Lots of factors played a role in Netflix becoming the world’s biggest TV platform within the space of a decade, but adopting the consumer and artist-friendly model of not including commercials absolutely helped. Viewers love watching TV without annoying interruptions, and going back to the earliest days of HBO and Showtime, audiences have demonstrated a willingness to pay more for a better experience. So naturally, the hottest trend in streaming right now is … adding commercials to previously ad-free platforms.
➽ Disney+ started the ball rolling last week when it announced plans to roll out a lower-priced tier with commercials toward the end of this year, which happens to be right around the time the service will mark its third anniversary. “Expanding access to Disney+ to a broader audience at a lower price point is a win for everyone — consumers, advertisers, and our storytellers,” Kareem Daniel, the chairman of Disney Media and Entertainment Distribution said in a press release.
➽ On Tuesday, Variety outlined how WarnerMedia’s HBO Max, whose nearly one-year-old ad-supported tier has thus far excluded HBO-branded shows from commercial interruptions, has begun experimenting with pre-roll advertising on HBO’s feature film library. HBO series are still exempt from advertising … for now.
➽ And then came the most intriguing hint at streaming’s sponsored future: Netflix chief financial officer Spencer Neumann spoke at an investors conference and seemed to leave the door open ever so slightly on a future alternative universe where season three of Bridgerton: The Early Years is sponsored by Lexus. While Neumann repeated the company’s long-standing mantra that it has no interest in adding commercials, he also added some qualifiers, namely that Netflix had no plans “right now” and that he would “never say never.” Someone as smart as Neumann doesn’t speak carelessly (I would hope), so even that teeny-weeny bit of hedging was enough to prompt headlines in the industry trades (and stories like the one you’re reading right now.)
It’s not much of a mystery why we are seeing brands that dove into streaming using the premium model now pivoting to ads. The story of the past few months in the industry has been slowing growth for the most established and successful platforms, particularly in mature markets such as the United States. The arrows are still headed up — streaming is not a fad — but acquiring and holding on to customers is infinitely harder to do when you’ve already signed up huge swaths of the populations in North America and Europe (as Netflix and, to a lesser degree, Disney+ have done). And while raising prices can bring in more revenue, it also risks increasing churn.
Among the many ways the old cable bundle was a better business for big entertainment companies was that it was very easy to hide price hikes. Disney could negotiate a deal with a Comcast or Charter for X dollars more per subscriber, and it would just be folded into a customer’s overall bill. And if a frustrated customer decided to cancel because their bill had gone up too much, they’d have to go up against a small army of cable company customer service reps whose job it was to either change their mind — “What if I offered you three months of Cinemax for free and access to the Dog Channel?”— or frustrate them with long hold times to the point that they just gave up. In the streaming world, breaking up with an overpriced service is just a few clicks away in an app.
But while increasing the number of subscribers is becoming harder to do, the need for that growth has not gotten any less urgent. All those new shows that keep getting announced cost money, and streamers (especially Netflix) have been financing these productions on the promise of becoming widely distributed around the globe. Disney and WarnerMedia, for example, have both told Wall Street they believe they can roughly double their current audience bases within the next two to three years. And while they’re both well on the way to doing so, it is also now clear that getting there without offering audiences a cheaper option probably isn’t possible. Disney was blunt about this in its press release last week: “The ad-supported offering is viewed as a building block in the company’s path to achieving its long-term target of 230-260 million Disney+ subscribers by [fiscal year] ’24,” it said.
Despite the spin that adding commercials to premium content is “good” and a “win” for everyone, it really isn’t. Parents who signed up for Disney+ wanting to give their kids a respite from the advertising cluttering up their phones and social media networks probably won’t be thrilled about the prospect of Madison Ave. being granted yet another point of access to impressionable minds. And I do wonder how the big name stars and showrunners who signed up to make (please forgive me) six-hour movies in the Star Wars and Marvel universes will feel about a model that will now feel more ABC than HBO. Yes, most Disney+ shows are the sort of broadly popular popcorn fare long supported by advertising, and as long as the checks still clear, I don’t think Jon Favreau and other showruners are going to get bent out of shape. But D+ shows will feel a bit less premium when broken up by ads from Chevy and Coke.
The counter from streamers is, well, there’s still going to be a choice: You don’t have to watch ads as long as you’re willing to pay for the privilege. And that’s true, up to a point: If you’ve been fine paying $7 or $8 for Disney+ the last couple of years, you probably don’t care if folks who didn’t mind watching ads only pay $5. Hulu pioneered just such a choose-your-own-experience model of streaming years ago, and it’s been a success (with most people choosing the ad-supported tier, by the way.)
But leaving aside the fact that Hulu’s roots were as a digital delivery system for broadcast TV content, the problem is that it is unlikely, over the long term, that Disney and other streamers will keep the price of their ad-free tiers stable after the ad-free versions roll out. Disney+ has already had one price hike in its first two years, and last month, Disney chairman Bob Chapek seemed to suggest another one could happen this fall ahead of its third birthday (and right around the time the millions who paid in advance for lower-priced three-year plans offered ahead of the D+ launch will have start having to pay again). What’s more, many industry analysts believe it won’t be long before Disney simply decides to shut down Hulu as a stand-alone service and push its more adult content into D+, which is what the company does in Europe. It is not at all unthinkable that a year or two from now the base price of an ad-free Disney+ (with Hulu) is somewhere in the $15 to $20 range, while an ad-supported version goes for around $10 per month. Consumers will still have a choice to go ad-free, but it could be a lot more expensive than it is now.
I don’t mean to single out Disney as the sole Scrooge McDuck here, by the way. The price points I theorized about above are just that: theories. It may find a way to keep Hulu available by itself, particularly since the “Hulu + Live TV” option is a strong little performer, and too much consolidation could hurt that part of the business. Plus, while HBO Max has avoided a price hike so far, I will be shocked if we don’t get one by this time next year. Incoming Warner Bros. Discovery boss David Zaslav hasn’t been definitive about his plans for combining Discovery+ and HBO Max, but some sort of combo is almost certain, and of course that will mean higher prices — with consumers who choose ad-free surely shouldering the brunt of the increases. The pressure to bring in more revenue will also increase further as more sports leagues do streaming deals: Amazon is raising the prices for its Prime subscription service in no small part because Thursday Night Football is coming to Prime Video this fall. Apple just did a (relatively) cheap deal for some Major League Baseball games, and more and more streamers are looking to add sports to woo subscribers and reduce churn. None of this comes cheaply.
The biggest question mark in the ads versus no ads debate remains Netflix. The company’s stock has lost one-third of its value this year and the competitive pressure from rivals is only going to get worse, further eroding its once near-monopoly on streaming audiences. It’s now not unthinkable it could decide to give in to the advances of advertisers who’ve long begged for it to take their money. And yet despite Neumann’s wiggle room, I still would be surprised if advertising came to Netflix any time soon. Not having ads has been a core part of the platform’s DNA from day one, setting it apart from most of its TV rivals. I would think that with Disney and HBO blurring the lines, Netflix might be even more inclined to want to set itself apart as the 7 Up of streamers when it comes to ads: Never had it, never will.
Still, even if Netflix (and every other major streamer) eventually reverts back to the old days of TV where everything had ads, consumers will in many ways still be better off than they were pre-streaming. Ad-free experiences will cost a lot more than they have during these early days of digital TV, when companies were still in the process of getting us hooked on streaming — but at least there will very likely always be an option. That wasn’t the case during TV’s first half-century, when save for a couple of premium networks, you had to endure ads to watch Cheers or Friends or Roots.
And while it’s been nice to have so much ad-free programming for a relatively low cost the past few years, that model simply was never going to last. Making too much TV costs a ton of money, and for most streamers, subscription fees alone aren’t enough to pay the bills and make a profit. If streaming is going to fully replace linear, ad revenue is likely the only way to make sure platforms remain accessible to most consumers, particularly if we’re now all juggling five or six streamers instead of one or two. The (ad-)free ride is over.