Industry
The end of ad-free streaming? Here's why ads will ruin your favourite shows
Summary
As Netflix and Amazon eye international markets for growth, they not only have to tweak their content but also their revenue models. Ads are playing a key role.For long, Netflix was a model for subscription businesses globally. It demonstrated that users could pay for high-quality content, helping media businesses rely less on advertising revenues. But then, in November 2022, the streaming giant launched an ad-supported plan, and has been pushing it ever since. And last week, it decided to axe its cheapest ad-free plan in the UK and Canada.
Amazon, too, has turned on advertisements for all its Prime Video users, asking them to upgrade for an ad-free experience. All this reflects a significant ongoing shift in the video-streaming market, as these moves have yielded results.
Read this: Amazon has upended the streaming ad market, and Netflix is paying the price
While Amazon converted every user to its ad-supported plan by default, Netflix announced in May that the number of monthly active users under its ad-supported plan had increased to 40 million, an eight-fold jump in a year.
The key reason these companies are eyeing advertising revenues is that revenue growth for both Amazon subscription services (predominantly Prime Video) and Netflix has been slowing down. While it is usual for growth to slow down on a higher base, the dip in the past two years also reflects a saturation of the user pool willing to pay a premium for content.
Moreover, the digital video advertising market has continued to grow. The ad spend is expected to touch $62.9 billion this year, compared to $26.2 billion in 2020, according to the Interactive Advertising Bureau. Both Amazon and Netflix are small players in this market, which is dominated by YouTube, a platform that has followed a different business model from day one.
And this: Behind Netflix’s advertising play
Global tastes
Both Amazon and Netflix are fretting over revenue growth because at the crux of their offering is content—and both are increasing their spending on that front. Even though the US is the biggest market for both, they are increasingly looking to international markets for future growth by acquiring content for users elsewhere.
According to Ampere, a data and analytics firm, both companies ordered a majority of their titles from outside the US in the first quarter of 2024. “The market saturation in North America, the growing cost of production, and the lingering impact of the Hollywood strikes have pushed Netflix and Amazon to increase investment in international productions to stimulate subscriber growth," Ampere wrote in its analysis.
In the first quarter of 2024, Netflix commissioned almost as many titles in Western Europe as it did in the US, even as it increased its titles in Asia-Pacific. Amazon saw 37 Indian productions during this period, more than the six previous quarters combined, according to Ampere.
ARPU play
To fund this content growth, both companies had leaned towards subscription revenues earlier because average revenue per user (ARPU) in that segment tends to be higher. However, high subscription rates also incentivize users to share passwords with friends and family. Netflix faced this issue in multiple markets. Its crackdown has pushed customers to create their own accounts. The strategy worked. It added over 9 million customers in Q1 of 2023.
While such crackdowns could help move existing customers to paid plans, they still keep out other potential customers who can't or don't want to pay. It is to tap this segment that the two companies are pushing hard on ad-supported plans. Netflix experimented with a free plan in Kenya in 2021, but did not pursue it. If Netflix manages to get its advertising game right, it could put this plan into action on a larger scale.
Revenue streams
Even as they push on advertising, the two companies cannot take their eyes off content. Ampere, in its recent report, pointed out that in Q1 2024, Netflix had commissioned its highest number of new titles since Q3 2021, while Amazon set a new record for quarterly commissions. However, going forward, other types of content are expected to grow faster.
Last month, Bloomberg reported that Netflix was set to show the anticipated boxing match between Jake Paul and Mike Tyson, would air two National Football League games this Christmas, and had bought exclusive rights to programming from World Wrestling Entertainment. Similarly, Amazon is expected to add the National Basketball Association to its Prime service. Gaming is another potentially big revenue stream. Earlier this month, Netflix added the popular Minesweeper game to its portfolio. These moves show that advertising or subscriptions, attracting and retaining subscribers remains the key to success.
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