Disney+, Netflix Ad Tiers Are Bringing New Inventory

When it comes to the changing TV landscape, marketers are crying ad tiers of joy. The days of streamers shunning marketers and gatekeeping massive subscriber audiences are over. Instead, SVOD subscriptions are declining, according to a Q3 analysis by Kantar, and growth is coming from platforms that have a combination of both SVOD and AVOD/FAST (free ad-supported TV), opening up inventory to advertisers. And with streaming giants Disney+ and longtime advertising holdout Netflix both finally getting into the lower-priced, ad-supported game within the past couple months, that growth will likely continue into 2023, especially with price-pinched consumers looking for cost relief. Netflix co-CEO Ted Sarandos has even said the platform might offer multiple ad-supported tiers in the future. "Consumers are hitting fatigue with all of these subscriptions," said Marcy Greenberger, evp, integrated investment, UM. "It's almost becoming as expensive as a cable subscription to subscribe to so many different services, so to have some either that are completely free with ads or that have a lower price tier but with ads is a good compromise and might enable consumers to have access to more of these platforms." Besides giving cost-conscious consumers lower-priced, ad-supported options in an increasingly uncertain economy, AVODs also allow marketers to access new, engaged audiences. "From the standpoint of advertisers, it's no secret that major brands have been clamoring for Netflix's addressable audience. And now with Disney+'s ad tier launching, this gives brands greater potential reach within the overall CTV marketplace," said Mike Proulx, vp, research director at Forrester. Disney+ reaches more than 164 million subscribers, and Disney ad sales chief Rita Ferro told Adweek that marketers have been asking for an advertising tier, which rolled out in December, ever since the platform debuted in 2019. Meanwhile, Netflix, which tops 223 million subscribers, was nearly sold out of inventory when its ad tier debuted last November, despite launching long after the upfront at a time when some advertisers were pulling back on budgets due to economic factors. Netflix’s New Ad Sales Chief’s Pitch to Marketers and How the Ad Tier Will Evolve in 2023 And though Kantar analysis shows AVOD users tend to have a lower income than SVOD subscribers, they are also likely younger with young families, giving advertisers a chance to reach the coveted 18-34 age market. Jeremi Gorman, Netflix's president of worldwide advertising, told Adweek she's never experienced enthusiasm quite like this from marketers. "Advertisers are looking to reach incremental audiences who may have changed their viewing habits, and we deliver that in spades," Gorman said. "We have the opportunity to help advertisers reach a diverse, younger audience in premium environments. There is a recipe for excitement and demand." Answers in a questionable economy AVOD tiers and FAST channels are also a sorely needed additional revenue stream for media companies looking to bolster finances in a rocky market. According to S&P Global Market Intelligence, FAST ad revenues could approach $4 billion in 2022 and reach $9 billion by 2026, with audience growth led by the migration of cord-cutters from linear networks. About two-thirds of that revenue will go through offerings from Peacock, Pluto TV and Tubi, but consumers have plenty of other options to choose from. There were more than 1,400 FAST channels estimated in the U.S. in 2022, and that number continues to balloon. "Ad support is clearly one arrow in the quiver," said Jason Kanefsky, managing partner, marketplace intelligence at Havas Media Group North America. "And you talk about RPU [revenue per user], the RPU at Hulu is proven, and I think that's clear across the board. Now ad revenue plus AVOD fee is better today than just SVOD." By all accounts, companies are sunsetting the streaming wars strategy of chasing subscribers for the sake of flashy stats; instead, they're focusing on RPU. Warner Bros. Discovery CEO David Zaslav has emphasized in earnings calls that the company won't overspend on content to simply boost subscribers, with the streamer even sending some of its existing HBO and HBO Max shows to third-party ad-supported platforms—his company is also working on its own FAST offering—to improve the bottom line with licensing revenue. On the Disney side, returning CEO Bob Iger said a top initiative is prioritizing streaming profitability over subscriber numbers. The company announced on its fourth-quarter earnings call in November that Disney+ had added 12.1 million subscribers in the previous quarter, but its direct-to-consumer segment lost $1.5 billion. "It is a very deliberate strategy in terms of what we offer. If you think of our full suite of streaming products [Disney+, Hulu and ESPN+] today, we have advertising as a proposition across all of them," Ferro said about how focusing on subscriber revenue fits into Disney+'s plans. "It gives the consumers the choice to have any of those and, obviously, allows us from a business perspective to be able to really service our customers." Though Forrester data shows consumers often take every opportunity to skip ads when possible, the company found in January 2022 that 44% of U.S. online adults using a streaming service would exchange the high prices for ads. According to Proulx, “there’s a great appetite” for ad tiers from consumers who would consider downgrading from SVODs or signing up for the first time. "How will consumers react to this? Well, now they have a choice," Proulx said. "If they don't like the ad loads that are contained within any of these streaming services, they can pay more money for an ad-free experience." Or they could drop the streamer altogether. For AVODs to be successful, it comes down to the viewing experience, according to Kanefsky, who added that "a lot" will depend on getting ad loads and frequency capping right, with pushback coming in the form of either completely disengaging from the platform or going with an SVOD option instead. "The true win is going to be some model of RPU that includes both ad support and a subscriber fee," Kanefsky said. "There's a fine line they're kind of on already. The pods that are 2 minutes long, feel long. The pods that are 90 seconds are perfectly OK." Tuned into the right frequency It's still early days for the latest major entries into the AVOD space, with both Netflix and Disney+ debuting with limited targeting and ad format options as each service builds up its audience before rolling out more capabilities in 2023. However, each service has also emphasized its viewer experience, with both focusing on eventually having around 4-minute ad loads and strict frequency caps. Buyers told Adweek that Netflix is looking at a cap of once per hour or three times per day per household for any particular creative. When it comes to Disney+, Ferro said the platform would limit spots to one per hour, two per day and 12 per week per user profile. By Adding Ads, Disney+ and Netflix Are Disrupting the Streaming Industry—Again "We are fully focused on the experience for partners, really getting as broad a list of advertisers as possible with as most creative as possible to really make sure that the fan who comes to Disney with ads is feeling like they have the most premium experience, just like one that comes to Disney+ today without ads does," Ferro said. As for the future of ad tiers, Gorman said Netflix will be in the business "for decades to come," and the TV industry is only the beginning. "I see this happening beyond media companies. One only has to look at the growth of the retail media networks like Amazon, Target, Kroger, Walmart. Or ads on Uber and Lyft," Gorman said. "More companies are realizing that advertising can be a useful tool to provide relevant content to their community, while also driving profitable revenue and giving customers options."

Outlook

Streaming in the FAST Lane: How AVODs Are Giving TV Back to the Advertisers

Disney+'s and Netflix's ad-supported tiers are opening up new inventory and audiences to marketers in 2023

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