The Power Of Free | Streaming Jungle (Issue #2)
Netflix’s disappointing loss of 200,000 subscribers means that Netflix will start to find new ways to grow. The company said they will use some version of ad-supported streaming to address their problem of password sharing between users, which has been hurting their Average Revenue Per User (ARPU). Ads will allow Netflix to make revenue from watch hours in addition to paid subscriber numbers. These problems and responses are worth monitoring for a couple of reasons. First, Netflix has been the seemingly undefeatable giant in the space for so long that this Achilles heel makes the future seem less certain. Secondly, Netflix was previously the poster child for strictly Subscription Video On Demand (SVOD) with no Advertising Video On Demand (AVOD). There are many ways ads can be incorporated into Netflix, which will they choose?
Netflix is in an unfamiliar position of learning from some old media competitors who had to pioneer different models to catch up to the Netflix juggernaut. Paramount has a service in all the different parts of the free spectrum. There is Paramount+ that can be full subscription or subscription subsidized by ads has a total of 56.1m users as the end of 2021. Then for the full free they have PlutoTV which consists mainly of content in the public domain with ads. Pluto has the most user numbers of any Paramount service, a total of 64.4m Monthly Active Users (MAU). Through end of 2021, both are still consistently growing with Pluto having ~18% user growth yoy and Paramount+ with ~20% growth yoy. All streaming revenue has been growing quickly for Paramount, but subscription revenue has been growing at almost 4 times as much as non-subscription (ad revenue).
In 2021 Paramount brought in a total of ~$4.2b in revenue from streaming. ~$2b of this came from subscriptions while ~$2.1b came from ads. This includes both full free ad revenue and ad revenue from ad subsidized accounts. The ARPU is significantly higher for subscriptions sitting at ~$9 whereas free is at $1.64 globally and $2.54 for the US. Paramount sees their total addressable market (TAM) at ~600m users worldwide. That’s a long way from 56.1m users. Paramount is getting more optimistic about their ability to perform. They moved their subscriber goal for 2024 for Paramount+, 100m users from 65-75m users.
There is a spectrum of “free” on one side there is the full subscription; this is where Netflix was and where Disney+ currently resides. On the other side there is full free with ads, for example, PlutoTV and YouTube. Over the last couple of years, we have seen a middle ground emerge. Streaming services are offering ad supported to offer lower prices without losing revenue. Hulu has been doing this the longest, but the space is about to get very crowded as Netflix, Peacock, Paramount+, and potentially a Warner Brothers Discovery product as well in the space.
Netflix hopes that more subscribers will be willing to forego password sharing and join Netflix because of a lower price point made possible by ads. The key is finding the balance between ARPU and user numbers to maximize revenue and earnings without cannibalizing the existing Netflix premium subscriber base.
Youtube provides another model to consider, YouTube made $8.6b in 2021 off 6 billion users and an average of 1 billion watch hours a day. This means they make 2 cents per watch hour. On the other hand there are some advantages that make YouTube successful. First, they don’t pay for content until it is already out in the public and they don’t have to pay anything before they get paid. Next, YouTube pays for content based on how popular it is rewarding those with more views or likes. Whereas traditional streaming services pay for a show up front and then hopefully make a return on it. This model makes YouTube only have to pay for content that is successful. Youtube has not invested to make actual TV shows or movies or their own. Presumably, Google will want Youtube to act as a bundler and become a one-stop-shop for content, between YouTube Videos, YouTube Shorts, YouTube Movies, and YouTube Music they are well on their way.
ARPU is the go-to metric to measure user value for SVOD services, but when it comes to free or ad-supported there are other ways to analyze user value. For example, YouTube references watch hours because from that you can extrapolate ad revenue. For watch hours it’s all about the attention of the user being sold to companies for advertising. This rewards popular services not necessarily the most clever ones. YouTube has over 6 billion users who provide over a billion watch hours a day. This generates the same amount of revenue at 100 million or billion users providing a billion watch hours a day.
Beyond ads, Netflix could learn from Disney and offer annual subscriptions to limit subscriber churn. The question is will there be other changes to Netflix’s model beyond economic models? Previously it was thought Netflix would stay the course of pure TV show and movie content with subscriptions, but now the future of Netflix is changing. Netflix could also venture into sports, news, or gaming. These are already competitive between the old media giants, but it may be crucial to Netflix’s survival. Netflix’s stickiness and motivation for users to join will increase with sports. News hasn’t seemed like as much of a driver of growth, profitability, or stickiness so it is unlikely Netflix will pursue that path. Although sports rights can be difficult to obtain, they are constantly renewing or running out contracts so Netflix should continue to have opportunities to enter the space.
If Netflix wants to survive and win the streaming wars they need to branch out. They have a winning formula, but now Netflix is in a position of what got them to this level is not what will get them to the next level in the face of increased competition. Netflix has to adapt to stay up to date. If Netflix properly executes a strategy that includes a mix of different price points through ad models and new content options, they have a strong chance of maintaining their edge in the streaming wars.