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The Rise of Ad-Supported Streaming Is Challenging How the Business Is Traditionally Done
Are the upfronts turning into TV execs’ personal “Black Mirror'' episode?
The annual feeding frenzy—in which C-suite television executives auction off highly-viewed (and costly) advertising time slots— is changing as new streaming behemoths shake up the market. The event often gives viewers and industry watchers insight on what shows are poised to become cultural phenomena, but that too seems to be disrupted at this year’s proceedings.
It’s been two years since major networks and television players convened in New York for a week, and it’s clear that technology is going to change a lot about how the process works.
Streaming, a popular way to view content, doesn’t follow traditional ad slots the way broadcast does. Nonetheless, last year ad-enabled streaming services–including Peacock and Hulu–slurped up a large slice of ad dollars. But this year may prove a turning point, as services like HBOMax and Disney Plus begin tinkering with ad-laced streaming, and Netflix promises to quickly roll out an ad-supported subscription tier. Large networks like ABC and NBC will have to start competing with streaming for the favor of companies and their ad money.
Another thing changing the market: the ads themselves. With more data at their fingertips, streaming services can offer far more personalized and targeted services than their network counterparts. Netflix and Disney collect mountains of data that can gauge what ads are most relevant to their viewers. That’s a huge plus for advertisers, even if streaming services like Disney restrict what kind of ads it will show.
Legacy TV companies have already taken note. NBCUniversal took great pains at Monday’s pitch meeting to offer their Peacock streaming service as an example of a dual streaming-and-broadcast model and lambasted streaming services that once showed disdain for advertisers and ad breaks.
“At those companies, advertising could seem like an afterthought… or even worse, a new idea for a revenue stream, but not here,” NBCUniversal’s ad sales chief Linda Yaccarino said, according to The Hollywood Reporter. “At NBCUniversal, advertising has always been an asset for our business… designed to enhance your business.”
Adding to the instability, Nielsen ratings, which has been the universal standard for measuring viewership, is being challenged. The company’s ratings were once the gold standard used, in part, to determine the time slots and networks that had the most viewers (and which became the most coveted by advertisers).
Last year, Variety reported major networks complained that the company was likely undercounting viewership due to pandemic-related restrictions, like being unable to go into peoples’ homes and making sure the data-collecting technology was properly working. In its wake, software-enabled startups have popped up to better gather data remotely.
Washington-based iSpot.tv received a $325 million investment from Goldman Sachs after acquiring similar companies including El Segundo-based Ace Metrix and Temecula-based DRMetrix. Pasadena-based tvScientific raised $20 million in April to glean adtech data from smart tvs. Edward Norton’s adtech firm EDO raised $80 million in April and booked a deal with Discovery ahead of the upfronts.
Nielsen also lost its accreditation with the Media Ratings Council, and without a standard ratings guide for the industry, navigating the upfronts will be a far more uncertain and nebulous process for both networks and advertisers.
With tens of billions of dollars on the line, advertisers are demanding more than just well-produced shows networks and streaming services alike—sophisticated ad placements is the name of the game.
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Disney Plus just showed up Netflix.
After Netflix stunned Wall Street by losing subscribers for the first time in a decade, Disney said Wednesday that its flagship streaming service is still chugging along nicely. Disney Plus added 7.9 million paying customers during the second quarter of fiscal 2022, beating Wall Street’s expectations of about 5 million. That brings Disney Plus to 137.7 million total subscribers.
The Burbank-based media giant’s strong showing comes amid growing concerns with the streaming business. Netflix’s poor earnings and the rapid demise of CNN Plus have rattled investors, who previously rewarded entertainment and tech titans that spent billions to launch streaming platforms and added many subscribers during the pandemic.
Now, Netflix’s stock has plunged 70% over the last six months. The company lost 200,000 subscribers during its first quarter and expects to lose 2 million more in the current quarter. Netflix blamed the subscriber slowdown on increased competition, password sharing and the war in Ukraine, among other things. And recent surveys show consumers are canceling subscriptions they believe are too costly.
“The business model isn’t as attractive as once thought due to the intensifying competition for time, attention and consumer spending,” media analysts Robert Fishman and Michael Nathanson of MoffettNathanson wrote in a recent report.
The problems facing Netflix don’t seem to be holding back Disney Plus—at least not yet. Executives told analysts that the service had a “stronger than expected” first half of the fiscal year and that it is expected to add more subscribers during the final six months, though maybe not by much. The company’s goal of hitting at least 230 million Disney Plus subscribers by 2024 is still on track, CEO Bob Chapek said.
“The growth of the platform since its launch reinforces its unique nature. Quite simply, we believe Disney Plus is one of a kind,” Chapek said. He later touted that, despite Disney’s family-friendly branding, almost half of Disney Plus subscribers were adults without kids.
Disney Plus may still be growing, but streaming is costing the company a lot of money. Disney’s direct-to-consumer division, which also includes Hulu and ESPN Plus, lost $887 million during the second quarter—more than triple the loss from a year ago. Disney executives expect its flagship service to become profitable in 2024.
Overall, Disney’s revenues rose 23% year-over-year to $19.2 billion during the second quarter. Net profits were down 48% to $470 million.
Despite avoiding Netflix’s fate—for now—Wall Street wasn’t impressed. The company’s shares slid more than 2%, to $102.75, as of 3:09 p.m. PT in after-hours trading.
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Coming soon to Disney Plus: commercials.
On Friday, Disney announced that it will offer a cheaper, ad-supported tier of its flagship streaming service, joining other major streaming platforms in giving subscribers an ad-supported option. The Burbank-based media giant did not disclose how much the less expensive tier will cost—Disney Plus is currently priced at $7.99 per month—but said it will roll out in the U.S. later this year, with plans to launch it globally in 2023.
“Expanding access to Disney Plus to a broader audience at a lower price point is a win for everyone—consumers, advertisers and our storytellers,” Kareem Daniel, Disney’s chairman of media and entertainment distribution, said in a statement.
The move isn’t surprising given the growing consumer demand for cheaper streaming options. Subscription analytics firm Antenna released data last week showing that consumers increasingly opted for less expensive, ad-supported subscriptions in 2021 than in previous years. Ad-supported sign-ups grew more than 117% year-over-year, from 19.4 million in 2020 to 42.2 million last year, according to Antenna.
At the same time, a recent survey by tech consultancy Concepts Rise indicated that many users are likely to ditch a streaming service this year because of the cost.
Disney views the ad-supported offering as a way to reach its long-term target of 230 million to 260 million Disney Plus subscribers by its 2024 fiscal year. The streaming service had 129.8 million subscribers as of Jan. 1.
But some analysts are already questioning whether Disney has made the right call. Analysts at media research firm LightShed Partners noted that inserting ads can lower users’ streaming consumption, adding that Disney’s addition of an ad-supported tier “feels premature.”
“The key now is driving usage so that Disney can capture more consumer time spent per household per day,” LightShed analysts Rich Greenfield, Brandon Ross and Mark Kelley wrote on Friday. “Lowering price and jamming in ads does not feel like the answer to driving usage—if anything it feels like it will have the opposite effect.”
Disney joins the likes of HBO Max, Paramount Plus and NBCUniversal’s Peacock in offering an ad-supported option. The company also offers a bundle that packages Disney Plus with its Hulu and ESPN Plus streaming services. Rather than releasing entire seasons of content at once, Disney Plus has joined other streaming platforms in opting to drop one episode at a time on a weekly basis—a move partly designed to keep users, who may otherwise binge-watch a show and then cancel their subscriptions, on the platform for a longer period.