Streaming services spent years selling the absence of advertising and then introduced tiers that carry it. The reversal followed from a change in where the growth was, and from the arithmetic of what a viewer is worth.
Subscriber growth ran into a ceiling
Once most households that would pay the standard price had subscribed, further growth had to come from those who considered it too expensive.
Cutting the price for everyone would have reduced revenue from existing subscribers far more than it added from new ones.
A separate cheaper tier reaches the price-sensitive group while leaving the main price intact, which is the same logic behind any tiered pricing.
Advertising can outperform the discount
An hour of streaming carries a certain number of advertising slots, and those slots are sold at rates well above what broadcast television commands.
The premium exists because streaming advertising can be targeted by household and measured against what viewers did afterwards.
For a heavy viewer, the advertising revenue can exceed the discount given, which makes the cheaper tier more profitable per subscriber than the expensive one.
Light and heavy viewers separate themselves
A subscriber who watches little generates few advertising impressions, so the ad tier earns less from them than the standard plan would.
Heavy viewers generate many, and they are also the group most likely to accept advertising in exchange for a lower price.
The tiers therefore sort viewers in a way that suits the service, with the least profitable customers on the plan that costs them most.
Content licensing complicates the rollout
Rights agreements specify how a title may be shown, and some were signed before advertising tiers existed on the platform.
Titles whose contracts do not permit advertising are withheld from those plans, which is why the ad-supported library can be smaller than the standard one.
Renegotiating takes time and money, so the gaps close gradually as agreements come up for renewal.
Where the model is heading
Advertising revenue is less predictable than subscriptions, rising and falling with the broader advertising market rather than with viewing.
Services are managing that by mixing the two, using subscription revenue as a floor and advertising as the growth component.
The practical result for households is a wider spread of prices for similar content, with the differences sitting in advertising load, resolution and simultaneous streams rather than in the catalogue itself.