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To Ad or Not to Ad?

How much is an ad-free experience worth to you?


I've been thinking about this question a lot over the past few weeks, prompted by two recent entertainment developments that I see as separate but related:

  1. Netflix is increasing their prices (again)

  2. Disney+ is launching an ad-free service


In today's post, I examine the relationship between content and advertising, how that relationship continues to evolve, and what that could mean for streaming business models going forward.


It's not a short read, but it's well-researched, and I hope you'll find it insightful.


 

Entertainment X Advertising


Entertainment and advertising have been inextricably linked since the very beginning.


Many of you reading this will be too young to remember this, but watching television used to be "free". When I was very young, my parents didn't pay monthly fees to a member of a telecommunications oligopoly to access television shows, they used a giant antenna attached to our homes to capture the signals broadcast "over the air" at no cost.


But nothing is really free... so how were these shows funded? Advertising!


Ever wonder why they're called "soap operas"? It's because these dramas were developed and sponsored "by the manufacturers of soaps, medicines, foods and other household goods." The shows were a vehicle for commercial messaging: they needed to entertain audiences because they needed those audiences to remain tuned in to watch the commercials... and eventually be persuaded to buy.


So people watched their content, and in exchange, they also watched their ads.


The content was purchased with attention, not dollars, and that was a fair exchange.


Over time, companies realized they could develop a telecommunications infrastructure that would deliver a more reliable, higher-quality signal to people's homes versus a traditional antenna. They realized not only that consumers would pay them for the privilege of accessing content, but that advertisers would also pay them for the privilege of accessing their consumers! (Today, this is referred to as a two-sided market, and it's a wonderful thing to control if you can get one up and running... which is admittedly easier said than done.)


As consumers replaced their antennas with cable, they essentially began paying for their content with both their attention and their dollars, and that soon became the new normal.


To be fair, it could reasonably be argued that building the infrastructure to deliver cable TV services was extremely expensive, that the advertising shown to cable TV subscribers served to subsidize the cost of the service, and that cable TV would be unaffordable for the average household without those commercials.


At one point, that was probably true. Today? Not so much, as evidenced by regular reports of record-breaking profits from telecommunication companies. (Just Google it...)


 

Enter... Netflix


Although Netflix began as a DVD-by-mail subscription service, it started streaming old movies and television shows over the internet to American subscribers in 2007. As a longtime entertainment fanatic, I loved the idea of "unlimited content, anytime" for one low monthly fee, and eagerly awaited the day when the service would be available in Canada.


And on September 22, 2010, Netflix sent me an email with the subject line, "Netflix is now available in Canada! Start your FREE trial today."


Excitedly, I forwarded the email to my wife with the comment, "We should SERIOUSLY look at getting this... Maybe even INSTEAD of cable!!"


And three months later, we did it: we "cut the cord" and subscribed to Netflix for all our entertainment needs. By the way, I've been a subscriber ever since, without interruption, and haven't gone back to cable television (which is mostly possible because I don't watch sports).


But have a closer look at that email above, and notice the price I paid when I first signed up: $7.99 a month, all in. Alas, those were the good old days.


Last month, Netflix sent me an email with a subject header I was much less excited about: "We’re updating our prices — here’s why". This is what it looked like:


So beginning in April, I'll pay $20.99 each a month for the subscription service, three times what I paid when I first became a member thanks to the HST now due on top of that amount. (Thanks, Trudeau.)


Am I going to cancel my Netflix subscription? Of course not. I love Netflix, and I watch it daily (as do my wife and four children), so Netflix has essentially made its pricing inelastic.


But one of the things I love about Netflix is that it's an ad-free experience: I pay for my content exclusively with my dollars, but in exchange, I'm never interrupted by ads.


Hold that thought.


 

Disney+ plans an Ad-Supported Option


A few weeks ago, it was reported Disney plans to offer an ad-supported version of Disney+ to US subscribers sometime in late 2022. The House of Mouse believes this option will serve as a “building block” as it attempts to meet its aggressive goal of reaching between 230 and 260 million Disney+ subscribers by the end of fiscal 2024.


Some context around those figures is warranted before we continue.

Disney+ launched on November 12, 2021. At the time, the publicly stated goal was to achieve between 60 and 90 million subscribers by 2024.


The following day, it was reported they had already acquired 10 million subscribers.


In a single day!


Variety suggested the following week that Disney+ was likely to hit their subscriber target two years early. But they were mistaken...


... it only took Disney until August 2020 to surpass 60 million subscribers. And by the end of Q1 in 2021, the figure had reached almost 95 million.


In other words, Disney surpassed its four-year target in just 15 months.


("And the award for worst forecasting or best sandbagging ever goes to...")


If you were a Disney shareholder, this was great news: Disney+ was an astounding success!


But anyone who's ever had P&L responsibility will immediately recognize the problem with these tremendous numbers: Disney would have to beat them the following year if they wanted to keep everybody happy. And by "everybody", I mean Disney's shareholders.


So the targets were raised: Disney+ would now work to achieve between 230 and 260 million Disney+ subscribers by the end of fiscal 2024... almost four times their original goal.


There are still many ways for Disney+ to grow, of course; you may recall I wrote and published a report filled with recommendations on that very subject last year in an attempt to be hired to make this happen in Canada. (Spoiler alert: it didn't work.)


But on the very first page of my report, I acknowledged a simple truth: the low-hanging fruit had already been picked, and those (like me) who were most excited about the service had already subscribed. "Performance marketing" (read: digital ads) won't help Disney here: they need smart and strategic ways to gain subscribers.


And offering an ad-supported tier is a smart and strategic way to capture households who wouldn't otherwise be willing to pay the full price of Disney's streaming service, which in the US, is $8 a month or $80 a year.


But what wasn't reported was what this new Ad-Supported Disney+ Service (which I'm henceforth calling "ADS" for short) will cost.


Clearly, ADS is intended to attract new subscribers. But there will inevitably be a percentage of existing subscribers who might decide they'd rather pay with a combination of their dollars and attention instead of their dollars alone... if they found the trade-off worthwhile.


Which brings us back to my question: how much is an ad-free experience worth to you?


 

As an aside, I appreciate the irony of a marketer like myself so adamantly trying to avoid ads.


But let's face it: not all advertising is Super Bowl worthy, to put it gently.


There's far too much terrible advertising out there, and when I do hear about a really great commercial I think I need to see, I can watch it on YouTube at my leisure. But when I sit down to enjoy great content, the last thing I want is to be interrupted by unrelated, irrelevant ads.


And to be clear, the key words in that last sentence were "unrelated" and "irrelevant".


In addition to Netflix and Disney+, I also have subscriptions to Amazon Prime Video and AppleTV+... and both of the latter services play ads before they show you the content you selected.


Do these ads upset me? No... because they're teasers for other films and shows available on the service: I'm on the service to see great content, and the service is promoting great content... that's a win-win! And if for some reason the content doesn't appeal to me, both services allow me to skip these ads and continue on with my show, a level of control you still don't have outside of streaming.


But would I be happy about seeing an ad for anything else? Highly unlikely.


Would you?


 

As recently as January 2021, Netflix Co-founder, Chairman, and Co-CEO Reed Hastings reiterated the company had no intentions of introducing advertising. When asked during the company’s fourth-quarter 2019 earnings interview about the idea, he said:


“We’ve got a much simpler business model, which is just focused on streaming and customer pleasure... So we think with our model that we’ll actually get to larger revenue, larger profits, larger market cap because we don’t have the exposure to something that we’re strategically disadvantaged at, which is online advertising against those big three... We want to be the safe respite where you can explore, get stimulated, have fun, enjoy, relax — and have none of the controversy around exploiting users with advertising.”


Well, that's the end of that idea, right?


Except, apparently, it isn't.


Speaking earlier this month at Morgan Stanley’s 2022 Technology, Media & Telecom Conference, Netflix CFO Spencer Neumann appeared to be more open to the general idea of introducing ads to the streaming service.


“It’s not like we have religion against advertising, to be clear... But that’s not something that’s in our plans right now… We have a really nice scalable subscription model, and again, never say never, but it’s not in our plan.”


Hmmm... I wonder why the Chief Financial Officer of the publicly-traded Netflix might be more amenable to the idea of introducing advertising to the streaming service... and if the fact that in 2019 it was estimated the company could earn $1 billion in annual revenue (and deliver $700 million of that to the bottom line) by doing so has anything to do with it?


 

Of course, the decision as to whether or not Netflix should introduce advertising isn't binary.


They could maintain their status quo and keep advertising off the platform.


They could introduce an ad-supported tier, like Disney+ has decided to do, and attempt to weigh the number of new subscribers they'd expect to gain against the number of existing subscribers who would downgrade their current subscriptions in favour of the ad-supported option... and price their new option accordingly.


But there's a third option: Netflix could simply introduce advertising into its existing tiers... without giving existing subscribers a discount or a choice.


Choosing that option would be similar to the "shrinkflation" we're seeing at grocery stores recently, where packaged goods companies reduce the amount of product they put in the package but charge you the same price in an effort to offset higher costs.


If Netflix were to start serving me ads in my existing tier without reducing the price I pay for the service, it would mean I'd be getting less entertainment per hour for the same money... which is effectively a price increase.


And it's one I'll bet would prove far less popular with subscribers than past monetary hikes.


 

And so I ask for a final time: how much is an ad-free experience worth to you?


The math will be different for everyone, based on their individual financial circumstances and how much they're bothered by ad interruptions.


For me, the calculation is fairly simple.


In Canada, Disney+ costs $134.47 (i.e. $119 +HST) a year if you pay up-front in one lump sum. If I watched two hours of Disney+ content per week (which isn't unreasonable based on the past two and half years I've been a subscriber) and they showed me two minutes of advertising for every hour of content, that would be 16 minutes per month.


How much is 16 minutes of your time worth? Well, it depends on what you could be doing instead of watching advertising.


But I'll use the $15/hour minimum wage in Ontario as the cost of my down-time for the purposes of this example: those 16 minutes would be worth $4 per month, or $48 a year.


So for me to give up my ad-free experience, I'd want the cost of the service to be reduced by at least 35%... more if they want me to watch more than 16 minutes of commercials per month.


For anything less than that?


Disney can keep its lower-priced tier... and I'll keep my uninterrupted TV time.


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