compete with other services on the market. Now, they are looking for a return on those investments – and subscribers will foot the bill. . 

NBCUniversal's Peacock, for instance, gained 4 million subscribers in the past quarter, bringing the total base to 28 million subscribers, an 80% year-over-year increase. The subscriber growth came even as the company began charging for the (formerly free) ad-supported tier, and raised prices on ad-free options.

Other streamers are leaning into ad-supported models and higher subscription pricing as well. Hulu and Disney Plus raised prices on their ad-free options, while keeping the cost of the comparatively lucrative ad-based tiers steady. Disney+ is introducing an ad-supported option, and also raising the price of its ad-free tier. Meanwhile, Netflix, too – a pioneer of streaming services – has introduced ads for the first time in many countries across the globe.

This approach marks a big change for these companies, who are making these moves to shift their original business models, says Dave Simon, head of growth initiatives at Moloco, a US-based machine-learning-based advertising company. "Most of the large content companies saw an opportunity to go direct-to-consumer, as opposed to going through their typical distribution points, the cable operators," he says. "They all took a swing at building a business with subscription being the core revenue driver."

However, the space has grown and changed throughout the past few years. "Now that we are seeing consumer consumption patterns level off, it’s time to re-evaluate whether or not that was the right bet."

Consumers have spent the past year or so purchasing and trying out different offerings as the market has expanded, so subscription numbers have generally been growing, he says. However, in September, about 6% of all streaming subscribers in the US cancelled their services, the highest churn rate ever recorded. "As consumers consider and reconsider what they can reasonably pay for month-to-month, streaming companies need to decide whether they'll stay with current subscription offerings or lean more heavily into ad-supported options," says Simon.

The moves have angered many subscribers, if not blindsided them. Yet streaming companies' quests for profitability supersedes consumer frustrations. "For a long time, several streaming companies have not been able to illustrate their capacity to turn a profit, and investors are now looking for those returns," he says.

This change comes as Netflix instituted a crackdown on password sharing and account usage on multiple devices. As many consumers lost access to covertly shared accounts, they opened their own. In the company's most recent earnings report Netflix reported it added nearly 9 million new subscribers and raised the price of its ad-supported and premium subscriptions – a stark exception to the cancellation rate of its competitors. Along with base subscription revenue, Netflix has millions of new eyes to which they can serve up adverts, opening a major revenue opportunity.

What does this one-two punch all add up to? Viewers' entertainment experiences may be coming full circle: even though they signed up for streamers in part to escape adverts, those  subscribers are now shelling out for the same ad-filled experiences of linear television. And the prices of uninterrupted viewing are spiking.

For a long time, several streaming companies have not been able to illustrate their capacity to turn a profit, and investors are now looking for those returns – Dave Simon

For customers who won't pay ad-free fees, Simon says the advert experience will be different than it was in the cable days. First, consumers may be subjected to fewer ads than if they were watching linear television – gone are the traditional days of 22 minutes of content and eight minutes of ads. "Many streaming services are reducing commercial time, some significantly,” he says, pointing to Disney+, which keeps ads to four minutes per hour of content.

The streaming technology that powers today's apps also means infinitely more advertising customisation than linear did. For example, while linear ads are purchased by a brand against a huge swath of audiences that mainly watch a show – like men aged 18-to-34, for example – streaming ad options have the capacity to be data-driven, enabling brands to reach consumers with specific preferences. "With a data-driven approach, streaming viewers will see ads that are far more relevant to their lives," he says.

Will consumers ultimately end up watching more ads than before, or bite the bullet and pay for ad-free top subscription tiers? Economic challenges and rising cost of living may mean many streaming viewers will end up watching more commercials.

Liz Duff, head of commercial and operations at Total Media, a behavioural media planning agency, says cost-conscious consumers are looking for ways to reduce expenses. Opting for a cheaper, ad-supported streaming experience is more affordable, and ultimately may win out as a result. "The cost savings of ad-supported options are undeniably attracting viewers," she says.

Ultimately, she adds that streaming services are so ingrained that market changes won't necessarily drive people back to the linear television they tried to escape in the first place. "It's unlikely that gradual price increases will drive people away from streaming," she says. "It's much more likely that price increases will encourage consumers to shop around more and take advantage of introductory deals, rather than revert to terrestrial."

-bbc