Streaming's Future: Ad-Supported Models and Subscriber Growth

Current State of Ad-Supported Streaming

Ad-supported streaming is growing, with Disney reporting 22.5 million ad tier subscribers and Amazon seeing a 24% increase in advertising services. Google's YouTube has doubled its monetization rate for shorts, while Netflix faces pressures on AVOD CPMs and considers pricing adjustments for ad-supported tiers.

"We ended Q2 with 22.5 million ad tier subscribers globally. We are pleased with the progress we're making in streaming although, as we said before, the path to long-term profitability is not a linear one." --- (DIS, earning call, 2024/Q2)

"Advertising services is an important contributor to both our North America and International segments and continues to grow at a rapid pace, reaching $47,000,000,000 in net sales for 2023, an increase of 24% year over year. We continue to see many opportunities to grow our offerings, both in areas that are driving growth today like Sponsored Products and in areas that are newer like streaming TV ads." --- (AMZN, event transcript, 2024/05/22)

"In the U.S., the monetization rate of shorts relative to in-stream viewing has more than doubled in the past 12 months, including a 10-point sequential improvement in the first quarter alone." --- (GOOG, earning call, 2024/Q1)

"Spencer Wang: Thank you, Greg. From Steven Cahall, his question is, given what we think are pressures on AVOD CPMs and the 10 hours per account per month viewing time you disclosed at the upfront for ad-supported members, what's the likelihood that ad support ARM drops below ad-free member arm in the second-half? Would you consider raising the price of ad-supported tiers as an offset?" --- (NFLX, earning call, 2024/Q2)

Subscriber Growth Trends in Ad-Supported Models

Ad-supported models are driving subscriber growth across major streaming platforms. Netflix and Disney+ have seen notable increases in subscribers due to attractive pricing and content offerings. Although starting from a smaller base, ad-supported plans are scaling well, contributing to healthy revenue and profit growth.

"And at least on the paid member front, we're also probably benefiting from that attractive entry point in terms of price point and feature set for our ads plan. So you put all that together and it was a nice quarter for subscriber growth, but even more importantly, a nice quarter in terms of driving healthy revenue growth and healthy profit growth." --- (NFLX, earning call, 2024/Q2)

"In particular, our expectations regarding DTC profitability, subscriber levels and ARPU are built on certain assumptions around subscriber additions based on the future strength of our content slate, churn expectations, the financial impact of Disney+'s ad tier, pricing decisions, bundling and availability of Hulu on Disney+, technological advances and paid sharing efforts, our ability to continue to rationalize cost while preserving revenue and macroeconomic conditions, all of which, while based on extensive internal analysis as well as recent experience, provide a layer of uncertainty in our outlook." --- (DIS, earning call, 2024/Q2)

"If you just compare the penetration of ad-like subscribers as a percentage of the total subscriber base, it's growing, but still from a lower starting point." --- (WBD, earning call, 2024/Q1)

"The rate of growth, it just happens to be growing off of a relatively small base because we're starting from only 18 months into ads so to have the kind of a primary revenue impact across a business that has been primarily subscription for a long-time that just takes some time. So we're scaling well through reach, through engagement, through growing inventory and that represents opportunity for us over a multiyear trajectory to have a big and increasing revenue and profit impact on the business." --- (NFLX, earning call, 2024/Q2)

"International Disney+ (excluding Disney+ Hotstar) average monthly revenue per paid subscriber increased from $5.78 to $6.28 due to increases in retail pricing, partially offset by the addition of subscribers to ad-supported offerings." --- (DIS, sec filing, 2024/Q2)

Revenue Implications of Ad-Supported Streaming

Ad-supported streaming models are driving significant revenue growth, as evidenced by YouTube's strong performance in both subscription and ad-supported content. Netflix anticipates that its new structure will enhance user engagement and retention, ultimately boosting revenue. Additionally, Amazon and Disney highlight the potential and challenges in ad revenue contributions, influenced by factors like viewership and international rates.

"In terms of expenses, total cost of revenues was $33.7 billion, up 10%. Other cost of revenues was $20.8 billion, up 10% on a reported basis, with the increase driven primarily by content acquisition costs associated with YouTube, given the very strong revenue growth in both subscription offerings and ad-supported content." --- (GOOG, earning call, 2024/Q1)

"This is -- our expectation is that this new structure will allow us to deliver as the old structure did for a decade, multiple repetitive material benefits to users in terms of engagement, which lead into retention and then revenue. But again, that will be a long" --- (NFLX, earning call, 2024/Q2)

"And do you think that could be a meaningful contributor to ad revenues going forward?" --- (AMZN, earning call, 2024/Q1)

"The decrease in impressions was due to lower average viewership. Higher international advertising revenue was attributable to an increase of 10% from higher rates, partially offset by a decrease of 3% from an unfavorable foreign exchange impact." --- (DIS, sec filing, 2024/Q2)

"Google Search & other Paid clicks change 5 % Cost-per-click change 8 % Google Network Impressions change (13) % Cost-per-impression change 14 % Changes in paid clicks and impressions are driven by a number of interrelated factors, including changes in advertiser spending; ongoing product and policy changes; and, as it relates to paid clicks, fluctuations in search queries resulting from changes in user adoption and usage, primarily on mobile devices." --- (GOOG, sec filing, 2024/Q1)

Competitive Landscape in Ad-Supported Streaming

The competitive landscape in ad-supported streaming is marked by a belief in a limited number of global streaming offers, with companies like WBD and NFLX emphasizing the importance of macro factors and strategic pricing. Both companies express confidence in their models despite the intense competition.

"We believe that if I really look at the whole landscape, we believe that in the end, the consumers will settle between 35 global streaming offers." --- (WBD, conference, 2024/05/15)

"We think about the competitive landscape. We do think about macro factors like disposable income." --- (NFLX, conference, 2024/05/15)

"Okay. So the more that you scale internationally on the streaming side, I'm wondering how do you think or have you today and expect to, going forward, manage the balance of the cannibalization right, of eating away at some of the linear revenues and cash flows that are obviously critically important to the company?" --- (WBD, conference, 2024/05/15)

"So to Ted's point, it is very competitive out there. And we also feel confident that our model works." --- (NFLX, earning call, 2024/Q2)

"It'll be priced well, and it'll be both Ad-Lite and Ad-Free. For consumers in the US, I think it'll be a really positive consumer experience, and gives us, I think, a real advantage and opportunity." --- (WBD, earning call, 2024/Q1)

Consumer Preferences for Ad-Supported Content

Consumers are increasingly engaging with ad-supported content, as evidenced by higher advertising revenues and impressions. The competitive market offers more choices, aligning with consumer preferences for diverse streaming options. Additionally, the appeal of TV advertising, with its creative and socially impactful formats, enhances the attractiveness of ad-supported models.

"Revenues - Advertising Higher advertising revenue in the current quarter compared to the prior-year quarter reflected an increase of 25% from higher impressions, partially offset by a decrease of 17% from lower rates. Key metrics" --- (DIS, sec filing, 2024/Q2)

"But again, it's competitive everywhere. And in a way, it's good for the market in the sense that consumers just have more and more choice and different options." --- (NFLX, conference, 2024/05/15)

"part, a good consumer proposition economically. But in today's consumer, used to both basically the Internet and app based experiences and ultimately AI driven experiences, wants much more than that." --- (DIS, conference, 2024/05/15)

"And what we think is amazing about TV advertising, which is an incredible creative format, better creative format in many cases than digital as well as the ability to put those advertisements next to content to titles, stories that are impacting the social conversation, which is important for advertisers." --- (NFLX, earning call, 2024/Q2)

Technological Advancements in Ad-Supported Streaming

Advancements in speech emotion recognition, video understanding, and non-interruptive ad formats like Pause Ads are revolutionizing ad-supported streaming. These technologies enhance ad efficiency, customer engagement, and overall user experience, driving the future of streaming platforms.

"His pioneering work, especially in speech emotion recognition, set new benchmarks for accuracy, underscoring its potential to revolutionize human-computer interaction.Transitioning from academia to the tech industry, Willy made substantial contributions to setting global standards in noise reduction for mobile devices at HTC and enhancing live streaming content monitoring regulations." --- (GOOG, press release, 2024/05/23)

"This advancement leads to more efficient ad spending and higher customer engagement levels, transforming how ads are crafted and delivered." --- (AMZN, press release, 2024/06/13)

"From our foundation of research leadership and technical advances, including multi modality and long context, to our global product footprint that gives us opportunities to bring helpful AI to people everywhere, to our world class infrastructure that makes it all possible.Through all of these efforts, we are constantly listening to feedback, making improvements, learning and in trading." --- (GOOG, event transcript, 2024/06/07)

"Thanks to advancements in video understanding, we can take visual search to a whole new level with the ability to ask questions with video." --- (GOOG, event transcript, 2024/06/07)

"For YouTube advertisers, increasing brand lift is one of the core goals. In Q1, we saw strong traction from the introduction of a Pause Ads pilot on connected TVs, a new non-interruptive ad format that appears when users pause their organic content." --- (GOOG, earning call, 2024/Q1)