After several years of selling a premium, ad-free experience, streaming services across multiple industries are quickly embracing the tried-and-true tactic of in-program advertising as a revenue generator. The shift places more pressure on staunchly anti-ad Netflix, whose stock is down 42% year to date on slowing subscriber growth, to join the crowd. 

Company officials are expected to release first-quarter results and speak on an earnings call Tuesday evening.

In the past 18 months alone, ad-supported versions of Peacock, HBO Max, and Paramount+ launched in the U.S., joining Hulu in offering a lower-priced video streaming option with commercials. Disney plans to follow suit later this year with an ad-supported offering of its Disney+ service.

At the same time, free video streamers such as Roku, Tubi, and IMDb TV reportedly saw record viewership in 2021, prompting YouTube to enter the space. Two top audio streamers, Spotify and Pandora, also notched record revenue from in-app ads, which grew at a significantly higher rate than subscription revenue. And now, Insider reports that Microsoft is exploring in-game advertising on its Xbox console platform, one of the last ad-free bastions in entertainment.

The shift back to traditional in-program ads arrives as several changes strike the streaming industry.

Consumers face more subscription options than ever, leading to ever-increasing bills and long-awaited warnings about “subscription fatigue.” A J.D. Power survey of 1,200 U.S. adults found that average streaming service spending increased from $38 monthly in April 2020 to $55 in June 2021. 

Americans also continue to grapple with a slight decline in real wages, at a time when Netflix, Amazon, Disney, and other streamers have increased their subscription prices. A CNBC-Momentive poll of nearly 4,000 U.S. adults in March found 35% of respondents had canceled a monthly subscription in the past six months because of higher prices.

In addition, ad-supported streaming has become surprisingly profitable. 

Executives behind Hulu and HBO Max said their subscription plans with commercials generate more revenue per user than ad-free options. On the audio side, Spotify reported that improvements in per-impression earnings last year contributed to its 62% increase in ad revenue, while Pandora parent Sirius XM attributed a 30% jump in streaming revenue to “strong monetization of on-platform programming.” (Subscriptions still account for 90% of Spotify’s revenue.)

The confluence of events has contributed, in part, to a change in consumer habits. 

Most notably, viewership of ad-supported apps continues to rise. Analytics firm eMarketer estimated that 128 million people would watch ad-based video-on-demand in 2021, an 18% year-over-year increase, and forecasted viewership would reach 172 million by 2026. Last May, Amazon reported a 138% year-over-year increase in viewership on its IMDb TV platform, with the average consumer spending 5.5 hours weekly there (raw viewership numbers were not released).

Early indications also suggest many consumers will stomach commercials in exchange for lower monthly fees. Outgoing WarnerMedia CEO Jason Kilar told Bloomberg last week that nearly 50% of new HBO Max subscribers are choosing an ad-supported option, which is $5 per month or $50 per year cheaper than the commercial-free plan. Disney officials also said in early 2021 that most Hulu viewers select the lower-cost, ad-supported option.

While Netflix CFO Spencer Neumann said last month that an ad-supported pricing tier is “not something in our plan now,” Wall Street may eventually force the issue if gloomy forecasts for subscriber growth extend deep into 2022 and beyond.

Want to send thoughts or suggestions for Data Sheet? Drop me a line here.

Jacob Carpenter

NEWSWORTHY

Raiders, take your mark. Twitter’s board is expected to reject Elon Musk’s $43 billion buyout offer in the coming days, though high-profile companies and private equity firms continue to circle the vulnerable social media outfit, the Wall Street Journal reported Monday. Citing sources familiar with the matter, the Journal reported that Twitter leaders could discuss their planned rebuff of Musk during the company’s April 28 earnings release. At the same time, several organizations are evaluating whether to participate in a potential bid for Twitter, including Apollo Global Management, Thoma Bravo, and Morgan Stanley.

Under the microscope. Amazon has commissioned a racial equity audit related to treatment of its frontline employees, a response to shareholder pressure for an independent review, the Financial Times reported Monday. Former U.S. Attorney General Loretta Lynch will lead the inquiry, which does not have a target completion date. Leading shareholders voiced concern that workers of color might suffer on-the-job injuries at higher rates than white employees at Amazon, particularly in warehouse settings.

Watch out, Gogo. Delta Air Lines has tested SpaceX’s signature satellite internet product on its airplanes as a method of delivering in-air wireless service, the Wall Street Journal reported Monday. Delta CEO Ed Bastian confirmed preliminary trials of Starlink hardware on company aircraft, though he declined to offer additional details. SpaceX, founded by Tesla CEO Elon Musk, is seeking to book commercial clients for its satellite internet technology, with airlines targeted as a natural customer.

Apple paid. Employees at a New York City Apple retail store are seeking a $30 minimum wage and additional benefits as part of a push to unionize. The demands arrive as labor organizers hope to build on a successful unionization vote earlier this month at an Amazon warehouse on New York City’s Staten Island, where a grass-roots group of workers secured a landmark victory over the e-commerce giant. Employees at the Apple store, located in Grand Central Station, would become the company’s first retail workers to unionize.

FOOD FOR THOUGHT

Showing some modern love. Tech companies reigned supreme in Fortune’s new ranking of experienced, diverse, and innovative corporate boards. Microsoft and Hewlett Packard Enterprise took the top two spots in the Fortune Modern Board 25, while Intel, HP, and Amazon helped round out the top 10. Microsoft earned particular plaudits for its “gender equality, board independence, board expertise, and ESG,” while Hewlett Packard Enterprise’s strong showing illustrated its growth following a series of governance controversies in the early 2010s.

From the article: 

Fortune has collaborated with the Diligent Institute, the research arm and think tank of the global corporate-governance software company Diligent, to develop this ranking—based on criteria that include the expertise, independence, diversity, and tenure of board membership. 

At a challenging time, these companies are setting themselves up well strategically for long-term, sustainable growth.

IN CASE YOU MISSED IT

Hackers stole $182 million in crypto. Here’s how Beanstalk Farms is hoping to stay afloat, by Chris Morris

How will Elon Musk finance his Twitter bid? The biggest question facing Tesla shareholders ahead of Q1 results, by Christiaan Hetzner

Elon Musk threatens to cut Twitter board members’ salaries to $0 as his takeover bid morphs into a referendum on the company, by Will Daniel

Netflix is losing billions a year to password sharing. Here’s how it plans to fight back, by Carmela Chirinos

Ford is ‘betting the company’ on a Tesla-style EV truck that could make or break its future, by Marco Quiroz-Gutierrez

Amazon is ridiculed for trying to motivate Easter Sunday workers with a raffle to win water and a bag of chips, by Sophie Mellor

BEFORE YOU GO

They’re a hoot. Move over, Bored Apes. There’s a new mammal taking the NFT market by storm. Sales from a collection of pixelated owl non-fungible tokens, called Moonbirds, have totaled more than $281 million in just two days, Fortune’s Taylor Locke reported Monday. The digital birds already rank among the hottest-selling collections on record, powered by interest from the Proof Collective, a group of about 1,000 high-profile NFT buyers. The collective’s involvement, however, has led to accusations of price manipulation by NFT ethics watchdogs.