Ad tiers and the 'broadcastification' of the global streamers, with Guy Bisson

 This is Puzzle Problem Mess, conversations about the media economy and how to think clearly when things get messy.

In this episode, I'm joined by Guy Bisson. Guy is one of the UK and Europe's leading entertainment market analysts and has specialized in the global television business for more than 30 years.

He is co-founder of Ampere Analysis, a London-based global analyst house focused on the entertainment, sport and game sectors. In this episode, Guy and I focus on ad tiers on SVOD services. On the surface, this might sound like a narrow topic, but with a large share of gross subscriber editions now coming through ad supported plans for many of the major streamers, the move into advertising is starting to reshape the subscription streaming business in some fundamental ways.

What is Puzzle, Problem, Mess?

Conversations about the media economy, and how to think clearly when things get messy.

Dan Fahy: 00:09

This is Puzzle, Problem, Mess, conversations about the media economy and how to think clearly when things get messy. In this episode, I'm joined by Guy Bisson. Guy is one of The UK and Europe's leading entertainment market analysts and has specialized in the global television business for more than thirty years. He is cofounder of Ampere Analysis, a London based global analyst house focused on the entertainment, sport, and game sectors. In this episode, Guy and I focus on ad tiers on SVOD services.

Dan Fahy: 00:49

On the surface, this might sound like a narrow topic, but with a large share of gross subscriber additions now coming through ad supported plans for many of the major streamers, the move into advertising is starting to reshape the subscription streaming business in some fundamental ways. Here's Guy. Good afternoon, Guy. And you're here in Sydney?

Guy Bisson: 01:15

Yes. I am for my annual, pilgrimage to this, fine city.

Dan Fahy: 01:20

And you're at the future of TV advertising conference tomorrow, keynoting. I'll be there. I'm looking forward to your presentation.

Guy Bisson: 01:27

That's right. I'll be talking about platform partnerships between broadcasters, streamers, what's going on in the market in terms of potential other partnerships, all of the M and A activity, a really long list of topics that we need to address.

Dan Fahy: 01:43

Sounds fantastic. And we're talking about ad tiers on SVOD services and The US and The UK context. There's quite a few layers to this topic. I know Ampere has a very unique position in terms of analytics around SVOD economics and also ads. Very interested in your perspectives on this.

Dan Fahy: 02:04

First up, I want to talk to you about ad tiers and subscriber acquisition effectiveness. And now that the ad tiers on the main services have been in market for a while, I wonder what your view is on the effectiveness of ad tiers today for unlocking new subscriber growth.

Guy Bisson: 02:24

Well actually, if you run the numbers, it's quite striking how successful for a platform like Netflix, for example, the launch of the ad tier was in terms of enlivening customer acquisition. Just prior to the launch of the ad tier, Netflix's customer base was going in the wrong direction. They'd had a shock, if you remember back then, lost a million customers in The US, elsewhere were struggling in some of their more developed markets to achieve growth. And if you actually plot what happened immediately after the launch of the ad tier, it's really quite striking, The almost instantaneous enlivenment to their customer growth again. And ever since they've continued that trajectory.

Guy Bisson: 03:15

For platforms like Netflix, it was very successful. Others I think come from a slightly different heritage. I think there are broadly three types of platforms. There's the Netflixes who came late to advertising, possibly slightly reluctantly, but they're probably glad they did now. There are platforms like Paramount, who I would say have a broadcast heritage, a long tradition through their parentage of ad sales on network TV and cable TV of course.

Guy Bisson: 03:48

And I put platforms like Hulu in that bucket as well. And then there are platforms like Amazon who come at it from a very different angle in respect that obviously they're about retail primarily and they just seized an opportunity to get advertising in front of everybody with the flip of a switch with their strategies. So it's interesting how the different strategies have panned out. But to directly answer the question, in terms of bringing customer growth back, very successful, because the market had entered a stage where saturation effects were starting to impact, growth was slowing down. That was particularly true in the wealthy markets, where income is higher, ability to spend is higher, but frankly it was getting to the stage where everyone who wanted and could afford streaming already had it, and something was needed to bring Grace back to the market.

Dan Fahy: 04:50

Interesting. And I know Ampere's own assessment of the rate of growth of the SVOD category shows that it's still growing, but it's growing at a slower rate than before. In that context, churn and particularly how you manage your resubscriber rate becomes much more important. What's the interplay between, say, managing a services re subscription rate and an ad tier? Do ad tiers play beneficially into re subscription rates or are they unaffected?

Guy Bisson: 05:24

Well, it's been a long term strategy in more traditional legacy pay TV that when you're trying to manage and control and reduce churn, and when times are hard economically for customers, obviously we've been through a cost of living crisis, Giving them an option to allow them to churn down to a lower cost option is a great retention tool. It allows you to maintain the relationship to keep them on platform, and potentially further down the line in the future they will come back. And it also allows them to keep engaged with the content, particularly in streaming where there is a large flow of new content coming on platform on a fairly regular basis. It's been a great retention tool. That said, it's not really about shifting the existing premium base to advertising.

Guy Bisson: 06:21

I think it's more been about bringing new customers onto the platform, And the churn down effect, while useful and beneficial and obviously is part of the strategy, is less what the whole advertising launch was about. It was really about bringing new customers, re enlivening that growth and to a secondary degree giving a churn down option for customer retention.

Dan Fahy: 06:49

You mentioned that it re enlivened Netflix's base and of course Netflix is at the top end of the service pecking order. The US and The UK for the mid tier, lower tier services, does the net ads benefit get progressively smaller or more diminished as you get down the pecking order and as you're more into the heavily stacked services?

Guy Bisson: 07:16

If you are further down the pecking order, then having an ability to come in at a lower price point is actually more encouraging for you to take maybe that second and third service. If everything was at a premium price point, I think you would find that decision a lot more difficult to stack multiple services onto your home entertainment stack. What sort of muddies the water a bit is what I was saying earlier, that some of those second and third tier, and I hesitate to call them that, but they are second or third to Netflix, as you say, which is the linchpin of the streaming bundle in most households. Those are actually the ones that come from that broadcast and cable heritage. So they already had that established advertising sales team, established relationships, platforms like Paramount plus which started of course as CBS All Access, began as an ad supported streamer.

Guy Bisson: 08:18

So that muddies the water a bit in terms of the impact of advertising on those platforms. The sign up rates for those platforms of ad customers is much higher as a proportion of new sign ups anyway, so it's sometimes hard to make that distinction. But to answer the question, think it's important to have that lower cost option to encourage stacking. Obviously, we've also now, especially in The US to a lesser degree in The UK, got completely free options, Tubi and Pluto, which themselves are also owned by the studios that own the major global streamers. You've kind of got the three levels: premium, ad supported and completely free ad supported, giving people that mix and match opportunity.

Dan Fahy: 09:12

Now onto the ARPU delivery on the ad tiers. From an SVOD operator's point of view, the basic unit level math has always been that the cheaper subs price will be more than offset by ad revenue per user. From what you're tracking in The US and The UK, is the ARPU benefit materialising or will it materialise over time?

Guy Bisson: 09:35

It's a really interesting and important question. And of course, it varies again by streamer. I did some analysis recently on Netflix on this very question looking at the value of their ad supported customers versus their premium. It's important to point out that they still make most of their revenue from subscription, so that is much, much more important to them as an overall part of the mix. But actually, at the moment, ad customers in The US are generating about half the monthly revenue of a premium customer.

Guy Bisson: 10:14

While it was incredibly successful at reinvigorating growth, if you take that to its natural conclusion and more and more customers are moving to or coming on as ad customers, and our forecasts actually suggest that in The US, more than 40% of the customer base for Netflix will be ad supported by 2,030. Obviously, if those customers remain at half the value, you've offset a lot of the benefit of the growth that you just got back from launching the ad. So the challenge then is to bring the value of those customers up, and there are two ways to do that. The first is obviously you can charge more, but then again that potentially offsets a lot of the grace you've just re enlivened. And the second is to carry more advertising.

Guy Bisson: 11:05

Now, our tracking shows that Netflix actually has the lowest ad volume of any of the major streamers in The US. It's averaging around two minutes, only an hour at the moment. A platform like Paramount plus is knocking around the ten minute mark, so much closer, although still well below network television. And the calculation shows that if Netflix does not increase prices at all, the rate of inflation, to bring those customers' value up to the same as a premium customer, they would need twelve minutes of advertising. Now, if they do a small price increase between now and 2,030 of say $2 a month on the ad tier, that brings down the volume of ads they have made.

Guy Bisson: 12:04

So weighing everything up, it looks like they need to get to about eight minutes of advertising per hour from the currently two, two and a half minutes that we're seeing, to actually bring the value of the ad customers slightly above the premium customers. And that would be with that $2 a month price increase as well. So it's certainly not unachievable. The fill rates that we're seeing suggest that they have inventory available at the moment for around six minutes or so. Obviously we'd expect that to increase over time anyway.

Guy Bisson: 12:41

So I think that's where we're going to see them land by 2030 to bring the values up to actually exceed that of the premium customers. And at that point, you've got still a great viewing experience because network TV has up to eighteen minutes of ads per hour, so it's still considerably better. Still a great price point because they haven't had to raise the price that much to bring the value up, and you've got customers that are at parity in terms of value. So again, advertising in a way at the moment is a bit of a Trojan horse for Netflix, because they're bringing on customers with this very attractive, very low ad volume. And over time that's obviously going to increase quite significantly.

Guy Bisson: 13:34

Other platforms that are already at the ten minute mark, yes, they don't have that sort of imbalance that we see per a platform like Netflix. So they are already at parity or above in some cases for the value of those customers.

Dan Fahy: 13:51

So it seems like Netflix and others have got some headroom in terms of their ad load and their fill rate, etc. And so if you play that forward, and I know at Ampey, you do track the ad market and ad spend very closely. How do you see this increased supply of premium TV inventory affecting the advertising pie? Does it increase it marginally? Does it just spread it more thinly across?

Guy Bisson: 14:19

Yeah, it's a really important question again because of course stepping to one side for a second, what we've seen with traditional television is a flattening of ad income and in many markets actually a decline, not drastic, but definitely the beginnings of a decline. And the spend, of course, where spend has been growing is on social media platforms. YouTube, TikTok, etc. Now, I don't know the answer because of course we are talking about something that is going to happen in the future. My personal view is that streamers potentially offer the best of both worlds.

Guy Bisson: 15:00

Because they have the high quality premium content and they have the ability to target advertising to perhaps a greater degree than linear television. So if you accept that theory, you would expect them to pull back some of that migration that we're seeing going, some of that spend that we're seeing going to social media. What's interesting, and we try also to track with our ad products and services the degree of targeting by age and gender, is that perhaps it's not as targeted as you might think. The data shows that there clearly is some targeting around gender, for example, for products that would be mainly of interest to male or female. But of course, when you watch a streaming service at home, you've probably given your demographic information to that platform, if you are the bill payer.

Guy Bisson: 16:02

But your partner, your son, your daughter, has not given their demographic information, and are just as likely to be the viewer in the household. So they don't have the degree of profiling information that perhaps a one to one social media account would have. So again, it's that middle ground. They have the quality premium programming. They have the significant large reach at scale, so great for brand building.

Guy Bisson: 16:37

And they have some ability to target. All of which is positive for certain types of advertisers. So it's a very long winded way of saying it's not something that's suddenly going to suck back tons of spend from social media. That's a very different environment, a very different type of targeting, obviously a very different type of viewing experience. More so, I would see it competing quite directly with broadcast TV and starting to take it, it's taking share to take it more from there than perhaps it would from social media.

Dan Fahy: 17:18

On to the effective ad tiers on the SVODs content propositions. I know AMP has done some really interesting thinking and analysis on how advertising on an SVOD service does start to reshape the content mix. What are you observing around how a move for SVODs is altering the content mix or the content proposition?

Guy Bisson: 17:44

So again, it varies by streamer. What we're seeing outside of Netflix is that the sequential drop of drama episodes has become more the norm, as opposed to dropping the whole season in one go. Netflix still does that mainly, they do a bit of staggered drop. Other platforms do it increasingly. That of course is about keeping the viewer coming back each week for advertising.

Guy Bisson: 18:13

The other thing that we've seen is a significant increase in unscripted content. So reality TV, game shows formats, light entertainment formats. Which again are great for regularity of viewing. Some of these shows are daily for example, others two or three times a week or weekly. But the point is that it keeps people coming back rather than bingeing of drama in one go which had become basically the standard way to watch streaming drama.

Guy Bisson: 18:51

So, and it started really actually in Covid during the lockdown, this love affair with unscripted content. That was for different reasons in many ways. It was difficult to make drama and globe trotting international drama during lockdown. So some of the unscripted formats began to rise. And we saw a move from a sort of three to one commissioning rate, scripted to unscripted, to a two to one, and today it is one to one.

Guy Bisson: 19:20

So the streamers commission one unscripted original now for every scripted. And that is one of the main effects of bringing advertising onto the platform. Another really important one of course is sports, live sport. And that again is about two things. Nothing is as simplistic as just one thing.

Guy Bisson: 19:44

It's about sign up because sport is fantastic for generating sign up immediately before a live event. And the other is for advertising. It's a premium advertising format. It brings on high value brands that hopefully stick around and stay as your partner and customer around other content. So it has fundamentally changed the content strategy in a multitude of ways.

Guy Bisson: 20:16

Another one, and again it's difficult to say it's just because of this, but it's partly because of advertising, is the way that streamers have gone back to licensing. Because bringing on drama that has worked well elsewhere has become a big trend. Even Netflix is doing it and using HBO and ABC drama etc. In a sort of second or third window, which again, good for advertising because it brings the volume of viewing that you can't really get just with your own originals.

Dan Fahy: 20:55

Yeah, and all of that sports, unscripted, procedurals, I think you've also done some analysis on sort of a bias back towards longer episode counts for seasons. It starts to look very broadcast like, doesn't it? I think you've written before on the sort of broadcastification of SVODs. And do you think that's inevitable? Is that is it all converging on a more uniform model?

Guy Bisson: 21:22

Yeah, definitely. Because if you think back just a few years, and we don't have to go back many, streaming had a very strong skew to a younger, slightly wealthier audience. And the programming mix reflected that. It was also obviously a period of intense customer acquisition. Again, the content that you use for acquisition versus retention is very different.

Guy Bisson: 21:48

As we've moved into effectively saturation, you by default have to become a generalist because your growth is coming from, for example, some of the older demographics who like a different type of content. You need to retain the younger customers that you've got. You need to mop up any missing customers among all of the demographics, including the older generations that you haven't got. And so you need to become a generalist, which is effectively what the national broadcasters are. The other driver for that is the fact that if you think about the wider market structure, we, for as long as I've been following this industry anyway, have always had a sort of vertical integration of production content distribution.

Guy Bisson: 22:39

If you go back to the 90s, the big content owners, the Hollywood studios, were really getting into vertical integration at that point and starting to buy up and or launch cable channels, network TV channels, physical cable distribution infrastructure, pay TV platforms that effectively allowed them to take the content they owned, control it right the way through to it reaching the TV screen in the household. Now that position of distribution is increasingly fulfilled by streaming. And so the streaming bit is fulfilling the channel bit of old. So when you think about production distribution, distribution is now streaming. That's what used to be the channels that used to be the generalist providers.

Guy Bisson: 23:35

So again, that's another driver for this broadcaster vocation of streaming. It's becoming the default way to watch television. And that's also what's driving some of the really interesting M and A activity that we're seeing in the market right now.

Dan Fahy: 23:53

Well, implicit in that answer is that there's a lot of change now and more change to come. We have a section on this podcast where we ask our guests for what advice they'd offer people who are starting their career in media or who are mid career in media in terms of how they'd manage their own career and development in a very tumultuous period. What's your advice, Guy?

Guy Bisson: 24:23

Well, I guess I have one key piece of advice that I think everyone needs to be thinking about, and I'm almost cautious to say it because it sounds too obvious. But there's a big thing that we haven't talked about, that is going to impact every single aspect of entertainment, from production to creativity to distribution to monetization, and that of course is AI. If we look back over time, and I've recently done an exercise where I've looked back over the thirty five years that I've been covering this industry, and tried to think of the multitude of things that have gone on and happened and we have talked about and we are going to be the next big thing. Some of them did change things, some of them didn't. What were the 10 things that really had an impact?

Guy Bisson: 25:21

If you go back over more than thirty years, there aren't actually that many that fundamentally shifted the way the business works. But AI is one of those. The other change that I compare it to is the advent of digital. Where we transition from film stock, analog means of distributing television which limited obviously the volume of channels, the way you could move channels around the globe and really opened up the whole world to a global content market for the first time. That was a massive change and it required a degree of re skilling at every phase.

Guy Bisson: 26:12

Obviously some jobs disappeared. There are no negative cutters anymore. For example, all of the other analog aspects of production disappeared, but it didn't mean that the industry was decimated. What it did mean was that re skilling was required. And I think anyone in the industry today or entering the industry really needs to be strongly aware of how AI will affect the segment in which they are focusing and operating and beginning to think about how one re skills for that fundamental change in the future.

Guy Bisson: 26:52

And I do think it's important to stress that I am not saying all of the jobs in media are going to disappear. Absolutely not saying that at all. What I am saying is the skill set is evolving and it's important to prepare for that re skilling.

Dan Fahy: 27:12

Fantastic Guy, thank you very much for your time on this topic and also good luck with the presentation tomorrow.

Guy Bisson: 27:20

Thank you.

Dan Fahy: 27:22

That was Guy Bisson. Thank you for listening. I'm Dan Fay. Original music is by Lee Rasavir and So Cow. And if you think any colleagues or friends might enjoy this episode, please send it on to them.