Premium Subscription Channels Race to the Bottom (Line)

6 Min Read

It’s been a big year for streaming, with a lot of shakeups in the industry. Netflix reported a loss of subscribers for the first time. Premium channels, including Netflix and Disney+, have announced the upcoming addition of ad-supported tiers. These shifts have kept viewers evaluating their streaming needs: from their willingness to watch ads to cut down their bills, to the decision to cancel subscriptions altogether. As we get further into the second half of the year, the state of streaming has continued to evolve, for advertisers and streamers alike. 

The prices, and the inventory, are increasing 

Disney broke the not-so-happy news last week: they will be upping their subscription cost, moving from $7.99 to $10.99 for their standard plan. This comes on the heels of an announcement of an ad-supported tier, which will be offered at…$7.99 (look familiar?). At the outset of this year, Netflix implemented their own price hikes and has since followed with a report of their loss of subscribers for the first time in the company’s history, leading to the implementation of a new ad-supported tier.

While these shifts in pricing may incite groans from customers watching their streaming costs increase, advertisers stand to benefit. The addition of ad-tiers allows them general access to two of the largest streaming audiences, helping them expand their reach and access to premium ad inventory. And they can be sure that many will opt into the ad-viewing experience as price-sensitive viewers look to maintain their low streaming costs in exchange for a side of advertising with their content. 

Streamers seek out good content, but channels can no longer stand on content alone

Disney’s price increase wasn’t the only reason the Mouse was in the news this past week. They also announced that they had surpassed Netflix in total number of subscribers; their 221MM global subscribers across their channels narrowly beat out Netflix’s 220.7MM. This news highlights the shifting environment, as Netflix, the original streaming darling, continues to slip behind newer additions. 

Netflix’s commitment to content has been seen in their multi-billion dollar invoice for original series and films. However, according to a study done by MoffettNathanson, while the release of these titles offers an initial surge of interest, it is short-lived. In fact, “[MoffettNathanson] found that Netflix had 40 original shows that reached Nielsen’s top 10 list during the third quarter, but that none of them accounted for more than 1.5% of time spent on Netflix in the U.S.” Clearly, their strategy of hinging on original content alone is an expensive way to drive viewership and one that’s starting to fall off.

Disney, on the other hand, benefits from the vast amounts of IP they already own. From a backlog of beloved Disney classics to the Star Wars and Marvel franchises, their content continues to drive sign-ups for the service (and that’s not even accounting for the variety of other content they supply through Hulu and ESPN+). In contrast to Netflix, it feels as if Disney has created an ecosystem of beloved content and true fans versus flash-in-the-pan content that drives little loyalty to the service. That said, Disney has had a decades-long headstart in that department—it’s a tall order for any enterprise in the entertainment industry to go toe-to-toe with them on content. 

Despite these two approaches to supplying content and lots of it, recent news has shown the importance of advertising to the streaming channels’ bottom lines, no matter the contents of the library. A monthly subscription fee doesn’t offer the same profits that these companies can amass by bringing in multiple monthly advertisers. In turn, streaming channels continue to add ad-supported tiers because while the price tag may be lower, those customers are worth more when taking into consideration the number of advertisements they watch. Plus, a monthly subscription fee remains the same no matter how much content a streamer watches. With ad-tiers firmly in place, those who are binge-watching their favorite show are now worth more as they consume more ads within the content. 

With increasing costs, streamers are willing to watch (some) ads–or cancel altogether

The public reaction to the ad tier announcements highlights the contrast of the Disney+ versus Netflix debate. While Disney’s news was met with relatively quiet acceptance, Netflix’s same story created an uproar. It seems that streamers had a strong reaction to the Netflix news for a variety of reasons. With the short-lived and declining interest in Netflix’s content, the addition of ads may feel like adding insult to injury. Plus, many misunderstood that the shift doesn’t mean that all content will have ads. Perhaps because Netflix has built their legacy on a subscription-based model, often touting their lack of advertising as a selling point, it’s been unclear to many that the ads only factor into the lowest price plan and a higher-priced ad-free option will be available.

Despite this backlash to the news, many streamers have admitted that when the time comes they will be willing to watch ads for a price reduction. According to a survey done by Voxpopme, 62% of respondents said they would watch ads on Netflix to have a lower-priced plan. Hub Entertainment Research also conducted a study of Netflix subscribers and found that almost half (46%) would choose the ad-supported option if it only encompassed pre-roll ads (meaning that ads were only shown before a show and content wasn’t interrupted with commercial breaks). These results showcase the importance of Netflix more clearly defining their ad strategy. Most likely, they will offer a lower ad load per hour than their competitors, a feature they should be highlighting to those streamers who wonder if the exchange of ads for a lower price is worth it.

These results perhaps aren’t surprising given that consumers are increasingly discriminating about what services they are spending on. The Wall Street Journal reported that subscribers are continuing to hit cancel on their premium subscriptions (which include both Netflix and Disney+). While 6% of subscribers ended a premium subscription in the two-year stretch ending in June 2020, a whopping 19% have done the same in the past two years. With the continued price hikes and an array of options, streamers are finding that their streaming costs are edging closer to the cost of the cable bill they cut the cord to escape. “You’ve got to trim the pennies. It’s like a diet, you know—you take a couple calories off here and there,” and it makes a difference, said Ms. Bigel, a retired game-industry art director in San Diego interviewed by the WSJ. “Why give them money if I’m not watching?”

As the industry continues to evolve, it’s become clear that including an ad-supported option is a necessary adjustment for these services to break even. And with more choices, many streamers are willing to endure these breaks in their content to help control the rising cost of their streaming bills. However, at the end of the day, content is king and an ad break is only acceptable within a show worth watching.

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