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Hollywood Reporter’s Alex Weprin on the Future of Ads in Streaming

By July 6, 2022No Comments

Alex Weprin, Media Reporter at The Hollywood Reporter, joins Cross Screen Media CEO Michael Beach to share his thoughts on the state of streaming, ad implementation strategies across platforms, and the latest on regional sports networks. Watch our latest Screen Wars Thought Leader Interview here and read the full transcript below!

Michael Beach: Alex, welcome to Screen Wars.

Alex Weprin: Thanks for having me.

MB: I want you to give us a quick overview of how you got where you are today.

AW: I joined The Hollywood Reporter as our newsletter editor a couple of years ago. But I’ve been writing about the TV business and streaming for over a decade.

I started out at a trade publication called Broadcasting & Cable, where I covered the early days of YouTube and Netflix when they made the switch from DVDs to streaming. Along the way, I’ve also worked at Politico and MediaPost covering advertising.

I’ve followed the entertainment space and the streaming world closely for a long time. It’s amazing how much it changes, even as you see a lot of the same players leading the space.

The rest of the industry, every other streaming service, every other company that's investing in streaming, is looking at what's happening to Netflix and seeing how it plays out.

MB: Absolutely. We’re heading into earnings season, which is an exciting time of the year here. What’s your overall thesis on the streaming industry today? There have been a ton of news. We’re going to jump into Netflix’s ad offering more specifically later. What’s your overall thesis? And where do you see the biggest challenges?

AW: After last quarter, when Netflix reported their decline in subscribers, I wrote that they were facing a “stress test.” And I referenced some big banks, and how they’re forced to undergo a stress test to see how they would hold up under a recessionary scenario.

Netflix faces something similar. It caught them by surprise, by their own admission. And the rest of the industry, every other streaming service, every other company that’s investing in streaming, is looking at what’s happening to Netflix and seeing how it plays out. There’s an expectation that whatever happens to them will happen to everyone else once they catch up.

At the same time, they also look at Netflix, which is the market leader with over 200 million subscribers, and think, “What can we do differently to avoid that fate?” And I will say that, talking to various folks in streaming today, a couple of the most common themes here are, one, they’re right to be in advertising. People are embracing the role of advertising in streaming video.
And two, how can we handle password sharing better? Because Netflix, almost since they began streaming, has been pretty lax about password sharing. Now they finally said they’re cracking down.

Everyone else is saying, “Well, maybe if we crack down early on, we can avoid this fate,” where Netflix now says they have as many as 40% of users sharing passwords. That’s a huge number of people. That number, in the United States, could be the top for the potential number of subscribers. Everyone’s looking at those two things and saying, “How can we adjust our business models to react and avoid the same fate?”

MB: You and I are tremendously bullish on ad-supported video, and we see that the shift to streaming advertising will have a ton of upside, eventually. The ability to generate more revenue.

Looking at Hulu as a proxy, I always felt that these services would become ad-supported at some point. The revenue per user… You can’t raise your prices fast enough to do a subscription offering. Is that correct in your view?

AW: Totally. At around $13 per subscriber, Hulu’s ARPU (Average revenue per user) is really good. And you have to consider that most of Hulu’s subscribers are in the ad-supported tier.

You can say that Disney or Hulu probably get about $6 or $7 per subscriber per month in advertising, which is huge. And it’s just starting. There’s a lot of room to grow there with better targeting, as bigger advertisers that make a push into the space.

That’s probably a big part of why Disney is bringing advertising to Disney+, although they won’t be as aggressive as Hulu is, at least not at the beginning. Of course, that’s why Netflix is interested in this as well.

Netflix’s basic tier in the US is $10 a month, but most people subscribe to the $12 tier, where you get streams in HD.

There’s a good chance that Netflix could launch a $5-per-month tier, and they could end up with more revenue per user than they do from their $10-per-month tier without ads. Because they’ll be able to monetize it more efficiently. That’s a critical thing. Hulu is probably the best proxy because Disney is public and granular with how that revenue shakes out.

MB: This week, the Wall Street Journal put out a rumor that Netflix is looking to partner with other companies. They mentioned Comcast, NBCUniversal, and then Google. Do you think that’s going to happen, or is Netflix going to launch with their own tech and leadership?

AW: We’ve heard that Netflix is in talks with Comcast, NBCUniversal, Google, The Trade Desk, Roku. My interpretation of the state of things is that they are talking to every major player in the space, and trying to game out what each is willing to offer.

Each company brings something to the equation. Once they have a sense of what is out there, they can decide who they want to partner with. Maybe they’ll even partner with a couple of them, and build out their ad tier pretty quickly.

There’s been reporting that they want to launch it by the end of the year. In order to do that, they would need a third party to take the lead on the tech side, and possibly the sales side.

That makes me lean towards Roku, Comcast, or NBCU. But you could see them partner with multiple parties. In the next few weeks, we’re going to see the first deals get signed. But right now, they’re talking to all the major players, seeing what each of them brings. Once they get that, then they can move to the next phase and strike the deals.

All video is moving to streaming. At some point, all entertainment, all sports, all news, will be consumed via streaming video.

MB: What’s your bull case for Netflix, and what’s a bear case?

AW: The bull case for Netflix is the same one that their executives make: All video is moving to streaming. At some point, all entertainment, all sports, all news, will be consumed via streaming video.

When that will happen is still up for debate, but that is the long game. They will argue that they only have 200 million subscribers, and that the ceiling should be over a billion, or maybe 500-600 million. Whatever it may be, it’s going to be much higher than it is now. And since they are the biggest, and they have the widest breadth of content, they’re leading the way.

The bear case is that they have cornered themselves in terms of a business model; this premium subscription model has worked tremendously well in the US, and Canada, and Western Europe, but hinders their ability to grow in emerging markets like India.

Reed Hastings noted on an earnings call that, in India, the typical cable bundle is $3 or $4 a month. While we pay $70 a month for an equivalent product.

So Netflix is a premium product in India, because they’re priced higher than a cable bundle. It’s a different product, so it is a luxury over there. If you’re going to compete in some of these markets, which have a lot of growth ahead of them, you have to figure out pricing, and figure out what the local audience really wants. This is a challenge for them.

The bear case is that they’re cornered in and that they are unable to break. They’ve hit a ceiling in the US, and Canada, and Western Europe, and they’re unable to break through in these emerging markets. And other players, like Disney, are willing to underprice in those markets, and are able to do so.

MB: It’d be interesting to see the earnings, especially the expectation they set of a possible loss of 2 million subscribers over the next 12 months. I don’t recall them having two rough earnings reports in a row.

AW: No. Look, they lost 200,000 subscribers last quarter. That was the first time they lost subscribers in over a decade. They were forecasting another loss, but they’ve always been pretty conservative with their forecasts.

That’s how they’ve always operated. They’ve had a few big misses over the past couple of years. You can reasonably say that the pandemic had a role in that, because it made it difficult to really game out what the consumers were looking for.

They’re forecasting a pretty significant loss. If it’s better than forecasted, that could work in their favor for their share price. But it’s also possible that they have a worse quarter than anticipated.

They debuted a new season of Stranger Things, which is their biggest franchise, at least until the second season of Squid Game comes out. That’s something that should help them, which is why some people were surprised that they had the lower forecast. We’ll have to wait and see.

MB: Switching gears to regional sports networks, you recently wrote about the launch of NESN 360 launch. Especially in the local space, this is a pretty big deal. My takeaway is that the consumer has a bit of a sticker shock about what these services cost direct outside the bundle.

What are your thoughts on that? And do you think that these direct-to-consumer RSNs are a threat to the bundle, or are they just trying to sign up people who’ve already cut the cord?

AW: Consumers have become so accustomed to streaming services that cost $15 or under, and have a ton of content, that when you see NESN, the Sinclair, or the Bally RSNs priced at $20 and above, there is that sense of sticker shock.

I do think that’s an issue. A lot more work to has to be done to educate consumers and make them realize that there’s a reason we’re charging this. Or they’ll be adding more to the product to help justify that higher price.

Sinclair has talked about trying to find a way to incorporate betting or gaming into such a product. That would be one way to engage sports fans directly. In fact, Bob Chapek, said at an investor conference that they’ve been thinking about a direct-to-consumer ESPN. Not that it’s imminent, but that whenever it happens, 5 or 10 years from now, it would have to be the place to go for any sports fan.

The future of sports, like all content, is in streaming. But the business model remains up in the air. For the RSNs, this is a first tip-toe in that direction.

For now, I suspect that it’s about trying to reach people that have cut the cord but are still big sports fans. The truth is, if you’re a baseball fan, you may just subscribe for June, July, August, September, and then cancel for the rest of the year until the next season picks up again. That may be how things shake out. And that could help alleviate the sticker shock to some extent.

MB: The rough math is, about 10% to 15% of people watch their RSN on a given month. There are about 60 million homes that have an RSN.

If you’re getting $5 from 60 million people, that’s $300 million a month. To replicate $300 million a month, the only people that would buy it are the 10% to 15% of the people that watch it. Suddenly, that price has to increase 10X. So, if you were going to replace the bundle’s revenue, it’d be much higher than, even, $30.

AW: There are creative ways to do it. One very clever thing that NESN did is include eight Red Sox tickets as part of their premium annual pass.

That was clever because I’m sure those tickets were not great tickets, but they probably cost about what the annual subscription cost was. But since the same organizations owns NESN and the Red Sox, they could do that. That’s the sort of bundle that may be required, at least at the start, to convince people to buy in.

Discounted tickets, real, meaningful, engagement with sports fans, Zoom video conferences with players; there are all these other things that could be brought into this product to add value and make people think, “Do I really want to pay for this? Maybe, if they add a couple of tickets and I get to ask questions to my favorite player.” That’s what they have to be thinking about.

MB: Absolutely. Same question. What’s your bull case and bear case for the regional sports networks?

AW: My bull case isn’t as bullish as my bull case on Netflix, just because, as you said, it’s a relatively small chunk of the population. It’s really hard to see how it becomes great economics without having some sort of betting side in it. The rights, and working with the leagues on that, are really complicated.

For me, the bear case is a lot stronger. Because they’re going to struggle. The sign-ups will be in the thousands, not the millions. But in the long-term, if everything goes to streaming, you could find a way to bundle it with other stuff, whether it’s tickets, or betting, or an interactive thing, or other content that could keep it going.

Since the invention of cable, the carriage fees have only gone up. We're entering a period where they go down.

MB: What’s the risk threshold of getting removed from the basic tier on any of those providers? It doesn’t look like it’s going to happen yet. But I’m sure that’s in their calculus for pricing and everything else. They need to keep as much of that 60+ million subscribers coming in on a monthly basis.

AW: I think that every cable or satellite is looking carefully at what every single channel is doing. That includes the RSNs, but also TBS, and TNT, and CNN, and Fox News, everything.

Basically, since the invention of cable, the carriage fees have only gone up. We’re entering a period where they go down, because there’s no reason for MTV to get whatever it’s getting right now. I don’t have those numbers in front of me, but they’ve gone up steadily for decades.

And MTV today is not the MTV from 10, 20, or 30 years ago. They have far less content now. Pretty much everything that is there is also available on Paramount+. You could say the same thing for a lot of other channels as well. Only a handful of channels will be able to justify rate increases. And that’s probably the big sports networks like ESPN, and big news channels like CNN and Fox News.

RSNs are so niche that, while they might be able to generate rate increases, there’s going to be pushback for including them in the base level of a service. And there’s going to be pressure to put them at a premium tier, or maybe a rev share with the cable or satellite provider to encourage them to push it on consumers.

MB: Switching gears one last time. One of my favorite even-year themes is the bullish statements from earnings season for TV companies that can sell political ads. You wrote a great story with plenty of this recently. How important is political advertising to local media companies?

AW: Political advertising has certainly become the lifeblood for local television. Every time in a midterm election year, in a presidential election year, we’ve seen these enormous jumps in terms of political ad sales from campaigns, from PACs, from third-party groups. It’s been crazy.

As the electoral map has expanded, a lot more states have become competitive. Democrats and Republicans have been trying to reach into other states, with Democrats spending aggressively in Texas, and Republicans spending in the Midwest. In the past, they hadn’t spent a lot of money on those places. This has shaken up the local media in a really crazy way over the last few years. It’s been amazing to follow.

As I wrote, thanks to your data, 2022 is going to be another crazy and record-breaking year. It makes me wonder what 2024 is bringing, because one can’t imagine it being bigger than 2020. But at this point, who knows?

MB: We talked to a lot of the local broadcasters. They’ve got to make the transition to digital at some point. They’ve got to get their people to watch local news through digital, and they’ve got to get more of the revenue to come from digital.

But these political tsunamis come in and relieve the pressure that other verticals can’t. I always wonder if this is delaying their growth into those new areas. According to our report, just connected TV alone, will be larger than all cable TV advertising during this cycle. Not mentioning social and mobile, desktop video, which are huge. And that trend is accelerating.

AW: You might be right with some of these companies. It depends on the company. It depends on the leadership. The best analogy is actually in cable, where you have ESPN, and I mentioned TBS and TNT before.

Bob Chapek at Disney and Jason Kilar at WarnerMedia, before he was unceremoniously fired with that merger, had both publicly said that those legacy cable channels are helping to fund the digital transition. They bring in so much cash, billions of dollars in cash, that they’re taking it, and they’re using it to invest in streaming.

If I was the leader of a local media company, a local television giant, I would be approaching political the same way. You get this enormous influx of cash. And it should be used to invest in the next generation of local media, whatever it may be. It will probably be streaming. It will be digital.

But it should not just be a cash grab so that you can keep doing what you’re doing. It should be something that you take and use it to invest in what’s coming next. That’s what a lot of the big cable companies are doing. And one would hope that local media is following that strategy and that they see that things are changing.

MB: Excellent. One more question. If you could get your entire team to read one book, what would that book be?

AW: If I were to recommend one book, I would cite something that I read recently, and it’s a book called The Master Switch by Tim Wu.

He’s best known for coining the term “net neutrality.” He’s working in the Biden White House right now on antitrust stuff. He does a great job of exploring the history of communications and this push and pull of consolidation and deconsolidation.

He comes at it with a point of view, but he’s a very good writer and writes in a clear way. It’s hard not to read The Master Switch and see where we are in the cycle, in his hypothetical cycle, right now, as we look at both deconsolidation and consolidation of the internet and media and communications and technology.

If you’re a nerd like me, and you’re really into media and tech and telecom, I felt like I learned a lot about the history of those. It made me think differently about how the business is conducted today.

MB: That’s great. Great recommendation. Well, Alex, I’ve really enjoyed the conversation, and I’m sure our audience is going to love it.

AW: All right. Thanks for having me.

Alex Weprin is a media and business writer for The Hollywood Reporter. Based in New York, Alex covers stories that touch on technology and streaming, business, finance, corporate maneuvering and strategy, advertising, sports, and news.

Before joining THR Alex covered video advertising at the trade publication MediaPost, and the intersection of politics and media at Politico, where he also served as deputy media editor. He has also worked for Broadcasting & Cable and Mediabistro.

Cross Screen Media is a marketing analytics and software company empowering marketers to plan, activate, and measure Connected TV and audience-driven Linear TV advertising at the local level. Our closed-loop solutions help brands, agencies, and networks succeed in the Convergent TV space. For more information, visit CrossScreenMedia.com.

Michael Beach

Michael Beach

Michael Beach is the Chief Executive Officer of Cross Screen Media, a media analytics and software company that enables marketers to plan, activate, and measure CTV and linear TV at the local level. Michael is also the founder and editor of State of the Screens, a weekly newsletter focused on video advertising that is a must-read for thought leaders in the advertising industry. He has appeared in such publications as PBS Frontline, The Wall Street Journal, The New York Times, Axios, CNBC and Bloomberg, and on NPR’s Planet Money podcast.