The Rise of Ads in Video Streaming: The Economics of Ad-Free Paid Streaming Services

Money Mar 19, 2023

For a long time now, low interest rates have supported many unsustainable companies that don't make any money, and investors have piled in, hoping to make a lot of money in the future. One of those is paid streaming without annoying ads, let us explain further.

Ad-free paid streaming has changed an entire industry. It killed home video rental and is slowly killing cable but it comes with one really big issue and it's profitability.

Shows and movies are costly to make and that is why cable providers charge a small fortune every month to pay for them, that is other than the many costs of running a cable company. A rough estimate says that 40-60% of what a subscriber pay every month goes to the content providers and that doesn't include the huge amount of money that advertisers pay to content providers to have their ads aired along with TV shows.

However, ad-free paid streaming services are very different. They charge customers a subscription fee every month, which is often way lower than what cable providers charge. However, the relatively low subscription fee is the only source of revenue for these services, and they have to pay content providers a significant amount to obtain the rights to stream their shows without including ads. As a result, content providers do not have the option to distribute ads that could offset their costs, which eventually lead to unsustainably higher streaming rights costs for streaming services relative to what they charge, lower-quality or older content on these streaming services, or content providers creating or moving to platforms where they can also have advertisers or at least not have a streaming service to divide the subscription fee with.

The video streaming service industry is slowly moving towards a more sustainable direction, with ads being introduced to many streaming platforms. We believe that in the future, the streaming service industry will resemble its traditional cable counterparts, while still offering the convenience that its pioneers first brought to their subscribers.

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