At first blush it seems like a step in the wrong direction. Walt Disney (DIS -0.09%) is a premium brand and should be treated as such. A lower-cost, ad-supported version of Disney+ slated for launch later this year arguably taints the brand, ultimately working against the draw of the Disney name.
It's a concern, however, rooted in worry that need not apply any longer. Consumers really don't mind watching the occasional commercial in exchange for a lower-cost streaming service. Better still, as it turns out, ad-supported streaming services from Discovery (DISC.A) (DISC.B) (DISCK) and Paramount (PARA 2.15%) are bearing more fiscal fruit than the ad-free versions of these platforms are.
Here come the commercials
If you're reading this, then you likely already know Disney is wading deeper into AVOD (ad-supported video on demand) waters. Its Hulu is already offered in an ad-supported version costing $6 per month less than the base price of $12.99 per month for the ad-free version. Now Walt Disney intends to deploy an ad-supported version of its Disney+ platform. The company didn't provide any pricing specifics, but the base price for ad-free Disney+ currently stands at $7.99 per month.
Some investors understandably have mixed feelings about the decision. As was noted, injecting advertisements into the Disney+ stream risks altering the perceived value and quality of the service.
But maybe it's not that big of a deal. As was also noted, a couple of other streaming brands are doing surprisingly well with lower-priced versions of their streaming platforms that interject the occasional TV commercial.
Image source: Getty Images.
Discovery -- the name behind The Discovery Channel, HGTV, Animal Planet, and more -- is one of those others. While CEO David Zaslav has been relatively tight-lipped about the specifics of Discovery+, he did divulge roughly a year ago that his company is making 30% to 40% more per user per month with the ad-supported version of the service than it's collecting with the ad-free version that goes for $6.99 per month.
Paramount is seeing similar figures with its premium streaming service Paramount+. Bob Bakish, CEO of the company formally known as ViacomCBS, commented around the same time: "We actually believe analytically that the $4.99 [ad-supported] version can actually generate higher ARPU [average revenue per user] over time than our [ad-free] $9.99 product."
Indeed, a careful examination of Walt Disney's most recent quarterly report reveals the company is driving $12.96 per month per Hulu user. That's despite the fact that market research company Antenna estimates about half of its 41 million subscribers are only paying $6.99 per month for the ad-supported version.
Assuming the ad-supported version of Disney+ achieves comparable results, the service's per-user revenue figure could plausibly ratchet up to more than $10 per month, all the way up to $12 per month.
And that's a big deal. For perspective, last fiscal year's direct-to-consumer business turned $16.3 billion worth of revenue into an operating loss of $1.7 billion, translating into a negative profit margin rate of 10%. Up 30% to 40% from the current price for the ad-free version of Disney+, Disney's streaming profitability problem, which I discussed late last month, potentially starts to go away.
The occasional ad is actually okay with most people
But are Disney's streaming customers not as receptive to commercials as Paramount's or Discovery's? Maybe. But there's no demonstrable evidence to that end. There's evidence, in fact, that most consumers -- including Disney fans -- are willing to lower their monthly streaming costs by watching the occasional advertisement.
Numbers from a Hub Entertainment Research survey shed some light on the matter, indicating that roughly 60% of consumers are OK with television commercials popping up every now and then if it means it lowers the monthly cost of their streaming service between $4 and $5 (which the data to-date bears out).Deloitte adds that while 40% of consumers are willing to pay up to $12 per month for an ad-free service, almost the exact same number of people would watch 12 minutes of advertisements per every hour of video consumed if it meant a completely free service.
Disney's planned pricing changes for Disney+ give would-be subscribers a couple of different ways to find the happy medium implied by these figures.
There is a proverbial trick, of course. The ads have to be relevant in order to avoid annoying rather than enticing viewers. This is largely why Discovery is doing so well on the ad-supported streaming front. While Hub Entertainment's report on the matter indicates that Discovery+ subscribers know they're seeing more ads than are airing on competing services, they also pay more attention to those advertisements than any other streaming service subscribers did.
Image source: Hub Entertainment Research.
Note that Disney's Hulu and the aforementioned Paramount+ didn't do nearly as well as Discovery did in terms of delivering ads that watchers bothered paying attention to. The House of Mouse may want to step up its game on this front, perhaps starting with better -- or better-applied -- consumer segmentation technology.
A working number to start with
Disney's ad-supported plans for Disney+ are still new, of course, and incomplete. There's no specific launch date or suggested price, the latter of which will be monumentally important. As was already stated, Walt Disney's per-subscriber AVOD revenue is apt to be in the same ballpark as that of Discovery+ and Paramount+, perhaps with a small kicker because, well, it's the venerable Disney.
More importantly, at around the industry's average per-user revenue vicinity, suddenly a money-losing Disney+ becomes a breaking-even Disney+ or even a profit-driving Disney+. It's all just a matter of finding the right price points and the right ad load. Whatever the case, at least current and would-be Disney shareholders now have a rough idea of what to expect.
