Why Netflix, Disney Plus are launching ad-supported streaming plans.

By | October 20, 2022

Just three years ago, Netflix unequivocally framed the idea that an ad-supported streaming service was ever going to take off.

“When you read speculation that we are moving to sell advertising, rest assured that this is false,” Stream said in its second quarter 2019 investor letter. “We believe we will have a more valuable business by moving away from competing for ad revenue and instead focusing entirely on audience satisfaction.”

Clearly, Netflix’s thinking about advertising has changed. Both Netflix and Disney+ are launching ad-based tiers this fall, looking to expand their addressable markets and tap into new revenue streams as subscriber growth slows — with Netflix losing 1.2 million in the first half of 2022. 5.5 million net profit in the previous year.

“It makes a lot of sense to allow consumers who want low prices and are ad-resistant to find what they want,” Netflix CEO Reed Hastings said in April.

The ad industry is excited by the two streamers’ moves. “It will be the most innovative inventory for television content introduced at once,” said Ashwin Navin, CEO of SambaTV, a television and streaming measurement firm. “Together, these companies represent the largest volume of premium video that has ever been out of the market [for advertisers]. It’s watershed time,” he said.

Netflix’s Basic With Ads, which costs $6.99 a month, will launch on November 3 in the US and 11 other markets. Disney+ will bow its ad-supported plan on December 8 for $7.99 per month.

For Q3, Netflix returned to positive subscriber growth, adding 2.4 million new subscribers, and predicted a profit of 4.5 million in the fourth quarter (which is the last time the company gives that guidance). In a letter to shareholders, Netflix tried to set expectations: “While we are very optimistic about our new advertising business, we do not expect a material contribution in Q4’22.” But it’s a big opportunity: Netflix and Disney+ will account for $2.7 billion and $1.9 billion, respectively, of connected TV advertising in the U.S. alone by 2026, representing a 15% share of the market, according to Morgan Stanley. Prediction.

Netflix and Disney+ initially refused to introduce ads, fearing disruption to paying monthly customers. Here are four reasons why they asked — and why both are now banking on lower cost levels to keep subscriber growth healthy.

Purity of streaming experience.

Netflix and Disney execs rightly believe that an ad-free subscription VOD service is more attractive to consumers — and the idea is that advertising somehow dilutes that premium-entertainment term. But plenty of research shows that many consumers are willing to trade attention for a price break. For example, 39% of those without Netflix said they would consider signing up for the ad-supported option, compared to 26% of those without Disco+, according to a September 2022 survey.

With the new advertising options, the companies can win back the lapsed subscribers and keep those cancellations. “It’s loosened the tolerance for ads in streaming services,” says John Gigengack, principal of Hub Entertainment Research.

There is a need to share data with third parties

Netflix is ​​famous for channeling data, seeing it as a competitive advantage in making decisions on content purchases and screenings. Now, with Disney+, Netflix is ​​forced to reveal even bigger data to advertisers about viewers and their viewing experience. (Netflix says its scaling deal with Nielsen will begin next year.) But that’s the cost of doing business, and it’s important to note that ad scaling accounts for only a fraction of overall usage.

The new services will be subject to government regulations governing the privacy of personal user data. When Hastings introduced Netflix’s ad plans, he downplayed the potential privacy risks: “We can be a direct publisher and have other people do all the fancy ad matching and aggregate all the data about people.”

Additional cost and complexity

Unlike Disney, Netflix had no history in the ad biz, and said its ability to integrate multiple moving pieces and make new investments required. The streamer is renegotiating licensing deals to get advertising rights from content partners, but must exclude 5%-10% of titles out of the gate (depending on the country).

To get to market faster, Netflix has chosen to partner with Microsoft, which bought AT&T’s Xandr digital advertising unit in June, in an ad sales and technology partnership. Netflix also hired two ad industry veterans to lead the charge: Jeremy Gorman and Peter Naylor, both most recently with Snap. “They have a great team of professionals in place — they know what they’re doing,” says Mark Melvin, senior vice president of America’s S for Myriad, which sells content sponsorships. “I’m sure Netflix will figure it out.”

The risk of eating meat from high-value crops

“When you pull existing business models, there’s always the existential fear of trading dollars for pennies,” says Blair Harrison, founder and CEO of cloud-based online streaming platform Frequency. Disney and Netflix execs have expressed their belief that they have adjusted their ad-level launch plans to address the threat of cannibalization, so that it doesn’t matter which plan customers choose. Additionally, he pointed out that if the companies can fetch premium ad rates over ad-supported tiers, it could be upside. While some ad buyers doubt Netflix is ​​getting into the $65 CPM range it floated to ad buyers in August, other industry observers say that’s not out of the question. “Netflix may be late to the game, but their game has been great,” said Mark DiMassimo, founder and chief creative officer of ad agency Digo.

Disney has an extra incentive to fit commercials into the mainstream. After initially lowering the service to gain subscribers quickly, Disney+ needed to raise its price point. As CEO Bob Chapek admitted at a Goldman Sachs conference last month, the $6.99 price point for Disney+’s November 2019 launch is “pretty silly.” The ad-free version of Disney+ jumps from $7.99 to $10.99 per month, while Disney+ is available with ads for $7.99.

The winners from all of this are consumers — who will have lower-cost options as inflation weighs on their wallets — and marketers hungry to reach cord cutters. Losers? Old-fashioned cable and broadcast TV networks are seeing more Madison Avenue money move into the connected world of streaming TV.

According to Samba TV’s Naveen: “The bastion that is linear television is cracking down.

Pictured above: Millie Bobby Brown as Eleven in “Stranger Things 4.”

VIP+ analysis: Why the future of streaming is in advertising

Category: tv

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