How to Win Customers with Video: Paid Subscriptions or Ad-Supported Services?

Nov 13, 2014

Netflix CEO Ted Sarandos wasn't boasting when he told GQ back in January that the company's "goal is to become HBO faster than HBO can become us." This prediction came true in August when Netflix's $1.146 billion subscriber revenue surpassed the cable network's $1.141 billion. Maybe this is why HBO announced on October 15 that it plans to create its own digital VOD service. And it's likely CBS heard about HBO's service, because the very next day CBS declared it too was going to release a subscription service. Only a few days after that on October 28, YouTube's CEO Susan Wojcicki noted the video site may soon offer an ad-free subscription option.

While the influx of new subscription services may seem all well and good on the surface for bettering competition and providing more options to consumers, my question is, will consumers actually be willing to throw more money at any of the new services?

A recent report leads to me think many won't. According to the "New Living Room" survey conducted by Sony's Crackle and PlayStation in conjunction with consulting firm Frank N. Magid Associates, 57% of consumers prefer streaming movies and TV shows on free, ad-supported options as opposed to paying for subscription services (this is up from last year's 51% who preferred free services). Partner this with the fact that Magid previously found 38% of respondents head to ad-supported YouTube for TV viewing needs, ahead of Netflix (33%), Hulu (17%), and Amazon Prime (14%), and all these networks looking to create subscription services might want to pause and think for a moment.

Granted, Sony and Magid's study only surveyed 1,200 adults-ages 18 to 49-within the United States. As with all reports, you have to take the findings with a grain of salt and decide whether or not to adjust your individual business accordingly. However, there's something to be said for that 6% increase in preference for free, ad-supported services among the consumers Sony and Magid surveyed. You can't just ignore it and hope the number goes down next year.

Consumers from the current and next generation (Gen Y and Gen Z) are young. I'm part of the Gen Y group, otherwise known as millenials. We're all under forty at this point, and our counterparts from Gen Z are even younger. We are the ones entering the workforce, driving the economy, and making the decisions within the next ten years. Our age means a few other things: a) we're as tech-savvy as ever, b) we avoid companies who aren't offering exactly what we need, and c) we care very much about where our money goes.

All of those points relate back to the paid vs. free streaming service debate because each one could affect how it turns out.

For starters, if your subscription service isn't easy to access from multiple devices, we won't care about it. The harder you make it to get to your movies and TV shows, the more likely we are to snag your content from a friend, pirate it, or stream it from a free, ad-supported site. Sorry, but it's true. After all, HBO's tight grip on its shows' online distribution caused Game of Thrones to become the most-pirated show of both 2012 and 2013 (cue HBO's consideration of a more widely-available subscription service...).

Also, younger consumers aren't likely to invest in your subscription service if we think for a second your company isn't tailored to our needs. I give props to CBS for recognizing this early on. When the network announced its impending subscription service, it didn't beat around the bush about what the service was trying to do or who it'd be for. Instead, CBS came out and said its SVOD subscription will be for their "superfans," not for people who want a whole bundle of channels. CBS recognized its limits but wasn't afraid to embrace them, nor tell us consumers all about them, so we could make an informed decision.

Finally, stemming from the custom-tailored idea, Gen Y and Z want to support the companies we feel are truly honest about their practices and care about their customers. Good luck convincing us to give you a single dollar if you act like our needs are more important than yours, but then secretly conduct experiments behind our back (a good example here, though not from the online video world, is Facebook's highly-criticized emotion manipulation test). Honesty from your business is even more vital if you want to convince future consumers to fork over a few bucks a month for your subscription service, especially when they will likely be burdened with thousands of dollars of student debt (but that's a whole other issue).

Ultimately, there needs to be a balance of both paid SVOD services and ad-supported free streaming options. You can't assume consumers will pump out monthly subscription fees for multiple services, because it's not going to happen (what's the point when the price of all those services would add up to the cost of a current cable subscription, anyway?). And you also can't assume everyone only wants to stream movies and TV for free -- you'd be missing out on a large portion of your market more than willing to give you $8 a month so they don't have to put up with ads.

Variety is the spice of life, after all. Hopefully, HBO, CBS, YouTube, and other companies interested in offering streaming services recognize that proverb and embrace it.