Channel 4 expands its ad-free subscription streaming service

“We’re getting serious about a paid upgrade to the free service,” said Richard Davidson-Houston, head of All 4. According to the broadcaster, 2018 was the most successful year for All 4 since it launched in 2006, with views up 25 percent year over year.

Broadcasters have enjoyed buoyant linear ad revenues to sustain them through trying times in digital media. But increasingly, they’re diversifying revenue streams to manage the slowing growth in linear ad revenue, while online video ad revenue is increasingly being snatched by competing services like YouTube and Facebook. For the most part, viewers can be more effectively monetized through subscriptions rather than ads, and making existing content available for a small price is all additional revenue. U.K. commercial broadcaster ITV launched its ad-free paid-for version, ITV Hub+, two years ago and has nearly 300,000 subscribers. This week, ITV announced BritBox, a collaborative effort from the BBC and ITV to rival Netflix, was expanding to the U.K.

To grow All 4 + in a crowded market Channel 4 will need to highlight the content people are willing to pay for. All 4 has licensed shows from media brands like Adult Swim and Vice, organizing these in thematic collections, to beef up its content aimed at younger viewers who are straying to Netflix and other services. The broadcaster said there has been a “fundamental shift” in viewing on All 4 over the last 12 to 18 months led by a 50 percent rise in box-set viewing year over year in 2018.

Channel 4 has historically catered to the 18- to 24-year-old cohort and still reaches more than rival public service broadcasters across its whole channel portfolio, according to Ampere Analysis.

“The challenge of the public service broadcasters is not just losing viewing but also a small handful of viewers entirely,” said Richard Broughton, research director at Ampere. The firm’s stats show a small but steady decline in reach of 2 percent over the last two years. Advertisers rely on reach to avoid showing the same ad to the same people, which has kept TV CPMs high.

Meanwhile, viewers, particularly younger ones, are switching to services like Netflix and Amazon. To be clear, All 4 + is unlikely to be a competitor to broader services like Netflix, rather an accompaniment. People are stacking up more than one subscriptions service: In 2015, 85 percent of U.K. households that had subscription on-demand services had just one. At the end of 2018, this dropped to 43 percent of households with just one, while 32 percent of households took out two video subscriptions, 12 percent had three and 14 percent had four or more.

ITV Hub+ shows there is some market for a premium paid-for service. ITV Hub has 25 million registered users and just under 300,000 paying for its premium version, according to ITV’s financial results. A conversion of less than 1 percent is fairly low, but ITV Hub+ doesn’t offer much more in terms of additional or exclusive content, said Irina Kornilova, principal analyst at analysis firm IHS Markit. According to estimates from Ampere, ITV made £8 million ($10.6 million) from ITV Hub+ subscribers in 2018 and is projected to make £15 million ($20 million) in 2019. Digital content licensing to third parties would likely bring in revenue worth multiple tens of millions.

“The tradeoff is how quickly can you grow that subscriber base if you want to offset the loss of licensing revenue if you decide to pull content from third parties like Netflix,” said Kornilova.

“Uniquely, 50 percent of All 4’s viewing is archive, up from 41 percent last year,” said Josh Krichefski, CEO at MediaCom UK. “Initially, you’d think it would make sense for Channel 4 to pull archive content from Netflix.” Based on the revenue generation estimates versus the licensing income, it’s unlikely content would be immediately pulled, he said, yet All 4 would have the benefit of cross-promoting content back to its own platforms.

Successful subscription services need long-term investment — Netflix sinks cash into acquiring new and exclusive content — making heavy investment from public service broadcasters difficult. Instead, these can offer useful learnings on catalog refreshing, subscriber acquisition costs and how to market their content for when they do build larger-scale platforms in the future to help insulate them from further declines in ad revenues.

Research firm IHS Markit estimates traditional TV ad revenue rose just 9 percent across France, Germany, Italy, Spain and the U.K. between 2014 and 2018, while that online video ad revenue soared 187 percent.

“A lot of it is going to Facebook and YouTube,” said Kornilova. “They are eating into broadcaster shares. Broadcasters have to start experimenting with other revenue streams as market share drops. They are in a position where this isn’t a nice to-have, it’s become critical.”

IHS Markit estimates Facebook and Google captured 65 percent of online video ad revenue across the five largest European markets in 2018; other ad-funded online video platforms held 10 percent, leaving broadcasters with a 25 percent share.

For broadcasters, the race is on to become one of the accompanying services to Netflix or Amazon.

“There’s a general rule in TV that U.K. viewers spend 85 percent of their time with five channels,” said Broughton. “The future of subscription services is probably not a million miles from that. If you fragment the market too much, no one benefits. Five options will probably be the max.”