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Will Streaming Services Be Forced to Drift to an AVOD Model?

Posted by Darrin Helfers on Nov 17, 2020 8:00:00 AM

Will Streaming Services Be Forced to Drift to an AVOD Model?

As we head into winter and the pandemic continues to rage, the next few months are ideal for staying at home and catching up on all your favorite shows and even some new original programming. The big question is: Which streaming service should you subscribe to? Consumers have an ever-increasing buffet of options to pick from.

How Much Does Cord-Cutting Save?

With all that’s been written and said about cord-cutting, I’ve wondered if the choice to sever ties with a cable provider in favor of a slew of subscriptions to streaming services makes economic sense. As a case study, let’s look at an average middle-aged sports addict, “The Office” fan, Star Wars/Marvel Universe nerd and blog writer. I recently canceled my large satellite provider at a monthly cost of $160 for a cheaper option. But am I really saving that much? Let’s break down the numbers.

I still pay over $100 monthly for my first year of cable plus internet, which includes ESPN and ESPN2. We also pay $25 a month for Netflix to have extra users and an old-school DVD every month. Then there’s another $12 for my aforementioned addiction to all things Skywalker and Stan Lee on Disney Plus, $5 for Apple TV, and another $12 for Amazon Prime. That’s $154 without accounting for Peacock Premium or HBO Max, which we may ultimately pony up for.

The Rising Cost of Streaming Subscriptions

The steep competition among these services raises the question of how they can keep creating quality content without raising their prices further. On the one hand, HBO and Disney have the benefit of immense content libraries they own and control; as a result, they can impose limitations on what their competitors offer. (If you want to stream the “Star Wars” franchise or “Iron Man 2,” soon enough your only option will be Disney Plus.)

Netflix and Amazon are countering by dumping mountains of cash into their own original content—but at what cost to you, the consumer? Netflix has historically been willing to take on staggering levels of debt in its quest for dominance, but that can’t continue indefinitely. Amazon Prime Video is more complicated. It’s included in the price of a Prime subscription and was designed to make that offering—which is the core of Amazon’s business model—stickier. So it doesn’t need to be a profit center in itself.

Here’s a quick look at how much streaming services are investing in content:

To pay for all this content, the streamers can periodically raise their prices just as Netflix raised its monthly fees by $1 in October. (We may see the most significant jumps in a few years’ time when the competition has thinned however.) But they can only raise their prices so much before there’s a mass exodus of subscribers. To me, it seems like the inevitable endgame is advertising.

The Race to AVOD

Perhaps we should stop calling them the “Streaming Wars” in favor of “The Race to AVOD” (i.e., advertising-based video on demand). With their options to limit or eliminate ads at certain price points and their reliance on traditional ad slates to supplement subscription revenues, Peacock and Hulu are already swimming in these waters.

So what could be the catalyst for Amazon or Netflix to take the plunge into AVOD?

While Prime Video doesn’t need to be profitable, Amazon might eventually look to expand IMDb.TV, its free, ad-supported streaming service. It also might be tempted to integrate Prime Video into its Unified Ad Marketplace, which enables targeting based on what Amazon knows about its retail customers and already has substantial video capabilities.

And though Netflix has long maintained that it will never resort to ads, its debt burden might make this position untenable long-term—even with a growing worldwide subscriber base. The company may have already dipped a toe into advertising if you count the video promos it’s tried inserting, to the consternation of some viewers.

Netflix CEO Reed Hastings has been quoted saying that the decision to refrain from serving ads comes down to “capitalism.” If Netflix saw an opportunity to include ads on the service without disrupting its overall strategy, my guess is it would probably do so. Thus far, it’s been much easier to raise the price of subscriptions every year or two, which the company has been more than willing to do.

So, as a consumer, how do you make sense of all the options for streaming content without breaking the bank? Each family has to weigh the cost of all these services and decide what stays and goes. (Do I have to have “The Mandalorian” or the NFL Network? “Seinfeld” or “The Office”?)

By relying exclusively on subscription revenue as many of them do, content providers are putting themselves beyond the reach of large swaths of their potential audience. (Consider that someone with a monthly entertainment budget of $50 could afford two or maybe three of these services at most.) The question is how many subscribers they can afford to cede to their competitors before it’s time to consider a hybrid model that includes AVOD. Apart from Disney and Amazon, I would argue not many.

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Topics: TV Advertising Sales