This morning Disney announced it will introduce an ad-supported subscription option in the U.S. in late 2022, with plans to expand internationally in 2023.
We had a warning signal about this yesterday from The Information's Jessica Toonkel, and it was confirmed this morning.
I think the key paragraph in the press release is this one:
“Since its launch, advertisers have been clamoring for the opportunity to be part of Disney+ and not just because there’s a growing demand for more streaming inventory,” said Rita Ferro, President, Advertising, Disney Media and Entertainment Distribution. “Disney+ with advertising will offer marketers the most premium environment in streaming with our most beloved brands, Disney, Pixar, Star Wars, Marvel and National Geographic. I can’t wait to share more with advertisers at the Upfront.”
Of course, there has to be demand given that titles from these brands have run with ads on linear TV for years. It's the same content on a new channel.
Streaming offers demographic targeting and non-interruptive formats that are not native to the linear ad buying experience. It also offers programmatic inventory, allowing third parties to bid on unsold inventory.
Since 2020, Disney has been pushing an "aggressive plan to unify all of its screens, automate more than half of its business and make the majority of its inventory – both linear and digital – addressable within five years."
Disney shared the progress of its unification plan with advertisers yesterday at its annual Tech & Data Showcase event. Disney Advertising president Rita Ferro told advertisers that Disney has 218 million monthly unique visitors in the U.S. to its media properties, 100 million household-level IDs, 160 million connected TV IDs, and 190 million device IDs.
According to Digiday's Tim Peterson, its four key updates to advertisers were:
Extending Hulu’s pause, binge and shoppable ad formats to other Disney properties
Expanding Hulu’s self-serve ad-buying tool to become Disney’s self-serve ad buying tool that will source inventory from Disney’s other properties
Opening up Hulu’s attribution tool to become Disney’s attribution tool that will also cover Disney’s other properties
Opening up a data clean room program for advertisers to match their customer data with Disney’s audience data, including Hulu’s data
So, all signs point to an ad-supported version of Disney+ succeeding... right?
Three Challenges for Ad-supported Disney+
I think there are three noteworthy challenges for an ad-supported Disney+.
1. Scale
The first and most important one is that it is a bet on additional Average Revenue Per User (ARPU) based on Hulu's success. As I wrote in If Streaming Growth *Is* Slowing, What Will Advertisers Buy In CTV?:
Hulu reported an ARPU of $12.75 in FY Q1 2022 on a higher monthly price of $6.99 for its ad-supported offering. Assuming two-thirds of its audience chose the ad-supported model, again, Hulu generated $15.58 off of its ad-supported offering, or $8.59 in ad revenue per user over the quarter (up from $8.27 or 4% from Q1 2021).
The implication is that with strong advertiser demand for Disney+ inventory, we will see similar math for ad-supported Disney+ because it will be serving ads off of the same back-end.
I don't think that's an unreasonable prediction. That said, Hulu has spent almost 15 years building out both relationships with advertisers and an advertising value proposition at an extraordinary scale. It is not clear whether or how the Disney+ ad-supported option will reach a similar scale.
2. Higher CPMs
Another key factor is that Hulu's growth in ARPU has benefitted from increasing Connected TV CPMs and, by implication, an unusually high fill rate. But, those are not guaranteed for other AVODs, as I wrote for Members, only, in The Cola Wars, Retail Velocity & Why I Disagree With "The Streaming Wars".
Specifically, I highlighted something AT&T CEO John Stankey had said in their earnings call:
I expect there'll be some customers that choose to go the ad-supported route that may have gone the subscription route before. However, what will happen is it's not that one is less accretive than the other. The subscription line will possibly dilute a bit, but the advertising line will increase. So when you look at the customer overall, they're no less profitable.
It just books to two different places on the P&L.And our goal, and in fact, what we are seeing today, we are indifferent as to what the customer chooses. Frankly, maybe in some cases, it's a bit more accretive if they go the ad-supported route.
The implication was that "not all HBO Max with Ads customers are valuable to advertisers, but some are."
In math terms, it means that they will not be selling 100% of ad inventory on ad-supported HBO Max at higher CPMs. So, on average, the service will sometimes but not always be delivering marginal revenues.
I think it is reasonable to assume this will be true for ad-supported Disney+, too. In turn, that impacts a key factor like fill rate. Meaning, if not all Disney+ ad inventory will be accretive to Disney+ because it will not always be filled with higher CPM inventory, then we are unlikely to see Hulu-like marginal ARPU at Disney+.
3. Reach
Last, Disney is announcing this new ad-supported service at a time where streaming growth, market-wide, is hitting a wall:
Instead, if demand is elastic and marketing fails to drive more audiences, demand for all streaming - SVODs, AVODs and FASTs - will go down and CPMs will stay flat or go down. Throw in Mike Shields' point above that the CTV numbers "don't smell great", and the entire streaming ecosystem may be more fragile than we have been led to assume.
In other words, if advertisers cannot reach streaming audiences at scale and/or are unwilling to spend more for additional reach in AVOD and FAST, then all three models (SVODs, AVODs and FASTs) are primed to hit a wall in 2022.
I added later in the essay:
There is scale in the Connected TV marketplace, according to a 2021 study from Association of National Advertisers (ANA) and Innovid: approximately 75 million unique, addressable CTV households in the U.S. (out of an approximate total of 128 million).
But the same study says there is not reach: the average campaign in the study reached only 13% of the available U.S. CTV households. This implies that CTV ad technology may not be able to reach target consumers cost-effectively, and the ANA and Innovid study said exactly this: it recommended that upwards of 100 million impressions should be purchased to reach 40% of the U.S. CTV homes.
Disney's updates to advertisers, above, show reach across the Disney ecosystem. That means two things:
Advertisers who need reach will buy from Disney, but
They will not always buy ad-supported Disney+ inventory, only
The other key thing to add is this problem of reach gets exponentially more complicated when Disney+ expands its ad offerings overseas. It is much harder to achieve scale in an AVOD model overseas, where the long tail of ad impressions - meaning, the unsold inventory served to content and/or audiences that advertisers and sponsors have not purchased - will need to be customized to each and every country and language where the app is being used.
Disney won't have that scale at launch or conceivably in five years.
Did Chapek Overpromise?
The looming question is, why is Disney making this move now?
As it implicitly admits in the press release, it needs more streaming growth after a year of slowing growth, particularly in the U.S. A lower-priced tier should attract more subscribers.
But Disney CEO Bob Chapek also reiterated a promise to investors in its FY Q1 2022 earnings call that they will reach 230 million to 260 million Disney+ subscribers by the end of fiscal 2024.
All recent trends in streaming suggest that may have been a miscalculation, if not overly aggressive bet, to double down on.
On the flip side, this may be Chapek and his team acknowledging what I argued in Why Disney+, Paramount+ and Legacy Media Streamers Can’t Escape the Past: new content loses to old content on the subscription-only platform.
So, maybe be old and new content would be better monetized on an ad-supported platform.