It's been the source of great debate in recent weeks. On the one hand, Walt Disney (DIS 0.16%) is a premium brand name that commands premium prices for (usually) superior products. A recent announcement that it is planning sometime later this year to start injecting the occasional advertisement into its video streams not only makes for a less-than-desirable viewing experience, but it could also damage the brand's image. On the other hand, a lower-cost, ad-supported version of Disney+ makes it more accessible to inflation-affected consumers who are growing weary of the relatively high cost of just a handful of streaming subscriptions.
On balance, look for the upcoming ad-supported version of Disney+ to do the company far more good than harm, providing Disney with the streaming scale it so desperately needs. Two reasons for its success stand out.
Image source: Getty Images.
1. This is where the streaming business's growth awaits
Disney may not like it, but advertising-supported streaming is where the industry's growth lies. Digital TV Research estimates that the worldwide ad-supported video-on-demand business will be worth $70 billion by 2027. At that figure, it will still only be about half of premium (ad-free) streaming's expected size. But that $70 billion figure will be nearly twice as big as this year's projected $38 billion worth of revenue for advertising-backed streaming. Digital TV Research's outlook suggests premium streaming's total revenue will only grow about 31% during that time.
In simpler terms, ad-supported video on demand is where roughly half the industry's future growth is.
And it's not just Disney+. The Information suggests that -- presuming nothing else changes -- Netflix (NFLX -9.09%) could see a 21% uptick in revenue once it launches its intended ad-supported version of its popular streaming platform. That's a big deal in light of the fact that Netflix's size and age means it faces more of a saturation challenge than any of its peers.
Read between the lines. No company in the business can afford to ignore the fact that cash-strapped households are increasingly questioning their capacity to add yet another streaming service. As TiVo pointed out in its fourth-quarter 2021 Video Trends Report, 54% of streaming subscribers wish their premium streaming services were offered in a lower-cost, ad-supported version.
2. It may be a more lucrative model anyway
On average, per-user revenue is higher for streaming services that inject the occasional TV commercial into the mix than for those services that don't.
It's a bit difficult to ferret out, but last quarter, Walt Disney's Hulu generated monthly per-user revenue of $12.77. In and of itself the figure isn't that remarkable, particularly given that the ad-free version of Hulu retails for $12.99 per month. The number becomes much more curious, however, given the fact that the majority of Hulu's viewers are enjoying the ad-supported version. While the company doesn't divulge details on the matter too often, an April 2022 Hub Entertainment Research survey of 1,600 subscribers to various streaming services suggests 58% of Hulu's subscribers are paying for the ad-supported version that costs only $6.99 per month. Among all subscribers surveyed, 39% had an ad-free version and 46% had an ad-supported version.
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Which version of each streaming service subscription do you have?* |
|||
|---|---|---|---|
| Service | Ad-free version | Ad-Supported Version | Don't Know |
| HBOMax | 67% | 28% | 5% |
| Discovery+ | 52% | 44% | 4% |
| Hulu | 35% | 58% | 7% |
| Paramount+ | 31% | 64% | 5% |
| Peacock** | 20% | 73% | 8% |
Notes: *Among those who have a subscription to each service. **Subscription version of Peacock only. Data source: Hub Entertainment Research April 2022 survey of 1,600 respondents.
Driving its average per-user revenue down even further is the fact that millions of people have access to Hulu only through a bundle that includes Disney+ and ESPN+. This bundle presently retails in an ad-supported version for a total $13.99 month for all three services, which is then prorated by the company to come up with each platform's average per-user revenue.
Roughly half of Hulu's per-user revenue comes from advertising, rather than subscription fees.
And less splashy streaming platforms confirm that bottom lines are better when ads are part of the business mix. Warner Bros. Discovery CEO David Zaslav commented early last year that the ad-supported version of Discovery+ generates 30% to 40% more revenue than the ad-free version does, as well as that much more than the company collects by offering its content to cable companies. Paramount Global CEO Bob Bakish is similarly hopeful about what he sees so far with Paramount+, explaining last year, "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."
Given the draw of Disney's content library, it's arguable that an ad-supported Disney+ will attract advertisers willing to spend even more to plug into the company's massive streaming reach.
Just the nudge Walt Disney needed
Surprised? It certainly wasn't something Walt Disney's top brass was discussing just a couple of years ago when Disney+ was still new. The good news is that the company's executives are now not only open to the potential of ad-supported streaming but seemingly embracing it. CFO Christine McCarthy commented at the recent MoffettNathanson Media and Communications Summit, "We expect about the same [ad-based video on demand] percentage for both Disney+ and Hulu, just based on the experience curve that we've witnessed." She added, "We really feel good about this opportunity."
And Disney's management should feel good about what awaits its ad-supported streaming business.
The growth of Disney+ is seemingly slowing, reaching around 140 million global subscribers worldwide as of the end of March. That's largely with the help of international expansion, however, and still well short of the 230 million to 260 million it suggested was in the cards by 2024 just a couple of years ago. Given all the relevant data, a lower-cost version may well reignite past growth and get the company moving back toward that target range within a couple of years.
Data source: Walt Disney: Subscriber data is in thousands. 4 per. Mov. Avg.= four quarter moving average.
More important than that, at average per-user revenue on the order of $10 to $12 per month versus an average of only about $6 for ad-free access now, Disney+ could conceivably pull Walt Disney's direct-to-consumer business out of the red and into the black.
