Friday Mailing: Marketplace Disconnects Between Disney+ With Ads & Advertiser Demand
If the buzz around advertising in streaming has been sounding unusually bullish lately, blame Upfronts. They start next Monday and aim to meet or pass the “robust demand” witnessed in the 2021 Upfronts.
CEO Bob Chapek told investors on the FY Q2 2022 earnings call that advertisers have asked for a Disney+ ad tier “for years”, and added, “Our advertisers increasingly are looking for multiple platforms to reach a broader reach.”
Jeff Green, CEO of the media-buying platform The Trade Desk, offered a similar, bullish take on advertiser demand earlier this week on his company’s Q1 2022 earnings call. However, Green also implicitly highlighted some key disconnects between advertiser demand and the supply Disney will offer via Disney+ with ads.
Demand is real
Green told investors:
As advertisers are seeing reach and impact erode from traditional cable television, they are focused on moving to premium streaming content. Increasingly, this is the most important buy on the media plan. Marketers want to advertise against premium content as much as possible. It's content they can trust.
It's content that reflects their own brand. It's content they can activate on and measure against with precision. As advertisers prioritize ads on premium content on our platform, they are beginning to start their campaign planning there, too.
Connected TV is “the fastest growing part” of The Trade Desk’s business, and the recent moves from Netflix, Disney+ and HBO Max are “requiring everyone to embrace biddable environments and move away from legacy models, like upfronts and even programmatic-guaranteed, where advertiser choice is limited. These changes in the TV landscape also have adjusted marketers' mindsets.”
Chapek is saying something similar: Disney+ is well-positioned to reap the benefits of these adjusted mindsets. Both are also saying it's early days for premium streaming inventory.
Supply is tricky
Green added two important caveats about the challenges from the supply side:
But CTV needs persistent identity to have effective and high CPM ads, and they need high CPM ads to fund that content. It's economics that's driving that process. As more CTV leaders embrace advertising, they want to ensure that they create as much addressability as possible because that's the only way that they can maintain high CPMs. And an advertiser will pay, say, a $12 CPM if they know the viewers are watching the latest hot reality show, but they will pay three times that if there's a reasonable chance those viewers are interested in their product.
If the point about spendthrift advertisers sounds familiar, it’s the one I highlighted in Netflix’s Best Advertising Bet Won’t Require Software: "Media buyers tend to be too risk averse to pay for adequate reach: As a 2021 study from The Association of National Advertisers and Innovid found, an average campaign reached only 13% of connected TV households in the U.S."
Effectively, in meeting market demand Disney may be sacrificing $30 CPMs on linear for $15 CPMs, and the inelastic demand of linear media buyers for the more risk-averse, elastic demand on connected TV media buyers. The shift in advertiser demand from linear to premium streaming has not brought the same premium economics with it.
The problem of walled gardens
The second caveat he highlights is that addressable inventory requires “persistent identity”, and Green makes it clear that we are still in the early days of publishers and The Trade Desk solving for post-cookie identity. Meaning Disney+ will have its own way of tracking users within the Disney ecosystem without cookies, The Trade Desk will have its own, Nielsen will have its own, etc.
The ecosystem will be suboptimal until or unless Disney can help to solve for interoperability of ID trackers. The point is not that they cannot solve this, because they will and The Trade Desk is a partner of Disney’s who can help them solve it. Rather, because it involves identity - which has the ongoing attention of regulators - it is a particularly thorny problem to solve, and Green's point is it is not yet solved.
Green is also highlighting the challenges of walled garden economics in ad-supported streaming that IAB Executive Chairman Randall Rothenberg recently pointed out in a long Twitter thread. Disney may have enormous scale, but walled gardens are limited by the size of their libraries. In turn, that limits total inventory.
Disney+ is one service that is very much limited by the relative size of its library (700 films and 400 TV series), despite the exceptional quality of its IP. In other words, even with the scale of Hulu and Disney’s linear business, both Green and Rothenberg are suggesting its ad business will need additional inventory on the open web.
That also requires Disney solving for the interoperability of how it tracks and serves ads to users within the Disney ad ecosystem with The Trade Desk and other media buying platforms.
On this point, it’s worth noting that Rothenberg concluded his long thread with: “regulatory pressures [will] cut into the effectiveness & advantaged pricing of digital audience targeting”. Meaning, regulators like the EU may be applauding the end of the cookie, but that does not mean they may be on board for open web ID standards.
Conclusion
The point here is not to discount advertiser demand for inventory on Disney+ and across the Disney digital ecosystem. The demand is real - $8B in linear advertising revenues and $3B in direct-to-consumer in 2021, alone - and Disney may have one of the strongest pitches in CTV with Hulu’s ad-delivery platform (now integrated into a broader programmatic solution called Disney XP), which earns around $15.60 per user for Hulu, alone. [1]
But, Bob Chapek is selling Disney+ as positioned for the upside of the shift in demand from linear to Connected TV and streaming. The Trade Desk’s Jeff Green does a helpful job in affirming this point and outlining how this demand is evolving. But, Green also highlights two important problems: effectively, the pivot to CTV is a sacrifice of relative operational simplicity and premium economics. Disney may not have all the operational and technological mechanisms in place yet to solve for both.
And if they do not, we can expect Disney+ with ads to be something analogous to how AT&T CEO John Stankey described HBO Max with ads to investors back in March: “maybe in some cases, it's a bit more accretive” if customers opt for the ad-supported model, but otherwise AT&T and WarnerMedia management were “indifferent to as to what the customer chooses”.
I'm not sure Bob Chapek shares Stankey's perspective that Disney+ with ads will be "in some cases, it's a bit more accretive”. But that may be what the market structurally requires him to have as it solves for the finer points of the economics, technology and identity-tracking of CTV advertising.
Footnotes
[1] The math is: $12.77 = [.33*(6.99)] + [.67(x)]
$12.75 = $2.31 + .67x
$10.46=.67x
x= $15.60