In the early days of the so-called streaming wars, subscriber growth was the name of the game. Now? Not so much.
Programmers still need new subscribers, but account growth alone isn’t enough to achieve profitability. Which may explain why streaming services are struggling to grow accounts and advertising revenue at the same time.
Or at least that’s what their latest earnings reports suggest.
For example, Warner Bros. Discovery (WBD) lost subscribers, and Paramount’s account growth plateaued. But both companies reported double-digit growth in streaming ad revenue. Disney also lost subscribers, and is laser-focused on streaming ad growth.
Netflix and Roku, on the other hand, gained new subs, but their ad revenue stagnated.
What gives?
Increasingly, streaming profitability is defined by average revenue per user (ARPU), which is largely fueled by advertising.
Meaning that programmers with rising ARPU, like WBD, Paramount and Disney, can report ad revenue growth while losing subscribers.
Spending trend
Consider the adage “You have to spend money to make money.”
Warner Bros. Discovery and Paramount made massive investments in their streaming offerings this year.
WBD launched a new streaming app, Max, which combines content from HBO Max and Discovery+. Paramount also recently rebranded its ad-free tier, renaming the service “Paramount with Showtime” to reflect the addition of Showtime IP.
Both companies sacrificed short-term subscriber growth to make those new offerings happen.
WBD lost 2 million subs as a result of HBO Max (RIP) subscribers jumping ship and Discovery+ users canceling their memberships in favor of Max. And Paramount added fewer new subs (only 700,000 compared to the 5 million accounts it added last year) because it had fewer new titles after delaying show and movie releases to align with the launch of Paramount with Showtime.
Which is not to say that WBD and Paramount aren’t prioritizing subscriber growth. Both are optimistic that new subs will start arriving now that their revamped streaming offerings are on the market.
But the first step each had to take was to build more profitable models for generating ad revenue.
WBD’s and Paramount’s streaming ad revenue growth in the previous quarter (25% and 21% respectively) suggests these moves were likely worth the risk of reporting lower subscriber numbers to shareholders.
As for Disney, it’s cutting down on content costs while focusing on expanding access to the ad-supported tier of Disney+.
WBD’s and Disney’s ARPU both rose 2%, and, although it didn’t share an exact number, Paramount said ARPU is rising and is expected to spike 20% in 2024.
Subbing in
And then there’s Roku and Netflix.
Roku and Netflix – although the latter has an ad-supported tier that’s still a work in progress – each gained more subs than WBD, Paramount and Disney combined last quarter.
Roku added 1.9 million accounts in Q2, while Netflix, thanks to an extra boost from enforcing anti-password sharing this year, added 5.9 million.
And although both are working on new formats to attract ad budgets, they also appear to be betting on their content slate to spur subscriber growth.
While WBD and Paramount were busy redesigning their streaming platforms, Netflix and Roku focused more on new content. Both licensed HBO shows from WBD this year, and Roku also added free ad-supported TV channels from programmers such as Common Sense Networks, which runs kids’ content.
New titles attract new subs. But the bad news is that both Netflix and Roku reported slower advertising growth and, therefore, lower ARPU.
To be fair, Roku is in a unique position. Until recently, it’s been overly reliant on ad spend from the media and entertainment vertical, so the concurrent writers’ and actors’ strikes are proving to be a one-two punch. To its credit, Roku just rolled out new ad formats to bolster spend in other verticals, such as auto, although it’s a little early to see a positive contribution to ad revenue.
Netflix, however, didn’t share updates on its advertising plans beyond what it already shared during its upfront presentation in May. The subscriber base for its ad-supported tier remains small at just 3% of the total user base.
If you’re wondering, Netflix’s ARPU was down 1% while Roku’s dropped 7% compared to last year.
The bottom line is this: The road to streaming profitability is paved with advertising growth.
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