As competition heats up, streaming providers must find different ways to drive growth and revenue. But is business growth with new ad-supported streaming packages and restriction on sharing accounts as straightforward as it sounds? Read the insights from our industry experts.
The final edition of our 2023 Global Streaming Study series explores advertising packages and password-sharing restrictions as growth levers.
In the previous two chapters, we discussed the slowdown of growth in streaming hours, increasing subscription fatigue and price sensitivity, as well as the streaming market share battle. These factors point toward there being a high likelihood of increasing churn in the near future. This is on top of the 40 percent of streaming customers expected to cancel in the next year, making it critical for providers to find ways to retain customers and boost acquisition volumes.
Finding expansion opportunities to drive growth
Since video streaming first achieved mass adoption, sharing accounts and ad-free content have been the norm. However, the economic realities of streaming are starting to catch up with the market, along with increased competition and subscription fatigue.
The result? Major streaming players are now driven to explore alternative approaches on both of these areas. Many have come to realize that the two-pronged approach of introducing ad-supported packages and rolling out measures to get subscribers to stop sharing passwords shows possibility for driving growth. But each come with potential pitfalls that will need to be avoided.
Netflix and Disney+ were the first major providers to launch an ad-supported package in the US at the end of last year. Our research shows that, to date, ad-supported subscriptions make up a small but significant share of the subscriber (Netflix 11 percent and Disney+ 15 percent of subscribers).
Since then, Netflix has launched the ad-supported tier in other countries, including Australia, Brazil, France, Germany, Spain, and the UK. The share of ad-supported subscriptions in these markets is lower, falling between six to eight percent. However, it’s too early to tell whether this stems from lower acceptance of advertising or simply a shorter timeframe since introduction. We do know that there are teething problems: the streaming giant’s Q2 results revealed challenges in delivering the viewership and reach promised to advertisers.
Price is the main reason to choose the ad-supported tier
Our research indicates that price is the salient factor when it comes to choosing ad-supported instead of a ‘regular’ subscription. Customers in the ‘price sensitive’ segment make up almost half of ad-supported tier subscribers. In addition, there are price-value-observant subscribers (20 percent) in this tier who have mixed priorities, most often looking for the best value for money offering. However, while most ad package purchases are price driven, indifference to advertising is also an important reason. We have 36 percent of respondents saying they ‘don’t mind’ advertising and 13 percent stating they enjoy watching advertisements.
Danger of cannibalization
Ad-supported packages clearly have the potential to interest new subscribers and drive incremental customer acquisition. But streaming providers must not overlook the issue of cannibalization – a very real threat that can counteract the positive acquisition impact.
Our Global Streaming Study reveals that 42 percent of Netflix ad-tier subscribers
downgraded from an existing non-ad offering. Meanwhile, 52 percent of Disney+ subscribers moved to the ad package as it was a cheaper option. If all of these subscribers would otherwise have stayed on the higher priced ‘standard’ tier, this switch to the ad-supported tier represents a major cannibalization impact.
Ad-supported tier as ‘save offer’
However, since the ad-supported tier is cheaper it can also play the role of ‘save offer’ whose lower price point enables it to act as a churn prevention tool. Of the 40 percent of streaming subscribers who indicated their intention to cancel in the next year, half showed their willingness to keep their subscription by moving to a cheaper ad-supported tier, if available.
But the effectiveness of advertising packages to prevent churn varies significantly by country. Our study shows the highest potential in India (74 percent), the US (61 percent), and Singapore (58 percent). Nevertheless, if we compare it to last year’s study, its effectiveness as a churn prevention tool is declining (down by three percent). The most significant drops were seen in China and the US, at 19 and 12 percent, respectively.
Sharing passwords is prevalent across most streaming services worldwide. In fact, 30 percent of streamers are ‘free-riders’ - those currently using a subscription paid for by someone outside their household. On a country-level, India and the Netherlands have the highest share of such streamers (both 40 percent) while the UK streamers make the least use of password-sharing (20 percent).
Streaming providers increasingly see this as an untapped opportunity and are looking to convert free-riders into paying customers. The response has been mixed, but our research results indicate this strategy could be successful as 56 percent of all streaming customers find it acceptable for providers to monetize free-riders and charge for ‘sub accounts’.
Moreover, when free-riding respondents were asked in our research what they would do if borrowing a subscription was no longer possible, the most common response was they would pay for a subscription themselves (50 percent). From this group, around 90 percent are willing to pay the full price for the regular subscription while the remaining would expect a discount. This clearly indicates that providers could even encourage customers to opt for regular subscriptions instead of offering sub-accounts.
Of course, not all free-riders are willing to pay. Around 30 percent would opt to stop watching the content entirely, while about 20 percent would attempt to access the content through unofficial websites. Respondents from Australia, France, the UK, and Germany would be more likely to stop watching the content (between 35 to 44 percent), while China, Singapore, and the Netherlands respondents (25 to 28 percent) would use unofficial websites to watch content.
Overall, our Global Streaming Study research continues to show that focusing on understanding actual customer needs and customizing offers to suit those preferences should be providers’ priority. With support from our team of specialists, streaming providers can adapt and adjust more easily to the changing market landscape.
Introducing ad-supported tiers and enforcing ban on password-sharing are levers that streaming players will need to pull in the pursuit of continued subscriber and revenue growth. Yet, these levers also have potential downsides and navigating them skillfully will determine the extent to which the benefits can be realized.
For more information, contact us today.
Read chapter one of our Global Streaming Study here.
Read chapter two of our Global Streaming Study here.