Ad-Supported Streaming Services to Gain Momentum in 2020

The streaming war is heating up in the overcrowded OTT space as both subscription video on demand (SVOD) and advertising video on demand (AVOD) business models gain momentum.

While subscription streaming services like Netflix NFLX, Amazon’s AMZN Prime Video, Disney’s DIS Disney+ and Apple’s AAPL Apple TV+ offer ad-free services, Comcast’s CMCSA Peacock, Quibi and ViacomCBS’ CBS All Access will have ad-supported options, as does Hulu.

Both the models are benefiting from strong consumer spending. Notably, American consumer spending on subscription-video services is expected to increase 29% to $24.1 billion in 2020, per Consumer Technology Association’s sales and forecast report.

On the other hand, advertising on OTT is witnessing huge demand from the advertiser community. Per a IHS Markit report, new AVOD rollouts and improved ad-tech are expected to drive U.S. online video advertising revenues to $27 billion in 2023, at a CAGR of 11% between 2018 and 2023.

Moreover, ad-supported subscription-based offerings have also started gaining traction.

Advertisers Favoring OTT Channel

Advertisers are rapidly teaming up with streaming providers that are offering ad-based subscription plans. This is because OTT providers are gathering (due to the nature of the business) a massive amount of user data that advertisers can use to deliver targeted or addressable ads based on viewing habits and location.

Although the effectiveness of OTT platforms is yet to be proven (the most popular one, Netflix, is ad-free), the proliferation of these platforms provides advertisers an alternative channel apart from Google and Facebook in the digital ad-market where spending is projected to hit $151.29 billion in 2020, per eMarketer Report.

Moreover, subscribers are enthusiastic about embracing ad-supported subscription services as these are less costly than a pure-bred subscription service like Netflix.

The Trade Desk’s recent survey of over 2600 U.S. consumers shows that 53% of U.S. consumers are open to watching ads in every other episode of a show if it lowers their streaming bill. Moreover, 68% are willing to watch ads relevant to their interests in order to watch fewer ads overall.

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Ad-Based Subscription Services to Watch

Disney, which carries a Zacks Rank #3 (Hold), owns Hulu, the foremost name in this category. Hulu charges $11.99 for an ad-free version and $5.99 for one with ads. Notably, out of Hulu’s 82 million viewers, 80% or 58 million are on the ad-supported plan, per a Variety report.

Comcast’s upcoming Peacock will be launched as a free service for its 28 million customers and will be available to others for ad-based monthly fees of $4.99 and ad-free $9.99. This Zacks Rank #3 company attempts to secure its market with subscribers unwilling to pay for another streaming service including those with ad-free preferences.

Peacock will include 10 advertising formats, including ‘shoppable’ ads, which let viewers purchase products but limit the duration to 5 minutes or less per hour

Moreover, launching Apr 6, 2020, Quibi will cost $5 per month with ads/$8 without ads. Quibi’s main focus is short-form content for mobile devices. It already has big names like Steven Spielberg on board.

Further, AT&T T carrying a Zacks Rank #3 owns WarnerMedia, which will launch its streaming service, HBO Max at $14.99 a month for an ad-free version in May and unveil a cheaper ad-supported tier in 2021.

Meanwhile, there are ad-supported services like Tubi, Crackle and Plex as well as Roku Channel, all offering a limited set of shows and movies.

Ad-Based Subscription: A Potent Threat for Netflix

Netflix, which carries a Zacks Rank #3, has dominated the streaming market in the past decade. Backed by a solid content portfolio, which included an attractive slate of original productions as well as regional shows, the company’s shares returned a humongous 4560.8% during the same time frame.

Per a Forbes report, currently 53% and 29% of U.S. households subscribed to Netflix and Hulu, respectively. Moreover, Amazon, which carries a Zacks Rank #3, accounted for 43% of total U.S. household subscribers on the back of Prime video.

However, entry of new low cost and ad-based subscription providers is likely to threaten Netflix’s dominance in the streaming industry in 2020. Per The Trade Desk survey, 59% of Americans are unwilling to pay more than $20 per month for their streaming TV needs while 75% will not exceed $30.

Notably, Netflix’s standard plan of $12.99 is far expensive than the ones offered by its new competitors. Per a Reuters report, the streaming giant is expected to lose 4 million U.S. subscribers in 2020, amid competition from Apple TV+ at $4.99 per month and Disney+ at $7.99 for basic service.

Currently, Apple carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here

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