Behind Disney+’s Ad Pivot: A Drive for Streaming Profits

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Disney’s reveal March 4 that it would launch a less expensive, advertising-supported tier of Disney+ spurred consternation from some Wall Street analysts, with firms like MoffettNathanson lowering their price targets for the entertainment giant. Was the company worried that it would miss its goal of hitting 230 million to 260 million subscribers by 2024?

“Is this a Hail Mary? No, it’s not,” Disney CFO Christine McCarthy said of the strategy shift March 7 at a Morgan Stanley conference. “We certainly welcome it if it drives more consumers, more subscribers, if it improves ARPU, but we are really doing it because of consumer choice.”

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In some ways, the move was the culmination of robust debate internally at Disney that had been happening on and off for years. On its November 2017 earnings call, two years before Disney+ launched, then-CEO Bob Iger revealed that the company was “not planning to sell ads on the Disney service,” specifically referring to interruptive commercial breaks.

However, he added that the streaming service still was “in development” and that “there may be some interesting possibilities in terms of sponsorships versus inserted ads,” leaving the door open to advertisers.

Ultimately, when Disney+ launched in November 2019, it did so without ads, but that step was not taken without much internal discussion.

A source familiar with the talks tells The Hollywood Reporter the feeling was that with a smaller price tag of $6.99 a month, a significantly smaller library, and with much of that library made up of feature-length movies, an ad-supported tier, even one based on sponsorships, wasn’t necessary. “We think for Disney, for these brands, at this time no ads is the right call,” said Disney’s then-direct-to-consumer chief, Kevin Mayer, at a 2019 corporate investor day.

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And then, earlier this March, the company changed its tune, announcing that Disney+ would get a cheaper, ad-supported tier later this year, with international markets to follow in 2023. Disney+ joins a crowded field of ad-supported streaming platforms, both subscription offerings like Paramount+, Peacock, Hulu and HBO Max, but also free offerings from the likes of Tubi and Pluto.

So what spurred the change in strategy? In short, Disney is not only focusing on subscriber acquisition but also improving profit margins while also doing something its advertising partners have long coveted.

“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,” Rita Ferro, president of advertising for Disney Media and Entertainment Distribution, said in a statement announcing the new tier.

A source at a media buying firm with clients that buy on Hulu and Disney’s linear channels confirms to THR that there has been significant interest expressed to the company in reaching Disney+ subscribers, particularly on the Marvel and Star Wars original series such as The Book of Boba Fett and Loki. Executives at the company say the move was made to get ahead of pitch meetings tied to Disney’s 2022 upfront, which will be held at New York’s Pier 36 on May 17, when Disney+ is expected to be a hot topic.

“We have more demand than supply,” McCarthy said at the conference.

And on the subscription side, while the company beat Wall Street forecasts last quarter, pushing Disney+ to 130 million subscribers, there had been concern in recent quarters that growth had slowed, and the company had told investors it didn’t expect an acceleration until later this year when it gets into a regular “cadence” of original content. A lower price point could entice a few million more people to join, helping it to hit its 2024 goal.

However, “the ad-supported launch is not just about subscribers, it’s also about revenue per subscriber, which is much higher for ad-supported viewers,” says Eric John, vp at the IAB Media Center.

If Hulu is any indication, the margins on the ad-supported tier could prove to be better than the ad-free tier. According to Disney’s last quarterly earnings report, Hulu’s SVOD product brought in $13 per month in revenue, despite most users subscribing to the $6.99 per month ad-supported tier.

It’s safe to say that Disney+ can expect similar performance, especially with Disney unifying the company’s ad sales division, having the same team sell Disney’s linear channels and streaming services, and with automation making it easier for buyers to buy ads across platforms in one click.

“It is finding the balance between the subscription revenue, and you want to maximize that for sure, while recognizing that there needs to be a way that accesses more people, because marketers want access to scale,” says Matt Spiegel, executive vp of TransUnion’s media and entertainment vertical. “If you can find that price point where you can drive a significant amount of more subscribers at a discounted tier in exchange for ads, that is a win all around. You increase scale, you increase reach and distribution of your programs, you are still monetizing directly through subs at some level.”

And after the tier launches, a less-expensive bundle with Hulu is all but assured to follow, where “Disney can target advertisers with inventory across both subscription platforms and users looking to save money on Disney content and services,” says Blair Harrison, CEO of the internet video service Frequency.

Still, there is no question the move is a significant pivot for Disney, which has until now resisted the temptation to bring advertising to its flagship streaming service.

At the company’s 2020 investor day, McCarthy said the “intention” was to not have ads on Disney+.

“When you look at the Disney brand, the Disney+ product, we have a very high volume of films on our service,” McCarthy added. “And we don’t believe that the consumer experience would be a particularly good one if we had advertising on Disney+.”

But what if Disney solved the film experience problem? A technology demo to the company’s advertising partners on March 3 suggests the company believes it has done so.

In addition to discussions about measurement, data and automated ad-buying processes, Disney demoed new movie-specific ad formats it plans to bring to its streaming services: a sponsored trivia format based on the film being viewed, and another called “Let’s All Go to the Pantry” (based on the 1957 musical advertisement, “Let’s All Go to the Lobby”) that could let streaming users order “concessions” from their couch. Such experiences, like Hulu’s “pause” ad formats, could work on both Disney+ and Hulu, minimizing degradation to the consumer experience through annoying ad breaks.

And keeping a good consumer experience must be top-of-mind for Disney.

“When Hulu started ads, it had low ad load, very targeted, very creative,” Lightshed analyst Rich Greenfield said on the company’s podcast March 7. “But it gets worse and worse and worse, because you keep on going, ‘How do I make the quarter? How do I grow revenues?’ More ads. That is the human tendency of a management team once you bring in ads.”

Data from the streaming advertising data firm MediaRadar shows that Hulu has 12 ads per hour on its original shows and 13.8 ads per hour on licensed content. In contrast, Peacock and HBO Max have 8.7 and 9.3 ads per hour, respectively (Paramount+ has the most ads among subscription streamers, with 23.8 ads per hour).

McCarthy confirms that Disney+ would launch its ad-supported tier with a lower ad load (the media-buying source speculated that it would be similar to Peacock’s and HBO Max’s) to maintain its premium status, though as Greenfield notes, the temptation to increase the ad load could grow over time.

McCarthy suggests that the company is well aware of its brand equity for Disney+. “It is a family audience,” the exec added. “We will be very careful about the ads we take and how we put them into our content.”

A version of this story first appeared in the March 9 issue of The Hollywood Reporter magazine. Click here to subscribe.

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