In late 2022, Netflix shook the streaming world when it started to offer subscription tiers supported by advertising. It didn't take long for other streaming services to follow suit, including The Walt Disney Company (DIS 0.14%) with its Disney+ streaming service.
There's a lot happening in the background with digital advertising and Disney just announced major upgrades. Moving forward, the company is looking to Alphabet (GOOGL 0.42%)(GOOG 0.56%) and The Trade Desk (TTD +2.96%) to better monetize its streaming services. Here's what it means for investors.
NYSE: DIS
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What's going on with Disney's advertising
Disney is a publisher -- it publishes video content on various platforms, including Disney+, Hulu, and ESPN+. These platforms have slots available for advertising, and it's the company's goal to sell these slots for maximum revenue.
Back in 2021 -- before the launch of an ad-supported subscription tier for Disney+ -- Disney laid out a five-year advertising plan to automate its platform. The plan necessarily had incremental steps, and its announcement on March 20 of partnerships with Alphabet and The Trade Desk was just the latest step forward.
Disney is unlike many of its streaming service peers. The company has a massive first-party dataset because of how many subscribers it has and because of how long it's been in business -- many competing services are either much smaller or relatively new.
Therefore, Disney's consumer data is extremely valuable when trying to sell ad slots for maximum revenue.
For years now, Disney has worked with supply-side platforms (SSPs) such as Magnite (MGNI 3.42%) to sell its slots. However, Magnite works with many content publishers. Any advertiser that goes through Magnite bids on ad inventory that includes Disney but isn't limited to it. But advertisers and demand-side platforms (DSPs) such as The Trade Desk want a more direct connection to Disney's audience.
It's understandable: Disney+ has around 150 million subscribers worldwide -- the audience is massive on its own.
Alphabet's DV360 platform and The Trade Desk will now connect to Disney's DRAX (Disney's Real-Time Ad Exchange). DRAX Direct will let these two DSP adtech platforms peek into Disney's ad slots and audience information to allow for more targeted advertising.
Who wins in this new scenario?
This should be a win for everyone: Disney, Alphabet, and The Trade Desk. And if Disney's management is to be believed, it's surprisingly not a loss for Magnite.
NASDAQ: TTD
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For Disney, this is a win because it moves the company forward in its goal to maximize revenue. In theory, Alphabet's DV360 and The Trade Desk will direct more advertising dollars to the company's various streaming platforms. This will increase competition for the ad slots and consequently push rates up, which is good for Disney stock.
For Alphabet and The Trade Desk, both companies are trying to deliver better results for their advertising customers. The direct integration with Disney's DRAX could provide better data for targeting. It seems likely that both companies will have more satisfied customers because advertisements will reach target demographics within Disney's massive audience more precisely.
That said, Alphabet's market capitalization is $1.9 trillion compared to a market cap of just $42 billion for The Trade Desk. Therefore, this news has a better chance of moving the needle for the latter as a much smaller company.
Finally, Magnite stock has plunged on this news that Disney is working more directly with DSPs, but according to AdExchanger, management teams at Disney and The Trade Desk don't believe this is bad news for SSPs like Magnite. Disney's move to allow direct access to its DRAX platform can be seen as a way to increase demand without taking business away from Magnite.
Indeed, Disney reportedly works with around 30 DSPs, and the company only partnered with Alphabet's DV360 and The Trade Desk for direct access because these two have the most scale. Giving these biggest players more buying options is just a sensible business decision.
However, Alphabet and The Trade Desk can still do both: They can use some ad dollars when shopping for ad slots directly and leave some for transacting through SSPs. Moreover, there are still plenty of DSPs working with Disney as they always have, providing ongoing business for Magnite.
That said, I believe the two biggest winners here are Disney and The Trade Desk. Disney should see material improvements to its streaming business as it finds way to grow advertising demand. And The Trade Desk continues to be one of the biggest beneficiaries of advertising's multiyear migration from linear content to digital.
