Subscription fatigue is a major topic of focus across the online video space these days. So is the rise of FAST Channels and AVoD.
The global video streaming industry continues expanding rapidly as new services keep appearing and traditional ones consolidate. Yet, the traditional subscription-based model seems to be giving way to alternative monetization models like advertising-based video-on-demand (AVoD) and free ad-supported streaming TV (FAST) channels.
Why are these ad-based models growing in popularity? Are they going to replace subscriptions altogether as the most viable business model, or will the future be about hybrid models combining subscriptions and ads?
The limits of the subscription model
As much as doomsayers present recent decreases in subscriber numbers from the likes of Netflix as a sign that the streaming party is over, the reality is a bit more complex than that. In fact, the party is not over but rather taking another whole dimension — it’s becoming a larger, different kind of party.
The subscription model is a great starting point for services that still lack a large enough user base to sell ad slots. That is the reason why a lot of new services launching today still opt for that model. However, the model has a severe limitation: it is extremely vulnerable to high market penetration and saturation levels. And Netflix is the perfect example of that.
With so many video content options available, the market is starting to suffer the effects of increased competition. Our own data shows that each streaming provider experienced an average 9% decrease globally in average effective playtime per user in 2021.
This data shows that the consumers’ time is limited, and there is only so much that one service can keep growing. This is especially detrimental to services that rely solely on subscription revenues — eventually, they reach critical mass, and revenue from subscriptions stalls or begins to drop.
But it is not only the consumers’ time that is a limited resource — so is their money. Faced with so many services from which to choose, consumers eventually settle on only a handful of subscription services and ignore the rest. Only in the U.S., the average household now pays for 3.7 different streaming services — a high enough number that, coupled with the current global climate of economic uncertainty, suggests subscription stacking is nearing its peak.
Advertising-based models, on the other hand, offer a workaround to these problems. They reduce the entry price or even eliminate it, and they are booming.
The rise of AVOD and FAST Channels
Back in the day, the growing popularity of subscription-based services like Netflix made media and advertising gurus ominously proclaim the end of the era of ads on TV. Fast-forward a few years, and ads seem to be about to again become central to the industry.
When Hulu and Netflix were competing head-to-head to take a bigger slice of the streaming market, Hulu’s business model could seem almost anachronic compared to Netflix’s ad-free experience. Who wanted ads anyway? Ten years later, Netflix is considering adopting its rival’s way of doing things.
Why? Advertising-based models offer streaming providers a way to maintain growth amid the current market saturation and their own high market penetration.
It is no surprise then, that global AVoD revenues are expected to grow at an increased pace in the coming years, reaching $70 billion in 2027 up from $33 billion in 2021. And that’s on top of the fact that AVoD average monthly revenue per user (ARPU) numbers are by definition higher than those of subscription-based (SVoD) services — according to recent reports, Netflix’s ARPU in the U.S. and Canada is $14.91, while Roku, which has far fewer users but features ads advertising, has an ARPU nearly three times as high.
And this model is not alone. Free, ad-supported streaming (FAST) channels and platforms are quickly gaining traction. Only in the U.S., these channels are being used by 60% of consumers, with adoption having grown by 10% yearly since 2020.
Will these ad-based models become the new norm?
While at NPAW we like to avoid any crystal-ball considerations about the future of our industry, there is a strong case to be made for hybrid models to be the best path forward. A hybrid model combining lower subscription fees with ads has the potential to satisfy both streaming consumers and providers, reducing the barriers to entry while allowing revenues to keep growing.