The Advertising Invasion of Streaming Services

Breadth Before Depth strikes again

A common business strategy is what I call Breadth Before Depth. The idea is that since it is easier to sell more to existing customers than add new customers, a path to market domination is to first attract as many new customers as possible to establish market share. Once dominant, the goal shifts to sell more things to the existing (now large) customer base, driving up profits and recouping the cost of the initial land grab.

We’ve seen this many times during the evolution of the internet: Amazon’s expansion from books to, well, everything; Google’s expansion from search to YouTube, Gmail, Google Workspace, Android and cloud computing; and Salesforce’s expansion from sales automation to every corner of CRM. The list goes on.

And we’re seeing it play out in real time in the streaming space.

For a decade, during the period of Peak TV, the game was to grow at any cost. Billions and billions were spent on content and marketing to build Netflix and the other streaming services. But a year ago Netflix’s subscriptions numbers declined for the first time.  (HBO)Max faces financial pressure to pay for the Warner Media merger with Discovery. And recently, Disney+ announced a decline in subscribers. The market is saturated. The era of growth is over. Thanks to subscription fatigue, new subscriptions will primarily come from stealing customers from the others.

But what’s interesting is that while the total number of subscribers may be reaching saturation, total viewership has not. In June, streaming services were for the first time the most popular platforms for TV consumption, eclipsing Cable TV for the first time ever. 38% of TV viewing is streamed, 30% remains with cable, and the remaining is on broadcast. This shift is both rapid and ongoing: just two years ago, only 15% of TV viewership was streamed.

As viewership continues to migrate to streamlining, surely incremental subscriptions will be gained. More folks will finally cut the cable cord and spend some of those saved dollars by purchasing incremental subscription services. But that subscriber growth is likely to be incremental, not transformative.

Which brings us to Depth.

While total subscriber growth may be slowing, one thing is certainly sure to grow: total viewership hours. By fully cannibalizing the legacy distribution channels, industry-wide viewership can grow about 3x. Subscriptions do not capture that viewership upside: if I 3x my viewership of Netflix, I still have exactly one subscription with one fixed monthly fee.

But there is a way to capture the viewership upside–advertising. Offering advertising on streaming platforms is a classic Depth strategy. The more people watch, the more ad inventory that can be sold, and the more money Netflix and other streaming companies make. Offering advertising on streaming platforms is therefore the best way to capture value from the next wave of streaming growth.

And so we have Netflix and Hulu integrating ads into their shows, just like conventional TV. Disney+ has an ad model with increasingly discounted prices, and the others can’t be that far behind. Monetizing Depth means the ad-supported tier has very attractive, low prices for viewers but more revenue for the streaming platform, while the ad-free tier price continues to rise. Presumably the goal is to push as many people as possible to be monetized with ads.

The net result is a streamlining landscape that looks a lot like cable. Consumers pay a monthly fee that’s equivalent to a few dollars per service for access (although in the case of cable it was bundled as one big bill), and actual viewership is monetized by forcing us to sit through ads. Ad blockers have never looked better!