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Ad-Supported Services Are Winning Amid the Streaming Boom

By Adam Levy - Updated Apr 13, 2020 at 4:55PM

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Incremental adoption of free video services is more than twice as high as paid services.

The amount of time consumers are spending video streaming is booming as people stay home to help curb the spread of coronavirus. Now that many have gotten through their Netflix (NFLX 6.16%) queue, they're looking for something new.

Twenty percent of consumers said they signed up for a new paid streaming service due to coronavirus, according to a survey conducted by Integral Ad Science. That bodes well for Netflix competitors like Amazon (AMZN 3.53%) Prime Video, which have seen an increase in subscribers. 

But free ad-supported streaming services have seen an even bigger boost. Forty-four percent of consumers have tried out a free service because of the coronavirus pandemic. That's great news for free streaming services like The Roku (ROKU 3.82%) Channel or ViacomCBS(NASDAQ: VIAC) Pluto TV.

A silhouette of a man standing in front of a panel of monitors.

Image source: Getty Images.

An increased preference for free

Just last month, IAS conducted a survey and found 55% of consumers "plan to watch any free video streaming services in the next 12 months." And a few weeks later, it found 60% of consumers have already added a free streaming service to their lineup since the start of the year. What's more, 47% of respondents plan to add another free streaming service within the next 12 months.

The average household already subscribes to two or three premium services. That seems to be where most consumers max out. While there's room for some households to add new subscription services, that population is getting smaller. IAS found 85% of households subscribe to at least one streaming service, up from 83% in its initial survey.

The one drawback of free services, however, is the advertisements. Some consumers are finding their tolerance for ads isn't as high as they thought, as they increasingly rely on free streaming services to round out their video entertainment. 

IAS saw a 3-percentage-point drop in respondents that said they're willing to watch ads in exchange for free content. That may indicate consumers are quickly fatigued by ad-supported services, leading them to prefer premium services.

Ad quality is also important. The majority of respondents said high-quality ads are very important to them. IAS notes consumers have relaxed their standards a bit amid the coronavirus pandemic.

Who's winning?

There are a few big winners in the ad-supported streaming ecosystem. 

Roku and Amazon are winning by owning the platform. Eighty-two percent of consumers use a connected-TV device like a Roku or Fire TV to watch streaming video, and 63% say it's their preferred way to watch. Both of those numbers are up from IAS' prior survey.

Roku and Amazon typically take 30% of ad inventory from ad-supported streaming services in exchange for distribution on their platforms. That means they benefit from the secular growth in demand for free streaming services, even if their own investments in free streaming content aren't seeing significant traction.

That said, The Roku Channel is indeed seeing strong adoption, with users spending more and more time on the service, in which Roku controls 100% of the ad inventory. The company launched the free service in the UK earlier this month as demand for free streaming increases. The Roku Channel was already available in the U.S. and Canada.

ViacomCBS' Pluto TV has seen a big uptick in engagement as well. Pluto CEO Tom Ryan says streaming hours increased by double-digit percentage points week over week in late March. And it's also growing internationally just as demand is spiking. Earlier this month, the company expanded its service to 17 countries in Latin America.

Not a Netflix replacement

It's important to note free video-streaming services aren't seen as a replacement for premium services like Netflix. In fact, Netflix has proven extremely resilient amid the coronavirus pandemic.

Forty-eight percent of respondents said Netflix is their preferred streaming service, which is an increase from just a few weeks earlier. So, people aren't exactly getting tired of Netflix. They're merely looking for something to supplement the streaming leader as they wait for the next season of their favorite series.

In fact, the growing acceptance and popularity of free streaming services may ultimately benefit paid services like Netflix. Free services make cord-cutting more viable as a less expensive alternative to paying for cable. And Netflix has shown it'll play a key role in streaming regardless of the competition -- paid or free.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon, Netflix, and Roku and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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