IPG Media Lab
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IPG Media Lab

The Future of Streaming: Watch for Free or Pay More for Netflix?

Ad-supported OTT services rise to challenge subscriptions, but Netflix has some cool new tricks up its sleeve

Photo by JESHOOTS.COM on Unsplash

When we last wrote about the TV & video content landscape in June 2018, AT&T’s acquisition of Time Warner was just approved by a federal judge, and Disney was still fighting with Comcast over 21st Century Fox’s assets. Back then, the video media landscape seemed to divide into three groups, with consolidated media giants like Viacom and Disney, telecom behemoths like Verizon and AT&T, and tech companies like Amazon and Apple, all vying for consumer attention.

Since then, Disney has closed its acquisition of Fox assets and announced plans for launching its direct-to-consumer service named Disney+ for late 2019, while AT&T-owned WarnerMedia has also announced their three-tiered SVOD service that ranges from ad-supported to premium content. Meanwhile, Apple is still ramping up content production as it angles for a reported launch in the next few months.

As we enter 2019, the U.S. video content industry will continue to be a brutally competitive and shifting battleground where content owners and distributors, divided into the aforementioned three cohorts, look to one-up each other and catch up with Netflix by launching D2C services and, surprisingly, testing ad-supported models. Meanwhile, Netflix now accounts for about 10% of all U.S. TV screen time, and it is only growing stronger as it expands its content slate. What would the future of streaming look like?

Ad-Supported Model Stages Its Resurgence

For the last few years, the rise of Netflix led to a popular narrative that the future of TV will be ad-free. Supposedly, the interruption-free, on-demand viewing that Netflix offers is so superior to the ad-supported traditional TV experience that viewers would soon no longer tolerate commercial breaks. The hypothesis was also backed by the growing use of ad-blocking software as well as a prevalent aversion towards traditional forms of advertising among younger generations. In response, TV networks trimmed their ad loads in hopes of improving its viewing experience. But that didn’t work, as over one million people ditched their cable and satellite TV packages in the second quarter of 2018, opting for ad-free subscription services instead, thus further propelling the narrative of ad-free TV.

Interestingly, recent developments in the OTT market seem to point to a resurgence of the ad-supported model. NBCUniversal announced its plan for an ad-supported SVOD service scheduled for 2020 while Amazon’s IMDb launched an ad-supported free streaming service named Freedive with a limited catalog of old movies and TV shows. In addition, Viacom has reportedly held talks to acquire Tubi TV, a free ad-supported service partly owned by MGM and Lionsgate which mostly streams old movies and TV shows.

A round up of the ad-supported vs. ad-free model among U.S. SVOD services

Last week, Amazon-owned IMDb.com announced its anticipated streaming service, Freedive, where viewers can watch full-length movies and TV shows for free in exchange for sitting through some commercial breaks. At the moment, most of the ads on Freedive are for Amazon’s own private label products, but if this service takes off, Amazon would have hot video ad inventory (and a lucrative revenue stream) on its hand for brands to plug into. There is no Prime Video tie-in at the moment, but Freedive could act like a gateway drug to get viewers to try out the ad-free viewing options Amazon offers.

On Monday, NBCUniversal announced its plan to launch an ad-supported SVOD service in the first quarter of 2020. CNBC reports it will be free to pay TV subscribers but will cost $12 a month or those who don’t which seems to overvalue the cable TV subscription and lacks competitiveness against ad-free experiences offered at around the same price). If anything, this plan shows NBCU is still holding onto the mindset of a broadcaster and its ad-supported pay TV model.

In short, ads seem to be back in style, although technically they never really left the content ecosystem. According to these companies, the future of TV looks pretty much like the TV of today — it’s just no longer linear nor delivered over cable.

The Case for Ad-Supported SVOD

One explanation for such a resurgence of the ad-supported model is that free services offer the best chance for Netflix competitors to acquire new users. There is no question that at this point, most people that are willing to pay for a streaming service already are doing so, regardless of whether they have cut the cord and left cable TV behind. The remaining long tail of TV viewers that have been slow to join the ad-free subscriptions like Netflix certainly won’t mind the commercial interruptions that much, and they will likely need an extra push to try out streaming.

Therefore, it makes sense that key players in the video content industry are suddenly interested in the ad-supported model again. By lowering the pricing to zero, these content owners are betting that the remaining TV audiences would be more willing to try out streaming and, once they tried it, eventually move down the conversion funnel and become a paid subscriber (although some might be perfectly happy to stay on the ad-supported level).

Will these ad-supported experiments be enough to help content owners fend off the growing dominance of ad-free SVOD subscription services like Netflix and upcoming Disney+? It is hard to say. NBCU cites its own research that found subscribers prefer free services with low ad load, but the criteria for defining a low ad load remains murky.

Currently, YouTube reigns supreme in the ad-supported, non-scripted space, and the Google-owned company has recently adjusted its content strategy to stop chasing the premium content for its paid subscription. Meanwhile, Netflix, Disney, WarnerMedia (which owns HBO), and Apple are playing (or will play) in the paid, scripted content space, all with a deep pocket to invest in original content.

NBCU may think it will face less competition in the ad-supported, scripted content space, but aforementioned new services from Amazon and Viacom may once again crowd the market. Not to mention Hulu, of which Disney now has the controlling share, which has long pursued a hybrid model — charging for a subscription fee, and showing ads at some pricing tiers — and recently crossed 25 million subscribers. Regardless of whether they prefer ad-supported or ad-free models, viewers will have plenty of content to choose from.

At the end of the day, it is also important to remember that streaming isn’t a zero-sum game. Many households will use multiple services, especially if they’re free with ads, and available via on-device search. The most likely scenario then becomes something like this: most households pay for one or two ad-free streaming subscriptions like Netflix or Disney+ for their highly differentiated, exclusive content and superior user experience, while supplementing their content consumption with various ad-supported free SVOD services. Although they are all ultimately competing for the same pool attention, ad-supported services aren’t necessarily directly competing with the ad-free subscription. A new research from Magid found that consumers are willing to pay an average of $38 per month in total for streaming services and they’re willing to subscribe to an average of six services, including ad-supported free services.

That being said, time is a zero-sum game, and until we can hack sleep, there are only so many hours in the day for media consumption. Can these ad-supported SVOD services steal some viewers away from the likes of Netflix by the virtue of being free? What does Netflix think of this ad-supported comeback?

The Future of Entertainment, According to Netflix

While it may look like Netflix may be under siege as competitors ramp up their streaming efforts, the leading global streaming service remains rather unfazed. On Tuesday, the company announced its biggest price hike in years, pushing its most popular plan to $13 a month. This will no doubt give Netflix more money to invest back into content to the tune of about $2 billion a year. And this is clever timing, since none of the major competitors (Disney and NBCU, and potentially Apple) will launch their own SVOD services until later this year, so Netflix is still many people’s best-value choice when it comes to streaming services.

Source: Recode

Being many people’s first choice of streaming service is a strong advantage for Netflix. Being the first SVOD service that took off and now with enough content to minimize churn, Netflix will likely remain a must-have for its existing subscribers and a first choice for many looking to cut the cord. With the recent price hike, price-sensitive users who already subscribe to Netflix may be hesitant to pay significant amounts for additional services if they already have enough to watch. Disney still has an advantage here, particularly with families, given its strong I.P. and marketing power, but it may not be so easy for Apple, who is already on the ropes with price-sensitive consumers, let alone Warner.

Netflix, for all its talk about technology and data, is fundamentally a media company, judging by its business model. However, it is mostly run like a tech company, putting a data-driven user experience front and center. Nowhere is this advantage more self-evident than the two success stories that Netflix had in December, namely, Bird Box and Black Mirror: Bandersnatch.

Both original movies successfully broke into the mainstream over the holiday break, a competitive period when a sleuth of entertainment options flooded the market, for very different reasons. Bird Box was something of a surprise hit, mostly propelled by Sandra Bullock’s star power and, more importantly, a number of amusing memes that started popping up online shortly after the movie is released on Netflix. In fact, the timing and volume of Bird Box memes are so good that some suspect Netflix ran a secret campaign to spread the memes in order to promote this movie.

Regardless of whether Netflix created the memes themselves (and they likely didn’t), the strong online buzz they generated turned Bird Box into one of the most watched movies in Netflix’s history. 45 million accounts watched it in the first week of its release, according to Netflix, and considering that people may have watched it with friends or family, the actual viewership might be even higher. Going by a reported US average movie ticket price of $9.14, 45 million viewers would give Bird Box a $411.3 million first-week box office opening. For comparison, Black Panther had the second-biggest opening week of 2018 with about $461.3 million worldwide. Bird Box went on to add another 35 million households in the first four weeks after its release, bringing its total audience to 80 million households.

Make no mistake, the memes made Bird Box “the first truly viral movie,” born purely out of memes and a sense of cultural FOMO. Sure, successful movies have always enjoyed a certain level of virality in the form of word-of-mouth, but Bird Box may be the first digital-native blockbuster movie that only Netflix, with its unparalleled global audience reach and super-low friction of content access, can deliver. Even the disclosure of its high viewership, a rare move for Netflix, could be seen as a strategic move to drum up more hype and, resultantly, FOMO for those who haven’t seen it.

Low friction in accessing content, especially compared to the troubles of actually going to the theater, coupled with a well-timed release during the holiday break created a perfect storm for people who didn’t understand the memes to flock to Netflix. In fact, they don’t even need to go search for it. It was right there waiting for Netflix users, prominently featured on the front page, the next time they open the app. Since you don’t pay an incremental fee to view something on Netflix, why wouldn’t you check out what everyone else is joking about?

In comparison, the hype surrounding Black Mirror’s special installment Bandersnatch, released exactly a week after Bird Box, is far less surprising. As the first high-profile interactive film geared towards adults, Bandersnatch is a bold experiment in content formats and the future of entertainment, befitting for a critically acclaimed series known for its unflinching examination of the dark side of modern technology.

Previously, Netflix has experimented with interactive children’s content, but Bandersnatch is, by comparison, a lot more complex and sophisticated in its plotting. Netflix even created a proprietary “Branch Manager” software program for managing the various subplots and narrative loops. In spite of the mixed response from critics, its release is no doubt a big moment for interactive content as it rides Netflix’s massive scale to reach a large audience. And because of its interactivity, it is essentially piracy-proof, engaging for longer than a typical film, and generates more data for Netflix to learn about their customers.

That last point, in particular, is intriguing in its potential for mining insights from customer data. The first choice that viewers of Bandersnatch have to make is between two cereal brands, one of which is Kellogg’s Frosted Flakes. This choice affects which cereal commercial they see in a later scene, But it is not hard to imagine that, once this feature matures, it could be developed into a”programmatic product placement that would dynamically present options for viewers to choose from based on their location and demographic data. And of course Netflix will know whatever choice the viewers make, thus gaining valuable data on user preferences, which it could leverage to deepen third-party partnerships as well as enhance its audience segmentation and product integration.

Besides these two big hits, Netflix also has an Oscar front-runner this year in Roma, which already won two Golden Globes and numerous critics awards. Netflix has previously gotten into scuffles with the film industry over awards eligibility for its titles, and Roma is pushing the narrative of what kinds of movies can win awards in part due to its distribution methods. If it does end up taking home big awards in the end, the majority of people will likely end up watching it at home rather than heading to the theater. In addition, this Spanish-language film is a great fit for Netflix’s international ambitions, especially in the Latin American region.

Taken together, this trio of recent releases spells a great future for Netflix: leveraging its global reach and low-friction access to create more must-see blockbusters like Bird Box, experimenting with new interactive formats¹ to boost engagement and collect data as they did with Bandersnatch, and continuing to support auteurs to produce award-winning content like Roma to not only build its industry cred and attract more talent, but also deliver niche content directly to the target audience without the conventional constraint in distribution. If Netflix can continue to pull this triple-feat off, perhaps the future of entertainment will look a lot less like the TV-movie divide of today, and a lot more like Netflix’s stated goal of a “global entertainment distribution service.”

Although video content remains a highly differentiated category, having too much to watch — which we now definitely have — renders it less of a deciding factor in choosing a service if you can’t even finish the content that’s already queued up or paid for. Given this increasingly “commoditized” content market, plus the fact that there will plenty of price points for consumers to choose from, it is then paramount that an SVOD provider must build a highly differentiated content library, like what Netflix is doing on these three fronts, for it will be the only way for the content owners to remain competitive. In the end, content is king, and distribution is queen. Only when they work harmoniously in tandem can the streaming kingdom prosper.

Footnotes

  1. Also includes “living content” that are constantly being updated and remixed to create new viewing experiences, like when they re-edited the fourth season of Arrested Development.

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Richard Yao

Richard Yao

Manager of Strategy & Content, IPG Media Lab