Desperate for streaming profits, media giants look to a soft ad market for help

After spending years amassing streaming subscribers at great cost, media companies now need to make some profits. And they’re increasingly leaning on advertising as the answer.

Look no further for proof of that than the most recent annual Upfronts, the events where media companies like Fox Corp., Warner Bros. Discovery, Disney and Comcast’s NBCUniversal, made their pitches to advertisers.

With the absence of stars and talent due to the ongoing Hollywood writers’ strike, NBCUniversal kicked off its event with an animated video of Ted, the foul-mouthed teddy bear created by Seth MacFarlane who has landed a series on the company’s Peacock streaming service, singing and dancing to a tune that included the refrain “We need ads.”

“We were all dreamers to think that the streamers were anything but fads,” the animated teddy bear sang to the audience. “Now, we’re all begging for ads.”

The ad push comes not only as subscriber growth slows and customers drop in and out of services — commonly known as churn in the media business — but as the advertising market has softened and been slow to recover.

During Disney’s earnings call earlier this month, CEO Bob Iger put new emphasis on ad-supported streaming. And Paramount Global and NBCUniversal have touted that they’ve had cheaper ad tiers since the get-go. Warner Bros. Discovery also has added such options for consumers.

“Despite the near-term macro headwinds of the overall marketplace today, the advertising potential of this combined platform is incredibly exciting,” Iger said after announcing Hulu content would join Disney+, a move that would be a positive for advertisers.

Even Netflix, which was against advertising for years, entered the game. The 800-pound gorilla in the streaming room for the first time this past week held a virtual presentation for advertisers, unveiling information about its ad-supported tier that gave a boost to its stock.

Still, it’s early in the game, and it’s unclear whether advertising will fill the gaps of unstable subscriber growth for streaming.

When Netflix said it lost subscribers earlier last year, it sent the streaming world into a spiral, weighing on stock prices and pushing executives to find other ways to bring in revenue. By the end of the year, Netflix had launched a cheaper, ad-supported tier. Rival Disney+ did as well.

Media companies are returning to the initial business models that long propped up their businesses — generating revenue off of content in multiple ways rather than relying on one route, a subscription business.

Netflix, while noting it was still “in early days,” said this week it had 5 million monthly active users for its cheaper, ad-supported option and 25% of its new subscribers were signing up for the tier in areas where it’s available.

But media companies are struggling with the question of whether ad-tier subscriptions make up for other losses.

“I don’t think we know that answer fully yet,” said Jonathan Miller, a former Hulu board member and current CEO of Integrated Media, which specializes in digital media investments. “But I think we’ll learn that a [subscription, ad-free] customer that doesn’t churn will be the most valuable. There’s math to be learned over time as the playing field settles.”

Disney, which is also the majority owner of Hulu, has the greatest number of ad-supported subscriptions, followed by Peacock, Paramount+, Warner Bros. Discovery — which has the soon-to-be-merged Max and Discovery+ — and Netflix, according to Antenna. Hulu and Peacock are the two streamers with a majority of subscribers on ad-supported tiers, the data provider said.

“I see FAST as a replacement for the old syndication business. There are multiple ways to monetize television,” said Bill Rouhana, CEO of Chicken Soup for the Soul Entertainment, which owns ad-supported streaming services including Crackle and Redbox, as well as FAST channels.

The free streaming services, which offer both a library of content on demand and a guide of curated channels, have seen explosive growth in recent years. Fox and Paramount acquired Tubi and Pluto, respectively, not long before the surge in viewership occurred. The deals became a badge of honor in the companies’ earnings calls.

For these larger media companies, they’ve also become a place for their own libraries. Pluto shows earlier episodes of the lucrative “Yellowstone” series, which has also seen multiple spinoffs boost Paramount+.

“It really was in the last year that we saw a seismic shift,” said Adam Lewinson, Tubi’s chief content officer. “With the overarching challenges in terms of the pay streaming model and then layer in subscription fatigue. This is where in tougher economic times people look more closely at their spending. On top of that, now nearly 1 in 3 streamers are reducing their spending on streaming.”

For Fox, which is focused on sports and news on traditional TV channels, Tubi is its answer to streaming. As CEO Lachlan Murdoch had earlier noted in an earnings call, Tubi was a focal point at Fox’s Upfront presentation last week. Executives cheered Tubi for making measurement firm Nielsen’s streaming gauge report for the first time ever recently.

Paramount has similarly emphasized Pluto’s growth. During the company’s Upfront dinners with advertisers, Pluto was a key part of the conversation, said David Lawenda, Paramount’s chief digital advertising officer.

Warner Bros. Discovery has said it plans to create its own FAST channels. In the meantime, it has pulled content from HBO Max and licensed it to Tubi and Roku.

“To also syndicate your content through FAST channels, that’s probably wisest. It could create strategic value in addition to just cash,” said Rouhana, of Chicken Soup for the Soul Entertainment. “In a world where churn is a fact, having the ability to show those lost subscribers content again and get money while doing it can only be good.”