After conditioning viewers to expect an ad-free environment, the industry is about to make a hard pivot to on-screen advertising. And if you don’t want to start watching ads again, all you have to do is pony up.
Walt Disney chief executive officer Bob Chapek last month revealed that its Disney+ AVOD offering would launch in December. The announcement came on the heels of the company’s strong third-quarter earnings report, including an uptick in subscribers to 221 million across its streaming bundle, which includes Disney+ and ESPN+, which put it in front of Netflix for the first time. Disney+ alone has 152 million subscribers.
On Wednesday, Chapek, speaking at the Goldman Sachs Communacopia + Technology Conference, pronounced himself “very optimistic” about the potential of the ad-supported tier to lure new subscribers and limit churn.
“The launch of Disney+ at that introductory price was pretty absurd,” chortled Chapek, referring to the $6.99 introductory price.
And so the current price — $7.99 — is still a huge bargain. Anyone with children can grudgingly attest to the mostly indispensable value of hundreds of hours of Disney movies.
“It was so attractive to the consumer,” continued Chapek. “And what have we done since then? We’ve continually invested and reinvested. So the value proposition to our customers is extraordinary. I think we have a lot of room on the price value range. And I think we believe that our churn implications of taking up the price, even in the big jumps that we’re doing, it is going to be negligible.”
Disney’s move to offer an ad-supported tier may spur Netflix to move up the release of its gestating ad-supported tier to November, The Wall Street Journal reported, though Netflix has not confirmed the timeline. The streaming giant is partnering with Microsoft on ad sales and technology and recently hired former Snapchat executives Jeremi Gorman and Peter Naylor to lead the division.
And while streamers will continue to offer ad-free premium subscriptions, inflation beleaguered consumers may be in for some sticker shock. Disney+ plans to charge U.S. customers $7.99 a month for its ad-supported option, which is the cost of the current ad-free service. Meanwhile, the ad-free service will rise to $10.99 monthly. Netflix has not revealed pricing, but its ad-supported tier is expected to cost between $7 and $9 a month; its current standard ad-free tier is $15.49.
Executives at Disney and Netflix maintain that they will prioritize the user experience by limiting ads to four minutes an hour. Disney will not accept advertisements for alcohol, for rival streamers or from political campaigns. Both companies have said programming aimed at young children will remain ad-free. And Netflix executives have said that original movies could have an ad-free window upon release.
Currently, Warner Bros. Discovery’s HBO Max ad-supported offering also limits interruptions to four minutes an hour. NBCUniversal’s Peacock has a slightly higher ad load at five minutes an hour. But other services are more stuffed with ads. Disney’s sister streamer Hulu runs up to 12 ads an hour and Paramount+ runs up to 17 ads per show and 23.8 ads an hour, according to MediaRadar.
But the ad-supported tiers were supposed to limit churn by offering a more attractive price point for inflation-battered consumers who have seen their streaming subscriptions balloon. In unveiling the launch of an ad-supported option earlier this year, Kareem Daniel, chairman of Disney Media and Entertainment Distribution, stressed that “expanding access to Disney+ to a broader audience at a lower price point is a win for everyone.”
Wall Street seems to agree that ad-supported tiers are at least a win for media conglomerates in need of revenue in a maturing and saturated streaming market. A recent report form MoffettNathanson estimates that, for Netflix, advertising could reach $1.2 billion annually by 2025. Meanwhile, at the moment, Netflix is busy pink-slipping hundreds of employees as its stock and market cap have tumbled. The downturn has spurred skepticism from some. Benchmark analyst Matthew Harrigan (who has emerged as a persistent Netflix naysayer) expressed skepticism about the company’s upcoming foray into the ad-supported market. In a recent note, Harrigan acknowledged the upside of AVOD “with exemplary execution” but added, “early indications are Netflix is unrealistically aggressive on pricing given vanilla ad feature capabilities, especially personalization versus peers and inadequate performance measurement.”
Multiple outlets have reported that Netflix is seeking $65 CPM (cost per thousand viewers) rates from advertisers, an astronomical price that is more than double those of Hulu and Amazon Prime. Harrigan chalked this up to “hubris.”