We now have a concrete value for an ad-supported video experience. CBS and Hulu say it is $4 a month per viewer. Even YouTube indirectly agrees with this valuation. Does that mean we witnessing the death of ad-free viewing?
CBS suggested last week that it might add an ad-free tier to its All Access SVOD service. Currently, the monthly subscription charge is $5.99, and CBS head Les Moonves said that each subscriber was worth about $4 a month in advertising revenue. Commenting on the ad-free option Mr. Moonves said: “We’re thinking about it. There could very well be a $9.99 product out there.”
Earlier this year Hulu introduced an option to allow its subscribers to watch ad-free by paying $4 a month more. Earlier this year I estimated that a Hulu subscriber is worth about twice as much (i.e. $6 a month) to the company as a Netflix subscriber is to it. The difference was the advertising revenue. I asked Tim Connolly, Head of Hulu business development, about this and he said each subscriber was worth not quite twice as much. Sounds like two-thirds was the magic value.
The outlier in this movement away from ad supported viewing appears to be YouTube. The company introduced an option to watch videos ad-free, called Red, for the cost of $9.99 a month. Does that mean YouTube is generating this much ad revenue per viewer? Hardly.
YouTube earned about $4B in 2014, mostly from ad revenue. Since the company is delivering video to about 175M unique viewers each month, that works out to about $2 a unique viewer a month. Given that heavier YouTube users are more likely to opt for an ad-free subscription a more reasonable price for Red might be, not coincidentally, $4 a month. So what’s the extra $6 a month for? YouTube has effectively merged YouTube Music with YouTube Red, to offer both for $9.99 a month.
These three services seem to indicate that the current value of advertising in video services is pegged at $4 a month per subscriber. Could this mean a whole range of video services that would otherwise use an advertising model will instead introduce SVOD services at around this price point? It could be.
NBC is trialing its ad-free comedy service SeeSo, which seems to be a perfect ad-supported vehicle. It is full of recent clips and library titles (as well as a smattering of new content,) perfect for a quick drop in for a chuckle fix. Yet NBC plans to charge $4 a month and sell no advertising against the content when it launches in January. Placing a subscription barrier in front of the content, much of which is available elsewhere, seems like it could be a tough sell with potential viewers.
A better approach might be as Hulu and YouTube have pitched it: maintain an ad-supported free tier, enjoyable by all, and use the ad-free option as a way to cement the relationship with the most committed service users. This fremium approach seems to maximize the opportunity for revenue. It allows must-see moments a chance to maximize audience and casual viewers a barrier-free way to sample the service, while providing a stable revenue stream from committed customers.
As more viewers transition to digital viewing over the coming year expect CBS, NBC, and others to move to a fremium model as a way to maximize the value of their content.
Why it matters
Hulu, CBS, and (by inference) YouTube agree the current value of an ad-free video experience is $4 a month a viewer.
Companies like NBC are trialing the $4 a month per subscriber price point for ad-free services without offering a free ad-supported tier.
The sweet spot in the market appears to be the combination of free ad-supported with an ad-free tier in so-called “fremium” video services.