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Why Ad-Supported Streaming Models are Here to Stay

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According to the 15th edition of Deloitte's Digital Media Trends survey, the average number of paid streaming services per subscriber dropped from five in October 2020 to four today. Deloitte told Fortune that customers are canceling their subscriptions at the highest rates they've ever seen in the history of the survey, with a 37% dropout rate between October 2020 and February 2021.

Netflix's subscriber growth has mostly plateaued this year. They exceeded Q2 expectations by 500,000 subscribers (total of 1,500,000) but all of the growth came from international markets. Taken together, these numbers fuel growing concern that U.S. streaming video consumers may be experiencing "subscription fatigue."

At the same time, ad-supported, free-to-watch services are on the rise. According to Deloitte, 55% of U.S. consumers are now watching at least one AVOD service, such as Tubi and Pluto TV, up from 40% before the pandemic.

There are a number of reasons for the growth of AVOD streaming services, some consumer driven, others driven by the OTT platforms themselves. Here are the leading factors. 

Cost

Deloitte says the increased popularity of ad-supported streaming services is due in large part to consumers becoming more mindful of their overall spending habits, with 46% citing cost as their primary reason for choosing one service over another.

The siloed nature of content is also pushing viewers to subscribe to multiple services at a time, which can add up to a monthly bill on par with a cable subscription. Deloitte's report says 53% of streaming customers expressed frustration with juggling multiple paid services.

Free trials are frequently cited by U.S. consumers as an attractive lure to join a service, but turnover after the trial period ends is a common thorn in the side of every SVOD. We recently saw that play out with the ill-fated Quibi. According to Slashfilm, Quibi saw a drop-off in subscribers as high as 90% after the expiration of its 90-day free trial.

Large, Easily Accessible Content Libraries

AVOD services offer large libraries of live and on-demand content containing hundreds or even thousands of TV shows, movies, documentaries and more—all accessible from any smart device. Most don't even require a log-in or credit card to get started. In as little time as it takes to download an app, viewers can begin browsing and making viewing choices.

They've also blurred the line in some ways between ad-supported services and paid ones: Many AVOD platforms allow viewers to pause, rewind, and fast-forward content, create custom watchlists, and surface relevant content recommendations based on past viewing habits.

Ad Experiences Are Improving

Consumers' tolerance for interrupted viewing is waning, so OTT platforms and aggregators have begun flexing to their preferences. For example, Roku says it will only serve ads in between episodes of its original content, not during them, and ad breaks will be limited to no longer than 60 seconds.

AVOD services have also begun introducing more relevant and less intrusive ad experience and formats, from targeted and addressable ads that show messages for specific geographic areas, to PIP-style ads that juxtapose spots in split screen with programming. Smart platforms and aggregators will continue using new technology to minimize disruption and strive for the best user experience—within on demand and even live content.

More Monetization Opportunities

Vast content libraries cost money. Subscription platforms can only profit off their investments by growing subscribers or increasing costs. However, each of those strategies have limits. SVOD services will either reach the end of their total addressable market or of what consumers are willing to pay.

Ad supported models represent a sustainable business model for the future of streaming. We know consumers are willing to watch a reasonable number of ads in return for free content. New technologies are allowing ad-supported OTT services to unlock additional advertising real estate. This brings in incremental revenue for the platforms, and also new ways for brands to reach consumers as viewing continues to shift away from linear TV.

Consumers are growing more cost-conscious when it comes to how many paid subscription platforms they have, and increasingly willing to view ads in exchange for access to robust libraries of free content. However, AVOD streaming services must successfully walk a tightrope between consumers' tolerance for ads and their willingness to pay for a service that doesn't include them.

Ever-improving technology is allowing OTT platforms to serve more relevant ads to viewers in ways that won't alienate their audience. These conditions taken together point to a bright future for ad-supported streaming services.

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