With a recession on the horizon, streaming services could be in for a rocky ride

An economic downturn may boost ad-supported tiers, but how much will advertisers spend?
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· 5 min read

Inflation is high. Tech companies are laying off workers in droves. Major banks have forecast a recession.

And streaming services thought their business was hard before.

It was one thing for companies like HBO Max and Hulu to battle for subscribers and ad dollars when the economy was doing well. But economic conditions are souring just as American consumers stand to become choosier with their discretionary spending, meaning streaming services are likely in for a bumpy ride.

“We’re going to see more concentration on tightening up their own business,” Paul Erickson, research director at market research firm Parks Associates, told Marketing Brew. If they haven’t already, he added, streamers are laser-focused on cost-cutting and “looking at increasing the monetization that they’re getting from the existing content they have.”

Cutting the fat

The tide was changing for streaming giants even before the threat of a looming recession. As streaming growth slowed down for giants like Netflix earlier this year, investors began turning their focus to profitability, placing pressure on companies operating streaming services to cut costs and increase their revenues.

That pressure has stung. Netflix has seen its share price fall more than 70% this year, while Disney, which has invested heavily in streaming entertainment, has had a nearly 40% stock-price decline since the beginning of the year. Since Warner Bros. Discovery began trading on the stock market in April, its share price has plunged 45%.

“There’s a bit of a maturity in how these services are being treated,” explained Liska Schmitz, managing director and partner at Boston Consulting Group. “It’s akin to moving away from a startup-type valuation to more of a mature-company-type valuation, where you’re not just looking at growth, but you’re actually looking at profitability.”

To help right the ship, streamers are eyeing ways to cut costs, and companies like Netflix have already begun laying off employees and paring down new projects. Expensive projects that can help attract talent but often haven’t delivered huge returns, like Netflix’s The Irishman, are also likely on the chopping block across the industry, Erickson said.

“Those big budgets are a thing of the past,” Erickson said. “It’s going to be considerably more controlled, the amount of capital that has been committed to content spend.”

Some streamers are pushing further into franchise-based programming, since proven titles can help improve return on investment, Paramount CEO Bob Bakish told investors at the Credit Suisse Communications Conference this month.

“Leaning into franchises, believe it or not, that helps with cost management, because you have a higher probability of success,” Bakish said.

Ad up

Another way to get to profitability? Adding ads. That’s a major reason why Disney+ and Netflix have both indicated their plans to roll out less expensive, ad-supported tiers, which could help them tap into additional revenue streams.

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“The recession is only going to hasten or underscore that importance for a lot of these services that they need to have some type of lower-priced ad-supported option, or to seek some type of partnership or bundle where there is a lower-priced option,” Erickson explained.

With most consumers feeling the heat from inflation or other economic woes, ad-supported tiers that are less expensive may become more attractive. Four out of five people surveyed by BCG said they already view ad-supported content as “high quality,” and nearly two-thirds of subscribers said they opt for less expensive ad-supported tiers when given the option.

Some companies are betting that having ad-supported tiers may help insulate them from the brunt of a downturn. At a May summit hosted by MoffettNathanson, Fox Corp. CEO Lachlan Murdoch said its ad-supported free streaming service, Tubi, was well positioned.

“Maybe people in Manhattan or Los Angeles or San Francisco don’t understand that, but particularly going into a potentially recessionary period or certainly a high-inflation period, free is a tremendous proposition,” Murdoch said.

But services with both ad-supported and ad-free tiers may be best positioned to weather turbulent economic times. “That is actually a model that, given the hybrid nature of it, could be recession-proof,” Schmitz said.

Streamers still stand to feel the effects of advertisers’ tightening their own purse strings in anticipation of a potential downturn.

“We are seeing some categories that are affected by things like supply chain and inflation,” Bakish said at the Credit Suisse conference. “But we’re also seeing some categories [that are] doing well, quite frankly. Travel, movies, sports, and political—that’ll certainly be a huge plus in the second half of the year.”

Keep on streaming

Luckily, streaming services might not be axed entirely from household budgets in the event of a worsening economy. During economic downturns, at-home entertainment, generally far cheaper than out-of-home options like movies, performances, and theme parks, often shows resilience, Schmitz said.

An economic downturn could even potentially solidify the streaming future, Erickson said.

“There will still be some contingent that subscribes to traditional pay TV, but I think that we will likely see further acceleration of the subscriber losses from traditional pay TV,” Erickson said. “They’re going to find alternatives…and saying, ‘Well, I don’t really need those 300 channels I was paying for because really, I just want to watch X. I’m fine with Pluto TV and Netflix. That’s fine enough for me.’”

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