The major battle of the 2020 streaming wars will be over ads

By Jeff Beer

If we ran a survey asking people what they do when they pause a show they’re watching on an on-demand streaming service, the top answers would likely be

1) get a snack;

2) take a washroom break.

Then, much further down the list—waaaaaay down,

down,

down,

no, keep going—

you’d find “stare at the screen for 30 seconds to receive a commercial message.”

Everything we know about actual consumer behavior—and heck, logic—from the last decade (and maybe the last four) is that people will do just about anything, and buy just about anything, to avoid ads. DVRs, ad blockers, and Netflix have all seen their rise fueled by a desire for ad-free entertainment.

Yet as we enter the next phase of the streaming wars—with AT&T’s HBO Max, Peacock, and Quibi coming online this spring, all of which have promised ad-supported versions (with some of them even stating that their ad-supported versions would still carry a monthly subscription fee), this pause moment has once again become one of the newest advertising opportunities on TV.

Last month, AT&T announced that its Xandr ad-tech arm is now selling video ad time during pause breaks. Hulu, which is majority-owned by rival Disney, had already been using that pause to post static ad images, but the AT&T announcement signaled that the old-school commercial break was alive again.

The difference here, as Xandr CEO Brian Lesser told Variety, is that these pause ads don’t interrupt your show. “That’s a noninterruptive ad,” he said. “It’s very high value. It’s very brand safe. It’s 100% viewable, and our sales team is in the market now with that product, and it’s gotten great reception.”

Well, that’s one way to look at it.

Within Media Gulch, there’s a reason for that great reception. One, it’s a new ad format. Two, it’s currently for linear and cable TV customers, which means it’s a way to extract more value from the holdouts who have not yet cut the cord. Finally, it points the way forward for perhaps a new revenue source for streaming services.

Traditional broadcast television created predictable commercial break standards; now platforms and brands are searching for ways to shoehorn ad opportunities into the streaming experience.

Welcome to the fight of 2020.

Streaming is an unproven business model

Why? Well, the streaming wars are expensive! There are all the costs associated with running your own technology service—from infrastructure to billing to customer service. Then there’s the content itself. With the expansion in competition among streaming services comes a content arms race; billions are being spent to lure the best and brightest to create content that audiences want to watch. Netflix, for example, has more than $12 billion in debt to fund its content ambitions. Disney has estimated that it’ll lose several billion dollars annually on its effort to establish Disney Plus, ESPN Plus, and Hulu as major platforms. It anticipates turning a profit in 2o23. WarnerMedia, a division of AT&T, which has approximately $134 billion in debt on its balance sheet, projects that its forthcoming HBO Max streaming service will reach profitability in 2025.

What’s notable about almost all of the new entrants in the streaming wars is that they come from the traditional cable television business, where they are used to having the dual revenue streams of subscriber fees plus advertising. WarnerMedia, Comcast, Disney, and former Disney exec Jeffrey Katzenberg (who is Quibi’s founder) are not ready to abandon advertising revenue. Given the unproven economics of streaming media, it’s no surprise that even the most ardent antiadvertising players, such as Netflix, are also experimenting with how they can score advertising revenue without interruptions, with commercial messages that don’t look like ads as we’ve seen them for 70 years.

The $70 billion spent on TV advertising annually has to go somewhere

While it’s easy to blame old media for clinging to a tried-and-true business model and trying to port it into the future, brand advertisers are perhaps even more concerned about how they’re going to reach consumers in a streaming future. A recent study by IPG’s Magna Global found that while 29% of TV viewing is done via OTT services (these are services that reach viewers directly via the internet, bypassing platforms such as cable and broadcast—via streaming, in other words), just 3% of TV ad budgets are spent there. Still, in 2018 OTT ad revenues exceeded expectations, growing 54% year over year, to hit $2.7 billion. That forced Magna to revise its OTT ad spend forecast upwards, predicting 39% growth, to $3.8 billion in 2019, and 31% growth, to $5 billion, by 2020.

This coming year will show just how creatively they plan to spend that money. Whether it’ll be on status quo ads we barely watch—or something much different—could determine some of these platforms’ very survival.

The determining factor in which platforms will survive and thrive—and which will either shut down or get acquired—will come down to finding the right balance between the experience of the three major stakeholders: the platforms, the audience, and yes, the brands. “If there’s an ad experience that makes advertisers happy, allows the platform to further monetize itself, and consumers are down with it and finding utility from it, it certainly sounds like it could be a win, win, win,” says Bill Durrant, managing director of media agency Exverus Media. “But only if it’s done in a way that goes hand in glove with the actual user experience while they’re watching and doesn’t try to force a different type of experience on them.”

Platforms that offer free streaming in exchange for watching ads will obviously continue to do so, and for many this is an attention tax to be paid to see the content. This is the bet that ViacomCBS has made with the free streamer PlutoTV, and Comcast’s Peacock service might be free (with an ad-free premium tier). Just last week, Comcast reportedly was close to acquiring the Xumo free TV app. There’s still value for platforms and advertisers in audiences who don’t want to pay for premium video.

The four emerging ad types we’ll see streaming in 2020

Pause ads may not be interruptive, but they do seem largely pointless and are likely not the answer.

But what might be?

One ad format with potential to, as Durrant puts it, find utility would be the shoppable ad concept. NBC started to use it in broadcast last May. Basically it’s a scannable QR code in the ad, which sends you to the advertiser’s site to buy that product straight from your phones. Moving this to streaming would make a lot of sense.

There’s also the brave new world of product placement, led by companies such as Ryff, which just raised $5 million in new financing in December. Ryff uses computer vision, machine learning, and rendering technologies to identify objects in a scene and replace them with branded products based on customer data. Meanwhile, Branded Entertainment Network uses AI to find the most contextually relevant influencer, streaming, TV, and film content to put a brand’s product in, and a company called Mirriad uses its technology to drop products into relevant scenes.

But according to ad industry insiders I spoke to, the most impressive example of how brands and streaming platforms can work together has been the partnership between Netflix and Coca-Cola on Stranger Things. Here we had a perfect storm: New Coke was already in the script, and the brand ran with it, bringing back the once disastrous formula for a limited run, and then using its own advertising to bask in the halo glow of one of the most popular shows in pop culture.

Of course, not every show has the cultural cachet of Stranger Things, and not every brand has such a clear—and relevant—connection to a show. It’s a relatively easy decision for major brands such as Nike, Burger King, and even the Chicago Cubs to hitch their wagon to a hit. The same goes for Netflix when it’s got a lineup of marquee marketers outside its door.

The billion-dollar question is how Netflix and other streamers leverage the quality of content they’re spending so much money on. Netflix, for example, is working to reverse engineer the ad content transaction, charging brands not to put ad content on the platform but for the right to use Netflix shows in their advertising and packaging outside the platform. Baskin-Robbins was nowhere to be seen in Hawkins, Indiana, but it had Stranger Things-inspired flavors in its ice-cream shops across the country.

As fun and creative as this model is when we’re talking big brands and hit shows, it gets decidedly less exciting, and much more difficult to pull off, when scaled across a wide slate of shows and marketers. Something tells me that the effect would be significantly diluted if we start seeing these Stranger Things-style promos happening with every show. Is Trojan going to make Sex Education-themed condoms? Is Ford going to create its own ads using the focus group guy from I Think You Should Leave?

Okay, those two could actually be great, but you get my point.

The next generation of branded content

A solution that might come closest to the win-win-win among stakeholders is actually a Holy Grail many marketers have been chasing for at least a decade: branded content that is actually part of the production. One of the best examples in recent years is Netscout bankrolling Werner Herzog’s 2016 doc Lo and Behold, but there are plenty of other examples that could point a way forward for streaming platforms’ quest for tolerable brand relationships. As the money spent by platforms on content rockets into the stratosphere, and our tolerance for ads continues to plummet, brands could help solve both by increasingly becoming production partners.

In September, National Geographic debuted a six-part documentary on global activism called Activate, featuring celebrities such as Pharrell Williams, rapper Common, and actors Darren Criss and Uzo Aduba, and highlighting the work of grassroots activists ending cash bail, eradicating plastic pollution, and more. The entire series was underwritten by P&G, and each episode mentioned work the company was doing to help each cause. Hugh Evans, CEO of Activate coproducer Global Citizen, told Fast Company that P&G “is genuinely committed to putting social good at the center of their business model. Activate was a logical extension of that model.”

Back in July, agency Observatory worked with comedian Whitney Cummings to create a three-part video series, funded by VCA Animal Hospitals, that lovingly parodies pet obsession. Observatory pitched the show to digital distributors, with no special emphasis on it being brand-funded, and after a bidding war between four different platforms, Refinery29 acquired the show. “Our economic interests are aligned from go,” says Observatory CEO Jae Goodman. “The show itself is both a great show for viewers who love their pets or who just love to watch shows about pets, and VCA is expressing its brand values through something that isn’t an interruption.”

It’s highly unlikely that the $70 billion spent on TV advertising will suddenly migrate over to producing new shows and movies. The bulk of it will still be spent on the kind of traditional interruptive ads we’ve been seeing for the last 70 years.

But if the successful experiments thus far to bring advertising to streaming tells us anything, it’s that platforms should be imploring brands to make advertising adaptations that treat audiences like actual audiences. If you want people’s attention, you’re going to have to earn it.

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