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How An Advertising Slowdown Could Affect Your Streaming Subscriptions

A new report could spell trouble for Netflix, HBO Max.

It’s become increasingly clear this month to experts that the U.S. economy will likely enter a recession sometime soon. 

Between what’s been termed “entrenched inflation,” a bear-ish looking stock market, and an ongoing labor shortage, Wells Fargo Chief Economist Jay Bryson recently predicted a downturn. “We are changing our base-case forecast for next year from an economic soft landing to a mild recession starting in mid-2023,” he wrote in a commentary.

What exactly a recession will look like and the extent of its severity are still major unknowns, and the market famously hates uncertainty. But these are already uncertain times for the streaming entertainment industry, which seems to be changing by the day and might soon have to deal with a new headache.

Advertising Cuts Coming For Streaming?

At the moment, the television industry isn’t too worried about a possible impending recession.

At the recent upfronts, all of the major (and most of the minor) television networks made their presentations for the fall 2022 through spring 2023 television year, notching a respectable high-single-digit increases year-over-year in terms of advertising sales, according to The Hollywood Reporter, which noted that NBCUniversal CEO Jeff Shell acknowledges that “Last year was hugely on fire in the ad market. So it’s still pretty strong, but it’s definitely weaker now than it was last week, last month, last year.”

The economic downturn hasn’t hugely impacted the television industry just yet, but a recent report from Bank of America analyst Jessica Reif Ehrlich has warned of “storm clouds developing” that could cut into the television industry’s advertising outlook. 

The media investment and analysis firm Magna has revised its 2022 advertising outlook downward from 12 percent to 9.2 percent, with growth continuing to decrease throughout the rest of the year and into 2023. 

Concurrently, Bank of America analyst Jessica Reif Ehrlich notes “the market is tepid due to advertiser concerns over inflation and supply chain issues," which could lead to a slow down in advertising spending, especially in areas “such as leisure and dining.”

There’s already rumblings of media companies slowing down their spending and hiring, with Netflix recently laying off 150 people. 

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While advertising deals that are already locked in and an expected boom in political advertising in the fall could help blunt some of the effects of the downturn for the television industry, it’s still likely to be a tough road ahead, and one especially difficult for streaming service that want to start dipping their toes into advertising. 

Streaming Services Lead

How Might An Advertising Slowdown Impact The Streaming Industry?

For the first decade plus of the streaming era, paid advertising was largely a no-fly area. While Hulu did offer a less expensive, advertising-supported version, services like Netflix and HBO Go resisted the concept. The idea was that streaming was an elevated, prestige product, and you paid more for a better experience than plain old television.

But as time has gone on, services have started trying to aim at a broader audience, which meant increased spending on content. All the while, as popular upstarts like Disney+  (DIS) - Get The Walt Disney Company Report and Apple+  (APPL)  entered the Streaming Wars, holdouts like Netflix and HBO have finally relented and announced plans to offer cheaper, advertising supported tiers later this year, both to help pay for all the expensive content and to make the services available to budget conscious consumers. 

Reif Ehrlich says “the more intermediate term opportunity in streaming is encouraging.” But if advertising does begin to dry up later this year, where does that leave the streaming companies counting on that money for their cheaper tiers?

“My opinion is that they are going to launch these tiers as planned. Setting up the infrastructure, operationalizing it and getting data is of the utmost importance. If anything, advertisers may want to dip their toes in these new waters despite whatever headwinds there may be in the economy and impacts on overall ad spend," says Jon Cohen, SVP of Development and Distribution at Frequency, which powers ad-supported streaming channels

So while it might be a rocky rollout for advertising tiers, the recession isn’t likely to stop what now seems inevitable. If anything, it will make the need for a budget-conscious option seem even more important. 

“Streaming services, like Netflix, will still forge ahead with offering ad-supported subscription plans because it still remains a great tool to attract consumers and make content more accessible. There's also still a good chance that consumers who value the content and service will become paid subscribers,” says Stefan Lederer, the CEO and Founder of Bitmovin, a start-up that provides video streaming infrastructure to companies such as the BBC, Class Pass, and The New York Times. “It's no secret that there's a real cost of living crisis and people are looking very closely at their expenditures, so offering an ad-supported model is one way to retain audiences."