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  • Brian Kline

Why Ad Support Has Always Been The Answer




Mark Twain is purported to have said “History never repeats itself, but it does often rhyme.” While it is unlikely he was referring to the evolution of TV at the time, the quote is universally applicable, which is why it endures. In terms of TV (or ‘streaming video’ as it has become), recent announcements from Netflix, Disney+ and HBO Max about their plans for ad-supported tiers to appeal to a broader audience feel very much like the last syllable of a historical rhyme.


Something about Netflix, the pioneer of endless original and commercial-free streaming entertainment, considering an ad-supported tier feels significant. This news is not surprising to those who follow the streaming video space. It's been a constant discussion point over the past few years with the rise of viable large-scale streaming competitors like Disney+, Paramount+ and HBO Max entering the fray just as Netflix has begun to approach market saturation in the U.S. What is a little surprising is that Netflix made the announcement at the same time they reported their first loss of customers in ten years; with more losses projected for next quarter. For such a forward-looking company, it seems odd that they announced it as a reaction to poor subscriber growth, rather than having seen this opportunity (or necessity) long before. Looking over the history of TV, it's easy to recognize that ad-supported models are where the audiences are, and where any large-scale service needs to be.


Early video distribution to homes came via licensed broadcasters that transmitted video signals over the air; funding programming entirely through advertisements. Free TV to the masses, funded by ads. Over time, the cable cord entered the home, providing the option to subscribe to even more channels that were still ad-supported. Premium channels like Showtime, Starz, and HBO emerged and offered an ad-free way to watch movies and premium TV shows for a fee, but they never accounted for a large share of viewing. In fact, the 2016 FCC report on TV viewing indicates that only 4% of primetime viewing in the 2012-2013 TV season (arguably around the peak of cable TV) was premium cable. Broadcasters (NBC, CBS, etc.) accounted for 31% and ad-supported cable was 52%. In fact, most of the large cable media companies made about half of their revenue from affiliate fees (what you paid for cable) and a half from advertising.


Given this history, it's not surprising that the leaders of the media companies of today are reaching the same conclusion that their predecessors did: the vast majority of the audience will migrate to the price/experience trade-off of ad viewing for most of the content they watch.


History does feel like we’re in the midst of a rhyme--similar, but not the same. What was linear is increasingly becoming “FAST”. What was premium cable is now SVOD tiers. Subscription bills are rising and customers are beginning to again realize they are paying for a lot of content (formerly known as “channels”) that they don’t watch.

But we are not destined for a repeat. This is good for consumers, and for streaming services. On-demand viewing, which puts control in the hand of the viewer, is a much more substantial part of video viewing than it was twenty years ago. Ad targeting capabilities are significantly better than historical cable, which drives higher CPMs and has leading streaming companies claiming they make more money on their ad-supported tier than their non-ad-supported tier. At the same time, ad loads which were as high as 18 minutes an hour have come down significantly for streaming services.


If history were to rhyme in this case, it seems like ad-supported will be even more important to programmers than it was in the past and less intrusive to viewers. More competition for eyeballs, and more power to target audiences offers more flexibility to find the right business model to attract and retain viewers.


As the flood of legacy cable TV advertising dollars migrates to streaming video, AVODs are learning that every ad spot counts. While streaming video ad infrastructure provides greater capabilities, the vast interdependencies between different market participants leads to multiple points of failure that cause missed ad opportunities and lower CPMs. Penthera has developed a unique solution to help AVODs using server-side ad insertion take maximum advantage of every spot and drive higher CPMs. It's called 2nd Look. Check it out at: https://www.penthera.com/2nd-look.



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