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  • March 12, 2024
  • By Matt Starker Chief Business Officer, Endeavor Streaming
  • Blog

The Rise of the Ad Tier: How Streaming Business Models Determine the Content We Watch

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In the pursuit of catalyzing profit, large video streaming companies have been radically altering their approach to growing top-line revenue and curtailing costs for some time now, be it through layoffs, password-sharing crackdowns, licensing of catalog content to rival streamers, and, notably, the introduction of advertising tiers. Following in the footsteps of Hulu, Netflix, and others, Amazon Prime Video became the latest platform to introduce an ad-supported tier to their streaming service earlier this year. The push toward ad-supported streaming has already changed how content budgets are allocated and the tonnage of content we see. In this expanded ad-supported landscape, the majority of content needs to perform at scale (i.e., drive time spent, ad inventory and ad revenue) or its days are numbered.

The pivot to adding an advertising tier is ubiquitous in streaming, and content budget rebalancing quickly followed suit. First, we saw underperforming content get pulled out from subscription video on-demand (SVOD) tiers and distributed or sold elsewhere. Last year, Warner Bros. Discovery launched several series on free ad-supported TV (FAST) channels rather than its SVOD offering. Disney pulled dozens of shows and movies from Disney+ and Hulu in 2023. We’ve also seen platforms like Netflix bring back in full force their content licensing strategy to complement their more expensive original content—for example, “Suits” record-breaking success in 2023 happened in parallel with the launch of season two of “The Lincoln Lawyer.”

The content these streamers pulled from their SVOD services and distributed elsewhere represent content cost without streaming revenue—the kind of content relegated to the bottom of their cloud storage that’s rarely, if ever, searched for and viewed by users. However, in this new context, it’s beginning to reap financial benefits.

Needless to say, there’s a balance to strike between culling content from your SVOD service and continuing to delight and retain subscribers. Not having a full library is a deviation from today’s experience and will have negative implications, some larger than others. Where streamers, who are also IP owners, choose to invest or divest in specific content formats will largely dictate where the platform wants to serve consumers in the future—whether that’s in new, water cooler style originals, the vault, or licensed content, including sports.

Optimizing for Ads: The Flashy Debut, The Vault, The Cheap and Cheerful

For platforms looking to grow subscriber numbers, a large chunk of content investment happens up front. It’s the big, flashy pieces of content that drive new eyeballs: A-list actors, scripted storylines, high production quality, and sizeable marketing budgets. Disney+, for example, gained a record-breaking 413,000 new subscribers at its release of the musical “Hamilton in 2020. In short, content with specific cultural relevance attracts a new pocket of subscribers. This is where we’ve seen platforms sink colossal budgets into producing original projects. However, the easy growth is behind streamers now. Most of the major platforms have hit mass scale, and growing their subscriber bases will be more costly than ensuring their current subscribers are watching more often and seeing more ads.

This brings us back to content rebalancing. Moving forward, we’ll see a sizable investment in content that gets existing subscribers to watch a lot more, but this will need to be done in a very cost-effective manner. Enter: the quality evergreen content and the cheap and cheerful content. This content will serve the core purpose of driving mass time spent and ad inventory with excellent return on investment. We’ve seen this content strategy implemented by music streamers, and we’ve seen it in the digital publishing boom as well, to varying degrees of short-term success. It’s TV’s turn.

Live Events in the Advertising Era

The profitability of the advertising model has proven its worth; Netflix, for example, flaunts a higher average revenue per user in its ad tier than its standard subscription tier, with industry insiders anticipating it will surpass Disney+ in US advertising revenue in 2024. To generate more profitability with its streaming service, Disney’s Bob Iger outwardly admitted that last year’s price hikes were meant to migrate more users into the platform’s advertising tier.

As streaming services and advertising become more intrinsically linked, streamers are now much more concerned with optimizing content types for advertising dollars than in the past. In addition to investing in the re-run classics and cheaper content with more episodes, platforms are finding high advertising value in licensing live events in sports and beyond. Events both big and niche are already commonplace in streaming. It’s a model borrowed, soon to be stolen, from legacy TV: ESPN, Fox, and Warner Bros. recently announced a joint sports streaming service that will offer content from all the major leagues. Big live events bring in big appointment viewership audiences, which in turn drive big sponsorship dollars. Sports is leading the charge here, with Thursday Night Football on Amazon Prime Video, Friday Night Baseball on Apple TV+, U.S. Soccer on Max. Even Netflix has entered the arena of live sports with The Netflix Cup, their first celebrity golf tournament, and The Netflix Slam, a match between Rafael Nadal and Carlos Alcaraz.  

This dual revenue stream of old (carriage fee + advertising) is the reason linear TV has been so successful for an incredibly long time, and as we move into a new phase of streaming, a new three-pronged revenue model—subscription, licensing, and advertising—is emerging to shape streaming platforms’ content investment and licensing strategies in significant ways. 

Follow the Data

In an age of content culling, streamers must decide what content is most valuable based on their long-term business objectives. And how can they assess the value of a piece of content? Let the data speak.

Platforms have the data to intimately understand their audiences, user behavior, advertising reach, and more. To assess the ROI of a specific piece of content, they must evaluate how many users are watching it for how long. For example, a series might have a relatively small audience, but if that audience is constantly rewatching the show, it becomes an incredibly valuable piece of content for advertising. The 80-20 rule—in which 20% of your audience generates 80% of your ad revenue—will likely hold true for streaming services. As streamers’ ad revenue increases in importance, it will be critical to understand the 20% of “super users” and how platforms can garner one or two incremental ad impressions out of them. It’s the multi-million-dollar question streamers will need to answer.

With granular data on how content is consumed within the platform, streamers can also run in-depth audience analyses to inform content spend. Picture a Venn diagram, wherein each circle contains a list of distinct content that serves one distinct audience. In a subscription-only world, platforms want to serve several unique audiences that don’t necessarily consume the same content, so the content that resides in the overlap of the Venn diagram, in many cases, isn’t viewed as valuable. In an ad-supported business model, however, that same content—the content that crosses over multiple audience cohorts—likely adds significant incremental value to the platform, as it generates more eyeballs for advertising.

How we approach content spend is changing, and it’s not because consumer preferences are changing, it’s because the way streamers make money is. Content strategy is even more of a data-driven approach in this new three-pronged revenue stream world, and as streaming platforms continue to switch up their content budgets to optimize for advertising revenue, they’ll find their footing on a different path than they’ve previously traveled.

[Editor's note: This is a contributed article from Endeavor Streaming. Streaming Media accepts vendor bylines based solely on their value to our readers.]

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