March 8, 2022

Disney+ Introducing Ad Option Is Smart

Streaming services used to be exclusively subscription-based. But as time has gone on, every one has started offering a cheaper, ad-supported version. The only two holdouts have always been Netflix, which started this trend, and Disney+. However, it seems that Disney+ is finally evolving as well.

But first… A message about our sponsor, Omeda.

Events are back. And in May, I’ll be in Chicago at the 5th annual Omeda Idea Exchange (OX5). 

Starting on May 4th and running through May 6th, Omeda will convene leading media professionals to discuss a multitude of topics, including:

  • Audience growth and engagement: How to build a sustainable audience?
  • Tech & reporting: What data actually matters?
  • Subscriptions: Breaking down the psychology of people paying
  • And so much more…

There are few events that convene this caliber of media professionals talking about the topics most important to our businesses. 

Register for OX5 today and join me in Chicago. See you there!

Now let’s jump in…

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The Information reported (and then Disney confirmed) that it would be introducing an ad-supported version.

The shift reflects a view among TV executives that a large segment of the viewing audience is willing to sit through ads if that means paying less—or even nothing—for a streaming service. NBCUniversal, for instance, has a free ad-supported tier of its Peacock service, while Amazon also offers a free ad-supported service, IMDb TV. The one holdout continues to be Netflix, which has said repeatedly it has no plans to launch an ad-supported version.

Disney’s service now costs $8 a month. Rivals such as Discovery+ and Paramount+ offer tiers with ads that each cost $4.99. Disney’s Hulu service has an ad-supported tier, which costs only $6.99 per month. By launching an ad-supported tier for Disney+, the company could attract a wider group of subscribers. That would help it increase revenue to offset fast-rising programming costs for its service.

The strategy makes a lot of sense. With so many streaming platforms out there, it will get increasingly difficult to get people to pay for everything. The cost hopefully becomes a bit more bearable for families by moving to a lower tier.

But it’s also a return to how video content has always worked. Historically, we had to pay our cable bill and watch advertising. That said, I think the strategy these companies are deploying is interesting, and it makes me wonder if there are similar approaches for text-based media companies. So let’s use some hypotheticals to discuss…

Let’s say you want to sign up for a new service. It’ll cost $5 a month, and you’ll have to watch some ads. These ads will generate good revenue for the platforms because every registered user has provided their credit card and other information about themselves. 1st-party data does work, after all.

But every 5-10 minutes, you’re interrupted with ads. After watching more content, you get irritated with having to see the ads, and you upgrade to the full-price subscription of $10 a month. Interruption free.

That’s the actual thesis here. My guess is that it depends on users watching more content. Part of the reason I don’t subscribe to certain streaming services is that there’s not enough to justify the cost. But would I pay less, suffer through some ads, to see that same content? And if I got hooked on the platform, would I then upgrade?

This works for the streaming companies because their ads are literally in your face. You cannot watch the show you want without first spending a minute or two on ads. So, when these platforms advertise an “ad-free” experience, it’s actually a feature and benefit.

Additionally, in the case of streaming, the costs are not linear with subscription growth. If it costs $100 million to make a new show, that cost stays flat whether 1,000 people or 100,000 people watch the show. As The Information reported:

The company has said it expects to spend at least $8 billion to $9 billion a year on Disney+ by 2024. Quarterly programming and production expenses for Disney+ have increased 78% to $920 million over the past five quarters, Disney’s disclosures show.

But how can this strategy be used for a text-based media company? It’s a little more complicated, and there have been attempts at it before.

Years ago, I was pitched on an ad tech solution to put an advertisement in front of the article. It would require the user to view the ad for a few seconds (boosting ad viewability) before closing it and reading the content. For those with subscription offerings, an individual could bypass this ad if they simply paid.

We didn’t move forward with the solution for various reasons, but it’s obvious why it didn’t work. With most content on the internet being derivative, users don’t have the patience to be interrupted with an ad. I wonder, though, if the content had been genuinely unique and found nowhere else, would users have been more comfortable with it? Say, for example, if it were a niche b2b media company and the content couldn’t be found elsewhere, would readers suffer through an ad if it meant free information?

The truth is, for most publications, the ads are not as disruptive as the streaming platforms (or the above-described service) do. In many respects, advertising is simply around the content. Because the ads aren’t interrupting, it makes it harder to justify an ad-free experience as an actual feature/benefit as the streaming platforms do. But what if the strategy were less about the advertising and more about the quantity of content consumed?

A strategy publishers could deploy is to offer three tiers to their readers. The first is the free, heavily-ad supported model. The goal with this model should be to capture 1st-party data, get people registered, and understand more about who they are.

Historically, the next tier would be the subscription. You pay a flat monthly fee and get access to all the content. In the case of some publications, the subscription gives you an ad-free experience. But what if we put a middle tier in there that told users they could pay half the subscription price if they were also willing to see advertising?

It would look like this:

  • Tier 1: Ad-supported, free site with a limited # of articles
  • Tier 2: Ad-supported, low-priced subscription, unlimited content
  • Tier 3: Ad-free, higher-priced subscription, unlimited content

Tier 2 would likely be for users who want more than just the couple of freely available articles but don’t need as much content as the power users might require. Publishers could offset the lost subscription revenue with targeted ads (1st-party data again).

The above approach is geared toward a metered paywall where a reader gets one or two free articles and then has to pay. But what about the freemium model, where some content is always free, and other content is always paid?

I think it depends on the topic. For a b2b media company, it’d be harder and likely less profitable to introduce this model. Since we’re dealing with corporate card purchases anyway, we want to maximize subscription revenue because the ads won’t offset the loss. However, for a consumer media company, it could work. Let’s use Insider as an example (disclosure: Morning Brew is owned by Insider), which appears to be trying this.

Users now have a choice. They can either go month-to-month, which is the most expensive option. They can buy an annual plan, which saves them a decent amount of money compared to the monthly. In both cases, the user will still see ads. Or, if they genuinely hate ads, they can pay even more for an ad-free experience. This is clean and treats the ad-free experience as a helpful feature.

All of this said, publishers can do things to make the ad experience more elegant for any paying subscriber. The primary thing I’d do is keep the ads limited to just directly sold. As publishers, we control this, which means the user experience should be better. Additionally, because paying subscribers are our most attractive users from an advertising base, we should be charging more for these ads anyway.

Advertising and subscriptions work hand in hand. I’ve never subscribed to the belief that “an ad-free experience” was a marketable feature for subscriptions unless the ad experience was absolute trash. Even then, users are more likely to leave the site than to subscribe. So while I don’t think it’s as compelling an offer for a text-based site as it is streaming, it is certainly something worth exploring.

As publishers, we need to constantly experiment with utilizing ads and subscriptions to hit our revenue goals. Disney+ and most streaming companies are wise to give users the choice of what they want. If I have to bet, Netflix will also introduce this sort of a product. Any stagnating growth will have investors demanding new revenue opportunities.

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