Ad-supported streaming options are on the rise as consumers demand cheaper entertainment options. Recent data has crowned Warner Bros. Discovery's (WBD -1.07%) HBO Max as having the best ad-supported offerings.
Here's why Disney (DIS -1.01%) and Netflix (NFLX 1.74%) would be wise to follow Warner's approach to advertising.
The rise of ad-supported streaming
As the cost of living rises globally, cuts in discretionary spending are driving up demand for ad-supported streaming services. In fact, the number of viewers using free, ad-supported options has more than doubled in the last year, making it the fastest-growing streaming tier, according to a Comcast (CMCSA -5.82%) report published July 21. The rise in demand prompted streaming giants Disney and Netflix to announce in March that ad-supported tiers are in the works for their flagship platforms.
Several streaming companies have already had significant success with ad-supported options. Comcast's Peacock launched in April 2020 with three tiers: A free, ad-supported 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 ad-supported options seem to stop it from losing members.
Peacock has 28 million monthly active users, and so 53.5% of its audience is choosing the free, ad-supported tier. The company also reported in January that a "vast majority" of its subscribers opt for its ad-supported options, adding that its research has shown that 80% of consumers prefer ad offerings over a higher-cost, ad-free service.
Additionally, Disney has enjoyed boosts in revenue thanks to its ad tier on Hulu, with 62% of its new members opting for the ad-supported membership as of March 2021. Between 2019 and 2021, Hulu's advertising revenue jumped by 48.3%, from $1.82 billion to $2.7 billion. However, while Disney has profited considerably from streaming ad revenue on Hulu, a recent study suggests its customers are not pleased with how the platform presents ads, and the company should take a different approach when it comes to Disney+.
Warner Bros. Discovery leads the way
According to research from Hub Entertainment, 67% of consumers are annoyed by the commercials on Hulu, with 41% "kind of annoyed" and 26% "very annoyed." Out of the five platforms that were evaluated, Hulu was the worst rated for ads, while HBO Max had the highest consumer satisfaction with ads. The figures for HBO Max showed that 27% of participants were "kind of annoyed" with advertisements, while 11% were "very annoyed."
HBO Max is still a relatively new platform, launching 13 years after Hulu, but the service has quickly perfected ad-supported streaming with just the right number of ads. The service debuted its ad-supported tier in June 2021, with 1% of U.S. subscribers signing up for the cheaper membership at launch. However, that figure has grown to 12% of subscribers, or 1.9 million, now choosing the ad-supported option.
Furthermore, the proportion of HBO Max subscribers choosing ads is steadily increasing, with 25% to 31% of new members opting for the ad-supported tier every month in 2022. A report by Whip Media on ad-supported streaming satisfaction stated:
HBO Max was the only service that users reported feeling the amount of commercials was less than expected. Their ad loads are very low at only 4 minutes per hour, and HBO originals on the ad-supported tier do not carry any commercials...Hulu's ad loads are known to be heavier than most in the industry, and our results show that viewers have noticed.
What's next
Viewers are making ad-supported tiers an absolute must for companies striving to succeed in the competitive industry. Disney+ and Netflix are smart to enter the lucrative market, but both platforms should take notes from HBO Max's advertising strategy.
Although Warner Bros. Discovery is at the top of its game regarding ad-supported streaming tiers, this is not a recommendation for the stock. Rather, it's guidance on what investors should look out for when Disney and Netflix launch their respective ad-supported tiers.
For instance, these companies will want to pay close attention to the frequency of their ads. HBO Max has won over consumers by showing ads four minutes per hour, withholding commercials in HBO original programming. Disney owns all of its content on Disney+, so paring down the ads shown won't be a major issue for the company. However, Netflix is currently negotiating with studios over ad-revenue terms, which could mean it won't have as much wiggle room on the frequency of its ads.
Nevertheless, investors should keep these factors in mind when Disney+ launches its ad-supported tier on Dec. 8, and Netflix launches its tier in early 2023. How their ad strategies compare to HBO Max may suggest the success -- and therefore revenue --that the companies can expect from their advertising venture.
