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Why Netflix, Disney Plus Launch Ad-Supported Streaming Plans

Why Netflix, Disney Plus Launch Ad-Supported Streaming Plans

Just over three years ago, Netflix unequivocally shot down the idea that it would ever launch an ad-supported streaming service.

“When you read speculation that we are moving to sell advertising, rest assured that this is untrue,” the streamer said in its Q2 2019 investor letter. “We believe we will have a more valuable business over the long term by keeping away from competing for ad revenue and instead focus entirely on competing for viewer satisfaction.”

It’s clear that Netflix’s thinking about advertising has changed. Both Netflix and Disney+ are launching ad-based tiers this fall, trying to expand their addressable markets and tap into a new revenue stream as subscriber growth has slowed — in Netflix’s case, it lost 1.2 million in the first half of 2022, compared to a net gain of 5, 5 million in the same period last year.

The move to allow “consumers who want a lower price and are ad-tolerant to get what they want makes a lot of sense,” Netflix CEO Reed Hastings told investors in April to explain his about-face.

The advertising industry has cheered for the two streamers. “It’s going to be the most new inventory of TV content ever introduced at once,” says Ashwin Navin, CEO of Samba TV, a TV measurement and streaming company. “These companies together represent a huge amount of premium video that has until now been out of the market [for advertisers]. It is a watershed.”

Netflix’s Basic With Ads, priced at $6.99 a month, begins November 3 in the US and 11 other markets. Disney+ drops its ad-supported plan for $7.99 a month on December 8.

For the third quarter, Netflix returned to positive subscriber growth, with 2.4 million new subscribers, and projected a gain of 4.5 million in the fourth quarter (which is the last time the company will provide that guidance). In its letter to shareholders, Netflix sought to set expectations: “While we are very optimistic about our new advertising business, we do not expect a material contribution in Q4’22.” But there’s a huge opportunity: Netflix and Disney+ stand to capture an estimated $2.7 billion and $1.9 billion, respectively, in annual connected TV advertising by 2026 in the US alone, together accounting for about 15% market share, according to a Morgan Stanley forecast.

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Netflix and Disney+ were initially reluctant to introduce advertising due to concerns that it would be a turn-off for monthly paying customers. Here are four reasons why they declined—and why both are now banking on lower cost levels to keep subscriber growth healthy.

The purity of the streaming experience

Netflix and Disney executives rightly believed that a subscription VOD service without ads is more attractive to consumers — and the thinking was that advertising would somehow dilute the promise of premium entertainment. But extensive research shows that many consumers are willing to switch their attention to a price break. For example, 39% of people who don’t have Netflix said they would consider signing up for an ad-supported alternative, while 26% of those without Disney+ said the same, according to a September 2022 survey by research firm Disqo.

With the new ad options, the companies could win back subs who dropped and keep those teetering on the edge of cancelling. “There has been an underestimation of the tolerance for ads in streaming services,” says Jon Giegengack, principal at Hub Entertainment Research.

Need to share data with third parties

Netflix has been notoriously stingy with disclosing data, viewing that information as a competitive advantage in making content acquisition and curation decisions. Now Netflix, along with Disney+, will be forced to disclose more detailed data to advertisers about audiences and viewing habits on their platforms. (Netflix says the measurement deal with Nielsen will start next year.) But that’s the cost of doing business, and it’s worth noting that ad measurement will only include a portion of total usage.

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The new services will also be subject to public regulations governing the privacy of personal user data. Hastings, in announcing Netflix’s ad plans, downplayed potential privacy risks: “We can be a fair publisher and have others do all the fancy ad matching and integrate all the data about people.”

Additional costs and complexity

Unlike Disney, Netflix had no history in the ad business, adding that ability has required coordinating a bunch of moving parts — and making new investments. The streamer is renegotiating licensing deals to get ad rights from content partners, but out of the gate will have to exclude 5-10% of titles (depending on country).

To get to market quickly, Netflix chose to partner on ad sales and technology with Microsoft, which completed its acquisition of AT&T’s Xandr digital ad unit in June. Netflix also hired two ad industry veterans to lead the charge: Jeremi Gorman and Peter Naylor, both most recently with Snap. “They have a great team of experts in place — they know what they’re doing,” says Mark Melvin, managing director of Americas for Mirriad, which sells content sponsorships. “I’m sure Netflix will figure it out.”

Risk of cannibalisation of higher price levels

“When you take existing business models with you, there’s always the existential fear of trading dollars for pennies,” says Blair Harrison, founder and CEO of cloud-based linear streaming platform Frequency. Disney and Netflix executives have expressed confidence that they have calibrated their launch plans to reduce cannibalization risk so that it doesn’t matter which plan customers choose. Also, the companies have hinted that there could be upside to the ad-supported tiers if they can command premium ad rates. While some ad buyers are skeptical that Netflix will get the $65 CPM (cost per thousand impressions) it sent to ad buyers in August, other industry observers say it’s not out of the question. “Netflix may be late to the game,” says Mark DiMassimo, founder and chief creative officer of ad agency DiGo, “but their game has been pretty good.”

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Disney has an additional motive for sewing ads into its flagship streamer. It needed to raise Disney+’s price point after it initially shut down the service in an effort to quickly acquire subscribers. As CEO Bob Chapek admitted at a Goldman Sachs conference last month, Disney+’s $6.99 price point when it launched in November 2019 was “pretty absurd.” The ad-free version of Disney+ will jump from $7.99 a month to $10.99, while Disney+ with ads will be available for $7.99.

The winners from all of this are consumers — who want more affordable options as inflation continues to weigh on their wallets — as well as marketers hungry to reach cord-cutters. The losers? Legacy cable and broadcast TV networks, which will see more Madison Avenue money move into the world of connected TV streaming.

As Samba TV’s Navin puts it: “The fortress that is linear television is cracking at its foundation.”

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

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