Hit the GAS: designing optimal generalized ad-supported subscription mechanisms

Digital content platforms such as Netflix, Spotify, and YouTube increasingly fund content through a mix of subscription fees and advertising. Most of these platforms offer users only coarse options: a single ad-supported tier, a single paid tier, or a two-tier "free-with-ads versus paid-ad-free" menu. We ask how platforms should jointly deploy these two revenue levers. The answer has implications for managers, consumers, and regulators. We introduce the generalized ad-supported subscription (GAS) mechanism: a menu offering users a continuum of ad intensity and subscription fee combinations that nests today's ad-only, subscription-only, and two-tier models as special cases and that is implementable in practice via a simple slider or a short finite menu. Although GAS is revenue-optimal within this broad class, we find the familiar two-tier menu is often near optimal. We pinpoint the conditions under which GAS's added flexibility yields a material revenue gain. We calibrate the model to a video-on-demand setting through an incentive-compatible willingness-to-pay survey and find that GAS raises platform revenue by 148%, 20%, and 1.8% over the ad-only, subscription-only, and two-tier models, respectively. We further show how emerging regulation that caps advertising intensity (e.g., the EU Digital Services Act and Digital Fairness Act) and competitive pressure reshape the optimal menu. Both forces can shrink coverage of low-value users and push platforms toward less ad-intensive offerings. Finally, we distill our findings into a practical guide for when platforms should adopt each mechanism.