Business

Streaming TV With Ads Puts Netflix Stock And Its Peers At A Crossroads

When people watch TV, increasingly they want it FAST — industry parlance for “free ad-supported streaming television.” Consumers are increasingly turning to ad-supported streaming TV, cooling off the long-hot subscription services market and threatening the growth of Netflix stock and other players.




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“Over the last 10 years, we’ve seen a rapid expansion of SVOD (subscription video-on-demand),” said Colin Dixon, an analyst at nScreenMedia. “Now it’s advertising-supported streaming’s turn. You’re going to see an equally rapid expansion, if not more rapid expansion, of ad-supported (streaming video) than we did with non-ad supported.”

Never were the signals clearer than this past week, when streaming giant Netflix did the unthinkable and broached the subject of ad-supported streaming video. After the company delivered a dismal first-quarter report, it’s now looking to offer a subscription tier that includes ads at a lower rate than the normal Netflix price. netflix-stock lost more than a third of its value Wednesday after it reported a surprise decline in subscribers and predicted wider customer losses to come.

no wonder Netflix (NFLX) is making the shift. At stake is a massive amount of advertising dollars chasing after cord-cutters and cord-nevers. Ad money is beginning to shift, along with audiences, from traditional cable and broadcast television channels to streaming TV offerings.

Last year, worldwide TV advertising spending hit $171 billion, of which $16.6 billion went to internet TV platforms, according to ad media firm GroupM. While ad spending on traditional TV is expected to be relatively flat in the years ahead, ad spending on internet TV services is seen surging to $32.6 billion by 2026, GroupM said.

Early Leaders In Ad-Based Streaming TV

Ad-supported streaming TV will have a much bigger presence at this year’s advertising upfronts. Each spring, television services pitch their program offerings to advertisers and sign commitments for ad purchases in the year ahead. The upfront season kicks into high gear in May, according to Adweek.

“Advertising video-on-demand (AVOD) and free ad-supported TV (FAST) channels are the biggest winners of the Streaming Wars, we believe, because ‘free’ always has the largest TAM (total addressable market),” Needham analyst Laura Martin said in a recent note to clients.

youtube google stock
If separated from Google stock, YouTube would be worth about $300 billion, one analyst says. (Thais Ceneviva/Shutterstock.com)

So far, the clearest winner in ad-supported online video is YouTube, owned by google parent Alphabet (GOOGLE), she says. If YouTube traded separately from Alphabet, it would be worth about $300 billion, Martin said.

Another early winner in ad-supported streaming video is amazon.com (AMZN). With its Fire TV platform and IMDb TV service, it has lots of areas to sell advertising. amazon is rebranding IMDb TV as Amazon Freevee beginning April 27. Plus, through links with its e-commerce business, Amazon can track actual purchases driven by advertising.

“Amazon is rapidly becoming a leader in this space,” Dixon said. “Can you think of a company that knows more about its viewers than Amazon?”

He added, “They can tie an advertisement to action. That’s going to be very interesting to advertisers going forward. They are going to be a force to be reckoned with in this market.”

Legacy Media Firms Take Notice Of Trend

Legacy media companies have jumped into the free, ad-supported streaming television market as well. Paramount Global (FOR) owns Pluto TV. Comcast (CMCSA) has Xumo. Fox (Fox) owns Tubi.

AVOD ad supported streaming video
Fox’s Tubi is one example of established media getting into ad-supported streaming video. (Tubi TV)

Other players in this AVOD market include roku‘s (ROKU) Roku Channel, Plex and Crackle from Chicken Soup for the Soul Entertainment (CSSE). Even TV makers Samsung, LG and Vizio (VZIO) have gotten into the game through their smart TV platforms.

TV and streaming device makers have an edge in the AVOD market because they provide users with an on-ramp to streaming video. Companies in the catbird seat include Amazon, Roku, Samsung and LG.

In the past month, CuriosityStream (CURI) and YouTube have introduced new FAST offerings.

Reasons For Turning To FAST

FAST video streaming usually refers to linear streaming channels that serve up scheduled content like traditional TV channels. However, many analysts stretch the definition to include AVOD, because more ad-funded services now offer both types. With AVOD, viewers pick the specific movie or TV episode they want to watch.

“The difference between the two markets is narrowing every day,” Dixon said.

FAST video channels are growing in popularity for several reasons, said Brett Sappington, an analyst at research firm Interpret. And it’s not just about consumers wanting to cut their Netflix price, he says.

Faced with choice paralysis from the plethora of streaming options, consumers like the ability they have with AVOD to just turn on a channel and start watching, according to Sappington.

Plus, the ad loads are less than conventional television. FAST services usually dish out eight to 10 minutes of ads an hour, vs. 14 to 18 minutes of ads for traditional linear TV.

Advertisers Chase Lost Consumers In Streaming TV

The move to ad-supported streaming video is important for advertisers, who have lost consumers to commercial-free television in recent years.

Ad supported television Netflix price Netflix stock
Traditional pay-TV services lost 4.7 million US subscribers last year, one research group says. (0meer—stock.adobe.com)

Last year, traditional pay-TV services like cable and satellite lost about 4.7 million subscribers in the US, according to Leichtman Research Group. That’s after losing about 4.9 million subscribers in 2020.

The problem that ad-supported streaming video faces now is that the audience is divided across a dizzying array of services, Sappington said.

“Viewing of ad-supported services is broad but it’s not deep,” he said. “Advertising works on scale.”

Viewership will increase as more desirable content moves to ad-supported services. That includes fresher content, exclusives and live sports.

The streaming market also could use some consolidation, Dixon says.

“One of the problems with the market right now is that it’s very complex and so fragmented,” Dixon said. “If you want to run an ad campaign and reach people on their connected TVs, you’ve got to figure out how to place ads across at least 10, maybe 15, TV OSes (operating systems) to reach the audience that you want to reach. This is a huge challenge.”

Netflix Stock: Paid Services Offer Ad-Supported Tiers

Meanwhile, commercial-free subscription services are adding lower-priced, ad-supported service tiers. The cheaper services provide additional revenue streams and new users to whom they can upsell premium services.

Reed Hastings, CEO Netflix Netflix price Netflix stock
A lower Netflix price point is what CEO Reed Hastings has in mind in adopting ad-supported streaming video. (catwalker/Shutterstock)

Premium subscription services offering lower-priced AVOD tiers with ads include Hulu, Warner Bros Discovery‘s (WBD) HBO Max, Paramount’s Paramount+ and Comcast’s Peacock. waltdisney (DIS) plans to offer a lower-priced version of its Disney+ service with ads later this year.

The Netflix plan to add an ad-supported offering makes it the last major subscription streaming video service to adopt an AVOD tier, something it scoffed at for years.

Chief Executive Reed Hastings says the company is making the move to give consumers more choice at different Netflix price points. Netflix stock analysts agree with the move.

“Those who have followed Netflix know that I’ve been against the complexity of advertising and a big fan of the simplicity of subscription,” Hastings said on a conference call. “But as much as I’m a fan of that, I’m a bigger fan of consumer choice.”

New Ecosystem For Ad-Supported Streaming TV

The shift to ad-supported streaming TV has fostered an ecosystem with new companies to support the business model. That ecosystem includes companies that sell and place advertisements on streaming services and those that measure and target audiences.

Nielsen TV ratings
Nielsen’s TV ratings service could face stiff competition as ad-supported streaming video grows. (Tada Images — stock.adobe.com)

Adtech companies like Innovid (CTV), magnite (MGNI), PubMatic (PUBM) and Trade Desk (DTT) are wrestling for a share of the fast-growing internet television market. At the same time, many large streaming services such as Roku are offering their own advertising platforms.

Meanwhile, new audience measurement services are looking to replace nielson (NLSN) as viewers shift to streaming video. Nielsen rivals include Comscore (SCORE), iSpot, Samba TV and VideoAmp.

“Every part of the ad stack is now adapting to the new streaming world,” nScreenMedia’s Dixon said.

But streaming video issues like Netflix stock are out of favor with investors now after peaking during the stay-at-home mandates of the Covid-19 pandemic.

As of Wednesday, IBD’s Leisure-Movies & Related industry group, which includes Netflix stock, Roku and other video streamers, ranked a dismal No. 185 out of 197 groups that IBD tracks.

Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.

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