Since announcing the introduction of ad-supported subscription tiers earlier this year, both Disney+ and Netflix have attracted a lot of excitement from the advertising world.
But with reports of very high CPMs and opaque measurement, it sounds like both may be hoping their reputations will be enough to draw in ad revenues. In this piece Ian Whittaker, founder and director of Liberty Sky Advisors, dissects whether they’re likely to live up to the hype.
The past few months have seen significant steps in the rollout of advertising to the SVOD services. Disney+ launches its product in the United States later this year while Netflix also confirmed it was introducing advertising. Both have recruited powerful partners to help them with their offering with Disney selecting The Trade Desk and Netflix Xandr). Disney+ has also confirmed its pricing (at least for the United States) when it comes to the ad-supported option – keep the existing $7.99 per month price for Basic and take adverts or take a $3 per month price rise for no ads. Netflix has chosen a similar price point, at $6.99 in the US.
The launch of advertising makes sense strategically. It offers a new source of revenue growth as opposed to a SVOD model, which depends on growing subscriber numbers and / or ARPU. That is critical because SVOD penetration is already slowing down, as witnessed by the Q2 results of Netflix, Comcast’s Peacock and Warner Bros Discovery. While Disney+ continues to grow, it is mainly fuelled by India, which is a low-ARPU market (around an underlying 1/9th of Disney’s non-India markets). Crucially, being high margin, such advertising revenues also have a disproportionate impact on profits. Meanwhile, growing pressure on households makes raising ARPU difficult and there is a natural trade off between subscriber and ARPU growth.
However, there are problems here for both platforms. The most often quoted so far is the pricing of the offerings. Disney+ is apparently being charged at $80 CPM whilst Netflix is reportedly charging in the range of $65 / CPM. Netflix’s offering has come under attack given advertisers have no transparency over where the adverts will be shown (although the recently announced deals with BARB and Netflix do suggest movement on the measurement front, the finer details are yet to be seen). In ordinary times, this would be a concern anyway, but it is more of an issue given greater economic uncertainty and, perhaps more to the point, rising concerns over TV the rising concerns over TV inflation.
Secondly, there is the size of the audiences reached. Most advertising markets – and advertisers spend – is still national in nature. There is a recognition, particularly in Europe, that an advertising strategy for France may not be the best one for Germany or for the UK (you get the picture). Yet, while the audiences of the streaming platforms are very large on a global basis, it is a different matter when it gets down to individual countries. In all the major European markets, streaming content does not threaten the top 20 shows in terms of audience size. So, for advertisers wanting reach, the streaming services – in Europe – do not meet the grade. It may start to be a different case in the United States, where the Nielsen data is suggesting that the streamers are starting to make meaningful gains in audience data. However, the world is not the United States – which is a point that seems to be lost on at least some of the decision makers.
That leads onto the third point, and an obvious one, namely what advertisers are getting for their money. One question that advertisers should be asking themselves is whether the streaming subscribers reached with adverts are necessarily the optimal ones. Certainly, the Disney+ pricing offering does not look like a way to attract new subscribers – if you are not taking Disney+ at $7.99 without adverts, why are now you are taking it at the same prices with adverts – but more to maximise revenues from the existing base and reduce churn amongst price sensitive customers.
It is a smart strategy, but the chances are that a disproportionate percentage of those who choose the advertising option are doing so because of economic reasons, which may not be the ones that advertisers want to attract. Having an advertising offering that theoretically reaches all subscribers, regardless of economic conditions, is probably a more attractive option for advertisers.
Of course, Netflix and Disney may not care about these concerns, even if they are aware of the issues. There is likely to be a cohort of advertisers who want to be on the service at launch because of the ‘wow’ factor. That will bring claims of success for the advertising strategy (we also do not know what minimum revenue guarantees have been given by their partners). In addition, as I noted above, advertising revenues should be very high margin for the streamers because virtually all of it should drop through to the bottom line.
All this not only helps the financials but also investor perceptions to the companies, which has been badly damaged over the past 12 months (Netflix’s share price is down over 60 percent in the period). However, if the companies want to turn their advertising propositions into a long-term, viable and meaningful business, then they perhaps should start to readdress the weaknesses in their plans.