Wall Street drives streaming’s pivot to ads

Netflix’s market swan dive and CNN+’s sudden death underscore a fundamental shift in the streaming economy toward ad-supported services.

Why it matters: For years Wall Street has rewarded companies like Netflix and rival Disney for adding paid users, then punished them when they hit a ceiling. Every streaming service is now looking toward ads as a way off that rollercoaster.

Driving the news: CNN+ got the ax because executives at Warner Bros. Discovery, its new parent company, didn’t think the economics behind its subscription plan made sense, sources told Axios.

• Discovery executives thought there weren’t enough people willing to pay for subscription video news services to warrant the $1 billion investment CNN planned for CNN+ over four years.
• Quibi — a subscription streaming service launched by former HP CEO Meg Whitman and Hollywood veteran Jeffrey Katzenberg — was forced to shut down after failing to accrue enough subscribers to justify its massive budget.
• While CNN+ executives predicted the service would break even after four years, Discovery executives were skeptical. Early data showed that CNN+ signed up roughly 150,000 subscribers in its first two weeks, but that was after spending roughly $25 million per month on marketing and $300 million total.
• Discovery executives instead see a lot of potential in pushing more content to CNN’s free app and selling premium video ads on those views.

Between the lines: Netflix’s historic market drop this week, shows that the market for those willing to pay for a subscription streaming service may be saturated.

• This shouldn’t be all that surprising, given that data from TV research firm Magid shows consumers haven’t increased their roughly $40 monthly streaming budgets since 2019.
• But Wall Street was caught off guard by Netflix’s numbers. Billionaire investor Bill Ackman lost more than $400 million after liquidating his Netflix stock Wednesday. He told CNBC, “I’m 100% ready to admit when I’m wrong.”

The big picture: The market for subscription streaming services seemed frothy during the pandemic, prompting a slew of traditional media companies to launch subscription services competitive to Netflix.

• But additional competition has made it harder for any streaming subscription service to continue growing without offering some sort of cheaper alternative, which is why nearly every subscription streamer — including Disney+, discovery+, HBO Max, Peacock, Hulu and more — now offers ad-supported tiers.
• Netflix on Tuesday finally conceded it’s weighing offering a cheaper, ad-supported subscription tier to expand its subscriber base.

Be smart: Ad-supported streaming is lucrative because it can increase the average revenue per user.

• Hulu, for example, makes much more money from users who subscribe to its cheaper ad-supported tier, which is what the vast majority of its subscribers choose.
• Netflix increased subscription prices earlier this year as a means of increasing revenue per user, but doing so may have also impacted subscriber growth.

What to watch: Subscription streaming services will still have a place in the future of television and entertainment, but those able to command a fee will need to have either broad appeal and scale or niche appeal that’s so specialized, a small group of enthusiasts will be willing to shell out lots of cash for it.

What to watch: Big Tech giants like Amazon and YouTube are doubling down on free, ad-supported services as a means to lure subscribers who are overwhelmed by rising subscription bills.

View the original article on Axios.