Are Ad-Supported Tiers the Future for Streaming Stocks?

Ad-supported tiers are a growing trend in the streaming industry, with free, ad-supported streaming TV (FAST) services particularly rising in popularity. As the streaming wars continue to heat up, many platforms could benefit from a FAST tier. Here’s why. 

The rise of ads

Not very long ago, consumers viewed ads as more of a hindrance in video streaming than a welcome option. Consumers rarely saw quality programming alongside ads, with Netflix (NASDAQ: NFLX) co-CEO Reed Hastings rejecting the idea of “exploiting users with advertising” in the company’s fourth-quarter 2019 earnings call.

However, times have changed. Demand for ad-supported tiers has risen, and Netflix and Walt Disney (NYSE: DIS) announced in early 2022 that lower-priced subscriptions with ads are being added to their flagship streaming platforms. While these memberships will likely require a payment, more streaming giants should consider a free option. Comcast (NASDAQ: CMCSA) published a report on July 21 illustrating the stark rise in FAST services with consumer use more than doubling since 2021 — making it the fastest-growing streaming tier. Additionally, the company says 60% of households now use FAST platforms.

Comcast launched its streaming service, Peacock, in April 2020 with three tiers: a FAST option with a limited library, a paid ad-supported tier with full access, and a premium ad-free tier. The company suffered a disappointing second quarter of 2022, reporting no new paid subscribers as it retained its 13 million from the previous quarter. However, its free tier seems to be paying off. Peacock has 28 million monthly active users, meaning 53.5% of its audience is choosing the FAST tier. 

As the streaming market continues to crowd with more and more competition, free ad-supported options could help platforms stay competitive by attracting viewers without sacrificing profits. Peacock’s model has seemed to safeguard the service in a quarter with disappointing paid subscriber growth, and it could do the same for other streamers. 

A farther reach 

Introducing a FAST subscription is an effective way for streaming companies to expand their reach in the market. As the cost of living continues to rise globally and the world recovers from an economically debilitating pandemic, free ad-supported entertainment allows companies to keep margins up by providing a service for consumers unable to commit to a monthly fee.

In the U.K., where inflation is at 9.4%, 51% of consumers have said they are unwilling to pay more to avoid ads. Inflation has soared in the U.S. as well, currently standing at just over 9%. As video streaming subscriptions fall in the priority lineup of many monthly budgets, FAST tiers can keep streaming services in consumers’ homes.

Because free ad-supported services provide a wide net of possible subscribers, companies can more easily make a significant impact on pop culture — driving membership growth. Netflix has experienced success in creating a culturally significant series with Stranger Things. The company reported a loss of 200,000 subscribers in Q1 2022, projecting a further decline of 2 million in Q2. However,  Stranger Things Season 4 debuted in Q2, becoming the most watched English-language show on Netflix and receiving almost double the Twitter engagement of Disney+’s Obi-Wan Kenobi, Disney’s most successful series of the quarter. Stranger Things’ success and cultural impact directly led Netflix to lose a more modest 970,000 subscribers in Q2 2022, retaining more than a million than expected.

The company did so without ads and a smaller reach than is possible through a FAST tier. Consequently, a free, ad-supported option — coupled with engaging content — has the power to significantly drive subscriptions with its wide reach of varying demographics.

What to look out for

Netflix and Disney have plans to launch ad-supported options in early 2023. If either service offers a FAST tier, the company would be in a better position to increase subscriber growth and, therefore, revenue as their services are more accessible, and ad revenue replaces the subscription fee.

Consequently, as free ad-supported services grow in popularity, investors can rest easy when a company launches a FAST service as it can offer low risk with a high probability of increased growth. 

Dani Cook has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix, Twitter, and Walt Disney. The Motley Fool recommends Comcast and recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.

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