This film image released by Universal Pictures shows Mark Wahlberg, left with the character Ted, voiced by Seth MacFarlane in a scene from “Ted.” (AP Photo/Universal Pictures)

Photo Credit: Universal Pictures/Tippett Studio

After spending years amassing streaming subscribers at great cost, media companies now need to make some profits. And they’re increasingly leaning on advertising as the answer.

Look no further for proof of that than the most recent annual Upfronts, the events where media companies like Fox Corp., Warner Bros. Discovery, Disney and Comcast’s NBCUniversal, made their pitches to advertisers.

With the absence of stars and talent due to the ongoing Hollywood writers’ strike, NBCUniversal kicked off its event with an animated video of Ted, the foul-mouthed teddy bear created by Seth MacFarlane who has landed a series on the company’s Peacock streaming service, singing and dancing to a tune that included the refrain “We need ads.”

“We were all dreamers to think that the streamers were anything but fads,” the animated teddy bear sang to the audience. “Now, we’re all begging for ads.”

The ad push comes not only as subscriber growth slows and customers drop in and out of services — commonly known as churn in the media business — but as the advertising market has softened and been slow to recover.

During Disney’s earnings call earlier this month, CEO Bob Iger put new emphasis on ad-supported streaming. And Paramount Global and NBCUniversal have touted that they’ve had cheaper ad tiers since the get-go. Warner Bros. Discovery also has added such options for consumers.

“Despite the near-term macro headwinds of the overall marketplace today, the advertising potential of this combined platform is incredibly exciting,” Iger said after announcing Hulu content would join Disney+, a move that would be a positive for advertisers.

Even Netflix, which was against advertising for years, entered the game. The 800-pound gorilla in the streaming room for the first time this past week held a virtual presentation for advertisers, unveiling information about its ad-supported tier that gave a boost to its stock.

Still, it’s early in the game, and it’s unclear whether advertising will fill the gaps of unstable subscriber growth for streaming.

‘We need ads’

There’s been an uptick of consumers signing up for ad-supported streaming subscriptions. In the U.S., they grew nearly 25% year over year to 55.2 million in the first quarter of this year from 44.3 million in the year-earlier period, according to data firm Antenna. Growth in ad-supported tiers was on the rise last year, too. Ad-supported plan tiers accounted for 32% sign-ups in 2022, up from 18% in 2020.

When Netflix said it lost subscribers earlier last year, it sent the streaming world into a spiral, weighing on stock prices and pushing executives to find other ways to bring in revenue. By the end of the year, Netflix had launched a cheaper, ad-supported tier. Rival Disney+ did as well.

Media companies are returning to the initial business models that long propped up their businesses — generating revenue off of content in multiple ways rather than relying on one route, a subscription business.

Netflix, while noting it was still “in early days,” said this week it had 5 million monthly active users for its cheaper, ad-supported option and 25% of its new subscribers were signing up for the tier in areas where it’s available.

But media companies are struggling with the question of whether ad-tier subscriptions make up for other losses.

“I don’t think we know that answer fully yet,” said Jonathan Miller, a former Hulu board member and current CEO of Integrated Media, which specializes in digital media investments. “But I think we’ll learn that a [subscription, ad-free] customer that doesn’t churn will be the most valuable. There’s math to be learned over time as the playing field settles.”

Disney, which is also the majority owner of Hulu, has the greatest number of ad-supported subscriptions, followed by Peacock, Paramount+, Warner Bros. Discovery — which has the soon-to-be-merged Max and Discovery+ — and Netflix, according to Antenna. Hulu and Peacock are the two streamers with a majority of subscribers on ad-supported tiers, the data provider said.

FAST lane

In this photo illustration, the Paramount Global logo is displayed on a smartphone screen.

Rafael Henrique | SOPA Images | Lightrocket | Getty Images

The free streaming services, which offer both a library of content on demand and a guide of curated channels, have seen explosive growth in recent years. Fox and Paramount acquired Tubi and Pluto, respectively, not long before the surge in viewership occurred. The deals became a badge of honor in the companies’ earnings calls.

For these larger media companies, they’ve also become a place for their own libraries. Pluto shows earlier episodes of the lucrative “Yellowstone” series, which has also seen multiple spinoffs boost Paramount+.

“It really was in the last year that we saw a seismic shift,” said Adam Lewinson, Tubi’s chief content officer. “With the overarching challenges in terms of the pay streaming model and then layer in subscription fatigue. This is where in tougher economic times people look more closely at their spending. On top of that, now nearly 1 in 3 streamers are reducing their spending on streaming.”

For Fox, which is focused on sports and news on traditional TV channels, Tubi is its answer to streaming. As CEO Lachlan Murdoch had earlier noted in an earnings call, Tubi was a focal point at Fox’s Upfront presentation last week. Executives cheered Tubi for making measurement firm Nielsen’s streaming gauge report for the first time ever recently.

Paramount has similarly emphasized Pluto’s growth. During the company’s Upfront dinners with advertisers, Pluto was a key part of the conversation, said David Lawenda, Paramount’s chief digital advertising officer.

Warner Bros. Discovery has said it plans to create its own FAST channels. In the meantime, it has pulled content from HBO Max and licensed it to Tubi and Roku.

“To also syndicate your content through FAST channels, that’s probably wisest. It could create strategic value in addition to just cash,” said Rouhana, of Chicken Soup for the Soul Entertainment. “In a world where churn is a fact, having the ability to show those lost subscribers content again and get money while doing it can only be good.”

Price check

Companies also are jacking up streaming prices to make up for losses. A combination of price hikes and advertising revenue make up the planned path to profitability, Iger said during Disney’s earnings call earlier this month.

Executives at media companies including Warner Bros. Discovery, Paramount and Disney have said in previous investor calls that there remains room to grow on ad-free streaming options.

During the Disney earnings call, Iger said that while the company didn’t intend to increase prices for ad-supported customers, people who pay for content without commercials could expect an increase later this year.

Disney Executive Chairman Bob Iger attends the Exclusive 100-Minute Sneak Peek of Peter Jackson’s The Beatles: Get Back at El Capitan Theatre on November 18, 2021 in Hollywood, California. (Photo by Charley Gallay/Getty Images for Disney)

Charley Gallay | Getty Images

“Meanwhile, the pricing changes we’ve already implemented have proven successful, and we plan to set a higher price for our ad-free tier later this year, to better reflect the value of our content offerings,” he said. “As we look to the future, we will continue optimizing our pricing model to reward loyalty and reduce churn, to increase subscriber revenue for the premium ad-free tier and drive growth of subscribers who offer the lower-cost ad supported option.”

HBO Max, Disney and Paramount have all stepped up pricing on their streaming services in the last year, all while consumers have been contending with inflation in food and other essential goods.

“It’s not clear to me that you can continue to raise prices on the subscription side given the nature of the macro economy,” said Miller of Integrated Media. “To me, it’s having the combination of things right that will optimize the business.”

Disclosure: CNBC is part of NBCUniversal, which is owned by Comcast.

Post source: cnbc

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