The Rise of Ad-Supported Streaming Services

Updated: Jul 5, 2022

The recent news of Netflix's entry into an Ad-supported video subscription model has been met with curiosity and opportunity by the advertising, marketing, media, and tech industries. According to Nielsen, Americans streamed almost 15 million years of content in 2021, and streaming services see an enormous opportunity for ad revenue. In this post, we will break down what this means for consumers, brands, and streaming platforms in the Rise of AVOD.

As of this year, 140M U.S. households have chosen AVOD services, and it's projected to climb to 171.5M by the year 2026, according to eMarketer. Consumers watching streaming services now account for 30 percent of TV time. Escalating viewership means more revenue and the opportunity to reach consumers where they spend hours at a time immersed in storytelling content. Analysts project that U.S. revenue for ad-supported streaming platforms will triple between 2020 and 2026 to $31billion, according to the global AVOD Forecast report, with the U.S. growing its total global share to 49.5% by 2026.

How Much is AVOD Real Estate Worth?

Hulu began operating lower-cost subscription-based and ad-supported tiers more than a decade ago in 2010. Today it generates more revenue per average user than from a user on the higher-priced ad-free level. The four leading ad-supported platforms in the U.S. (excluding YouTube) generated $3.5 billion in advertising revenue in the 12 months leading up to September 2021, according to Kantar. Hulu accounted for most ad sales over that period, generating $2.1 billion. Paramount+ was second at $822 million ads sold, Peacock with $279 million, and Tubi with $250 million, as reported by DigiDay—making dual revenues of ad-generated and subscriptions appealing to providers at all levels.

Early Revenue Projections

Analysts Moffett Nathanson forecast Disney+ will make $1.8 billion from ads in 2025. The industry leader in ad-supported streaming revenue, Hulu is expected to make $4.1 billion in ads that year. Netflix is expected to make $1.2 billion in U.S. advertising revenue by 2025, equaling just 4 percent of the company's worldwide revenue last year. For the Disney+ ad-supported tier, Moffett Nathanson sees more revenue, opportunities to monetize content and a more significant share of subscribers who will choose AVOD.

Why Now?

In the words of Reed Hastings, Netflix CEO—"Be big, fast, and flexible." AVOD provides an opportunity for the streaming industry to innovate with new products, new monetization, new audience channels, and formats. Here's why:

Concerns about slowing consumer spending and increased competition mean consumers have many affordable options.
Subscriber attrition
Platform revenue alone is not growing enough to cover the rising content creation costs. Comcast lost $1.7 billion on Peacock in 2021; Disney's streaming division lost $593 million in the last three months of 2021; and Paramount reported a 2021 streaming revenue of $1.6 billion, $600 million.
First-party data reserves are increasingly becoming a crucial selling point to attract advertisers, as privacy concerns and regulations around the use of third-party cookies in programmatic advertising increase. Publishers rely on those reserves and in-house tech stacks to appeal to brands and target ads.

Improving Viewer Retention

To begin with, streaming services will have to address the underlying incentives for consumers to remain locked into AVOD. Ads must serve a purpose other than lowering subscription costs. It may be enough to acquire new users, but what will it take to avoid consumer subscription downgrades? Here is what we are hearing.

Marketers say Ad frequency capping and management are essential when selecting a streaming service.
Platforms will employ techniques to ensure new and improved ad caps. For example, Hulu has strict ad repetition guidelines and hourly, daily, and weekly frequency rules when ads are purchased through its private marketplace.
Personalization, but not too much. In other words, viewers are bothered by targeting that feels too precise or invasive.
Bridging digital and physical worlds allows an avatar from, say, Roblox to be used on a Disney+ login. Creating interoperability to extend the viewer's world wherever they are.

Visionaries Reimagine Shoppable

The rise of AVOD is possibly the most significant opportunity for creative visionaries to reimagine advertising. Earlier this year, we wrote about four trends marketers could expect to see in 2022. Here are three more shoppable trends that viewers can look forward to.

Shoppable in streaming services IP and advertising units are now a reality with solutions like Fade Technology. It Lets viewers discover and buy from movies, series, ads, and more without hopping to shop, search, or be chased across the internet.
The new 360-degree business strategy that connects brand and performance includes embedded commerce, providing creators unlimited opportunity to deliver business outcomes. Reimagine surrounding tent-pole releases with exclusive content, discoverability, and in-video purchase with next year's Barbie movie from Warner Bros & Mattel. From pre-release theater promotion to streaming services, shoppable provides ample commerce opportunities for advertising, IP, and exclusive BTS content.
Strategic partnerships that allow brands to collaborate on exclusive offerings. Think, Emily and Paris + Vespa. Ozark fan, Play the Ozark Tax Simulator game from TurboTax

While AVOD is becoming the tool for streaming services to compete for viewers, striking the right balance between viewer needs and maximum engagement will be a critical challenge for advertisers and service providers. By enabling embedded commerce for IP and Ads on AVOD services—a proven model in gaming—OTT will significantly raise the value chain of viewer engagement and conversion for advertisers on mobile, web, and the living room experience.

Sign up for Embedded Commerce in OTT & Publishing Beta for IP and Advertising video here.

About:

Fade Technology is the first-to-market commerce-enabled technology connecting IP and advertising video content to purchase on OTT and digital publishing platforms across mobile, desktop, and living-room experiences. We simplify and integrate naturally into the viewer's video experience routine to shorten the discovery and purchase journey. Fade Technology is a women-owned technology company in the San Francisco Bay Area.