How Disney+’s Ad Tier Can Pull the Company Out of a Fiscal Slump | Analysis

Disney, Getty Images

The Walt Disney Company has officially debuted ad-supported streaming with the rollout of Disney+’s new subscription tier in the United States on Thursday. And experts told TheWrap that the new option should help the entertainment giant pull out of a fiscal slump that’s seen its shares down more than 40% from the start of the year and its direct-to-consumer losses total $4 billion.

In addition to the $7.99 monthly standalone ad-supported offering, consumers will have the option to bundle the ad-supported tier with Hulu with ads for $9.99 per month, Hulu and ESPN+ with ads for $12.99 per month and Hulu with ads and Live TV and ESPN+ for $69.99 per month.

“With these new ad-supported offerings, we’re able to deliver greater flexibility for consumers to enjoy the full breadth and depth of incredible storytelling from The Walt Disney Company,” Direct-to-Consumer president Michael Paull said in a statement.

Here’s how AVOD (advertising-based video on demand) will benefit Disney moving forward.

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1. Helping Disney+ reach profitability

In the fourth quarter of 2022, Disney’s streaming division’s operating loss widened to nearly $1.5 billion. Despite the disappointing results, former Disney CEO Bob Chapek emphasized on the company’s earnings call that it’s now on “a path to a profitable streaming business.”

“Assuming we do not see a meaningful shift in the economic climate, we still expect Disney+ to achieve profitability in fiscal 2024, as losses begin to shrink in the first quarter of fiscal 2023,” he added, though warning that target assumed “we do not see a meaningful shift in the economic climate.”

In June, analysts at MoffettNathanson estimated that Disney+ could potentially generate $1.8 billion in revenue from the ad-supported tier by 2025.

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2. Tapping into new subscribers

In addition to making Disney+ profitable, the company is also tasked with maintaining growth in the platform’s total subscriber base.

Disney’s ad-supported tier will allow the company to access untapped audiences, especially those who are younger and more affluent, according to Samba TV senior vice president Dallas Lawrence.

“A massive 90% of U.S. adults who do not currently subscribe to Disney+ are already watching other ad-supported streaming platforms,” Lawrence noted. “These audiences who have chosen to date not to pay for Disney+ are already comfortable with the value exchange an AVOD service offers, have no aversion to watching ads in exchange for free or reduced-price content and are prime candidates to turn to Disney+’s new ad-supporter tier.”

However, he cautioned that it remains to be seen whether Disney’s ad-supported tier offers the “right value exchange formula.”

Consumers ”report being most likely to adopt an ad-supported tier when it reduces the price of the paid subscription by half or more,” he added. “Disney has not chosen to offer that significant of a price differential between its tiers, and that may give those who have been sitting on the sidelines waiting to join a reason to pause.”

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3. Retaining loyal subscribers

As economic uncertainty grows and inflation continues to take a bite out of consumers’ earnings, streamers including Disney+ must also combat the threat of subscriber churn, the rate in which customers join and cancel a service.

“The new offering could save some consumers from leaving Disney entirely,” Matt Voda, the chief executive officer of marketing analytics firm OptiMine, told TheWrap. “As long as Disney has a similar [average revenue per user] with their two offering tiers, they win by keeping subscribers in the Disney family” even if millions switch to a lower-price tier.

According to Kantar Research, Disney could potentially see 23% of its current subscriber base switch to its ad-supported offering. As of the end of the third quarter of 2022, Disney+ had a total of 164.2 million subscribers, including 46.4 million in the U.S. and Canada.

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4. Increasing average revenue per paid subscriber

Revenues generated from the ad-supported tier — coming both from subscription fees and advertisers — could also give a boost to Disney+’s average monthly revenue per paid subscriber, a key metric that has lagged behind other streamers and recently fell from $6.81 to $6.10 in the company’s latest quarter.

Netflix has led the pack on ARPU, racking up $16.32 in the U.S. and Canada in the last quarter. Coming in second was Hulu’s SVOD (subscription video on demand) service, which most recently reported an ARPU of $12.23. Warner Bros. Discovery rounded out the top three for the quarter, boasting domestic ARPU of $10.66.

5. Strengthening Disney’s advertising presence

Most importantly, the introduction of the ad-supported tier will strengthen Disney’s preexisting relationship with advertisers on whim it currently depends for revenue from its linear networks like ABC and ESPN.

“This new tier will likely help expand Disney’s overall presence in that advertising adds even more data to the mix of information about viewers and content preferences. Serving ads for products and services that are of interest to viewers will be more engaging and more effective,” Parks Associates president and chief marketing officer Elizabeth Parks explained to TheWrap. “Likewise, helping marketers reach a more targeted audience can help [over the top] services to justify higher ad prices based on documented delivery and results.”

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The firm projects that the number of households using ad-supported streaming services will grow from about 37 million households in 2022 to 52 million in 2027, a compound annual growth rate of 6.7%.

As of its launch, Disney+’s ad-supported tier has over 100 advertisers. Lawrence believes that Disney embracing an advertising model signals “a transformative moment that will accelerate the migration of dollars out of linear into streaming.”

“While traditional linear TV will not go away overnight, we are racing towards a future where all content will eventually be streamed and where advertisers will have the ability to marry all of the incredible measurement and targeting capabilities they love with digital with the creative power of being on the biggest screen in the home,” Lawrence said. “Not only will this spur overall [connected television] revenue to grow at a substantially faster rate than the overall ad market in 2023, it is also spurring new innovations in ad creative and delivery that will continue to improve the entire advertising experience.”

Disney+’s ad-supported offering will also roll out internationally in 2023, extending both the company and advertiser’s reach in markets abroad. Excluding Disney+ HotStar, a low-cost streamer operating in India, Disney+’s international subscriber base climbed 57% year over year to 56.5 million.

“Historically, international markets have primarily leveraged linear — CTV and streaming haven’t been must-buys,” Innovid co-founder and chief technology officer Tal Chalozin told TheWrap. “The launch of these ad-supported tiers will encourage advertisers to expand their streaming efforts in other markets, thus expediting that international transition.”

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