AVOD revenues are forecast to triple in the U.S. between 2019 and 2025. Some analysts think subscription services that include ads – like Hulu – could miss out. However, the data shows Hulu should continue to do well.
AVOD services forecast for strong growth
Analyst firm Digital T.V. Research (DTV Research) forecast that global advertising-supported VOD (AVOD) revenue will more than double to $53 billion by 2025. The U.S. will lead the charge throughout the period. DTV Research forecasts expenditures on AVOD services in the U.S. will grow from $8 billion in 2019 to $24.2 billion in 2025. The next biggest market, China, will reach only $9.2 billion in 2025. AVOD expenditure in the U.K. will be $3.2 billion, in Japan $2.8 billion, and India $1.7 billion in 2025.
According to Simon Murray, Principal analyst at DTV, impacts from COVID-19 will slow the growth of AVOD in 2020. In the U.S., nScreenMedia discussions with AVOD providers confirmed that ad rates have fallen as advertisers pulled back spending due to the pandemic. However, increased viewership has more than compensated. DTV Research expects a return to strong growth in 2021 and beyond.
Could hybrid services like Hulu be left behind?
While it appears to be full speed ahead for free advertising-supported services, some are suggesting services blending a subscription fee with ads could be limited in their growth. Barclay’s analyst Kannan Venkateshwar says Hulu’s growth was less than peer ad-free SVOD services and free ad-supported services during the lockdown. He suggests that ad-free SVOD has set consumer expectations higher for all subscription services, making a subscription service with ads less appealing:
“While it is a bit premature to extrapolate present trends into perpetuity given that ad-supported models are still relatively new, we do believe newer services will need to think more carefully about their brand identities and consumer experience when choosing a monetization model. Just creating a hybrid model to provide a lower price point is unlikely to drive greater subscriber scale in itself.”
On the face of it, the data seems to support Mr. Venkateshwar’s statement. ComScore says that Hulu saw a 20% increase in streaming hours through the week of April 13th but has since seen usage return to pre-emergency levels. On the other hand, ad-free Netflix, Amazon Video, and free ad-supported YouTube have seen their streaming hours grow 20% or more and stay at that level.
Not a simple connection between hybrid models and viewing
However, as I pointed out yesterday, there could be another reason for Hulu’s poor performance. In particular, the dwindling supply of fresh T.V. content explains the comScore data for Hulu far better than antipathy for ad viewing. Hulu’s hybrid model is popular with customers. According to Hulu’s SVP of Ad Sales Peter Naylor, 70% of Hulu’s viewers watch with ads.
Other data shows ads have not been a barrier to people subscribing, and that a lower subscription fee stimulates growth. Since the company cut the price of its entry-level ad-supported tier to $5.99 a month in January, subscriber growth has surged ahead. It added 1.7 million subscribers in the first three months of 2020, versus 1.4 million in the last nine months of 2019.
Should NBCU be concerned for Peacock?
What should NBCU take away from the Hulu experience? Its Peacock service launches nationally in July at the cost of $4.99 a month with ads and $9.99 without them. Hulu shows that a low price with a light ad load can work very well in the market. However, a steady flow of new content is necessary to sustain growth. And that could be difficult to pull off in 2020, with television production at a standstill.