Netflix, Disney+ jump into ad-supported streaming in 2022

2022 was a year that saw two leading SVOD services jump into the ad-supported world with long-time holdout Netflix, as well as Disney+ both launching streaming plans with ads as they look for new avenues to fuel growth.

Although both streaming services didn’t debut ad-supported tiers until later in the year (Netflix was first out of the gate on November 3, with Disney+ following one month later), the moves piqued interest from the industry and advertisers since plans were first announced.

Netflix’s Basic with Ads plan is priced at $6.99 per month, while Disney+ with ads is $7.99 per month (the latter bumped up the cost of its commercial free base plan to $10.99 per month). Here’s a look back at how the two major streamers dove into ad-supported streaming during 2022.

Netflix finally eyes ads 

Netflix’s move to commercials may have come as the biggest surprise as the SVOD giant has long held a stance of remaining ad free. Even as recently as March 2022 when Netflix CFO Spencer Neumann was questioned about the potential for ads, he reiterated that commercials were not part of current plans.

“Again, never say never, but it’s not in our plans. Other folks are learning from it so it’s hard for us ignore that others are doing it. But for now, it doesn’t make sense for us,” Neumann said in regards to introducing ad, during a March Morgan Stanley investor conference.

But clearly plans can change.

As subscriber and revenue growth slowed in Q1 2022 (with Netflix reporting its first subscriber losses in a decade), the streamer indeed decided it was time to explore advertising and later confirmed it would launch a lower-cost plan with ads as way to attract and monetize customers and create a new revenue stream.

The November launch of Basic with Ads came quickly, just six months after plans were officially disclosed and earlier than an initial 2023 timeline Netflix was targeting at one point. Netflix’s plan with ads first debuted in the U.S. and 11 other countries. And in the runup there was plenty of tidbits, as well as speculation along the way.

Netflix’s first major move was to announce Microsoft as its technology and ad sales partner of choice (forgoing other candidates such as NBCUniversal and Google, which had reportedly been in the running). It also tapped DoubleVerify and Integral Ad Science to verify viewability and traffic validity of ads starting in the first quarter of 2023, and plans to use Nielsen’s Digital Ad Ratings (DAR) in the U.S. sometime in 2023.

To spearhead its ad-supported launch, Netflix made key strategic hires, scooping up former Snapchat executives Jeremi Gorman and Peter Naylor.

As it moved into the ad-supported sphere, reports surfaced that Netflix could be charging up to $65 per CPM (cost per thousand) – higher than typical industry. But with a previously untapped audience and premium inventory it appeared advertisers were eager and willing to pay a higher price tag.

Analysts also took note of the potential opportunity, with LightShed Partners focusing on Netflix’s large share of time spent viewing on CTV as fueling ad dollars. In July analysis the firm said Netflix could potentially have a $4 billion-plus ad revenue opportunity in the U.S.

Still Netflix had to deal with other elements, including negotiations for content that wasn’t originally licensed with rights for ads to run, and not all the content on Netflix is immediately available to users of the plan with commercials.  

At launch Netflix is running 15-30 second ads before and during shows and films. It has said it would offer broad targeting capabilities including by country and genres.

In October, Netflix COO and product chief Greg Peters categorized initial advertising demand as very strong.

“We’re turning some folks away right now, we just don’t have the go-to-market capacity to serve everyone,” Peters noted at the time.

Netflix hits a few bumps with ads

And while there was plenty of excitement leading up to the launch, it hasn’t been completely smooth sailing for Netflix.

 Digiday reported that the streamer was refunding some advertisers after it wasn’t able to meet audience viewership guarantees. According to the report, citing five agency executives, in some cases Netflix only delivered roughly 80% of the expected audience.

According to Field Garthwaite, CEO and co-founder of Iris.TV, the move to return money to advertisers indicates Netflix is following industry best practices “knowing they are positioned to become a global leader in the future of TV advertising.”

Garthwaite doesn’t think it will deter advertisers from wanting to spend with Netflix, telling Fierce Video that “if anything this will just strengthen their market position and trust with major brands and holding companies.”

He also noted that for Hulu’s ad-supported tier has been the company’s most profitable model for years.

“Once Netflix refines their marketing and positioning of their advertising tier, they are going to become one of the largest players globally in streaming advertising,” Garthwaite said. “These deft moves by the Netflix leadership team are showing that they are building a business that will be here for many years to come.”

While Netflix is capable of commanding high prices, TVREV analyst and co-founder Alan Wolk warned the streamer not to get too greedy at the risk of a poor ad user experience.

“It’s an easy thing to do with advertising, given how much brands are willing to pay [Netflix] and the temptation to squeeze in just one more minute can be great—just ask the broadcast and cable networks—but remember that consumer experience is important too and that a poor one can cost you more than the revenue you'll get from that extra minute,” Wolk wrote in a June column on Fierce Video.

In terms of uptake, in reporting third quarter earnings Netflix COO and Chief Product Officer Greg Peters suggested that he didn’t expect many users to switch from the commercial-free tier to an ad-supported plan, rebuffing concerns that a lower-cost tier with ads could cannibalize subscription revenue.

Still, new users don’t yet look to be clamoring for a Netflix plan with ads, with a December report from the Wall Street Journal citing Antenna data that showed tepid initial uptake. According to the report, just 9% of Netflix’s new subscribers in the U.S. in November opted for the Basic with Ads plan. Of those taking the ad-supported tier, 43% were subscribers who downgraded from Netflix’s pricier plans, per the WSJ.  

During investor events and quarterly earnings interviews throughout the year, Netflix executives have continued to emphasize a “crawl-walk-run” approach to advertising ambitions that would iteratively improve the service and build in capabilities to make it increasingly attractive to advertisers. Over time the streamer expects to introduce multiple tiers with ads and create a more personalized experience.  

Disney+ leans on Hulu learnings

As for Disney, the jump into an ad-supported model wasn’t completely new territory. As mentioned, Hulu’s had an ad-supported model, providing learnings to lean on.

While Netflix beat Disney out of the gate at launch, the media company in March 2022 was first to confirm intentions for an ad-supported tier, and later in August disclosed an official launch date and pricing.

At the beginning of 2022 Disney CFO Christine McCarthy zeroed in on an ad-supported tier being all about choice for consumers who don’t mind ads, with potential upside of for subscriber growth and increased ARPU – as well as attractiveness for advertisers looking to reach the platform’s unique audience.

At launch on December 8, Disney+ had over 100 advertising partners on board, although one major platform player was missing – Roku.

Disney benefits from experience in the advertising space, including with Hulu. Disney executives have noted that the ad-supported tier of Hulu has more subscribers than the ad-free version, with two-thirds accounting for the former. They’ve pointed this fact as a good indication the Disney+ tier with ads will also be popular.

At an investor conference in May Disney’s Rita Ferro highlighted intel and experience from Hulu as helping set the foundation for the Disney+ with ads. Ferro also cited interest in advertising on Disney+ since it launched three years prior.

“I can’t even tell you the demand we’ve had for this,” Ferro said. “I remember the day Disney+ launched, I had four or five clients call me and say, when is the date?”

With a family-friendly focus, Disney has said it would keep some kids shows and profiles ad-free while keeping ad breaks to four minutes per hour – fewer than some competitors– for a better experience.  Speaking to that point in August, Disney CFO Christine McCarthy discussed how the company would take an intent ally limited approach to the ad-supported tier, debuting an AVOD version with lower ad loads and frequency compared to Hulu.

“Because of that disciplined lower ad load and lower frequency, and the strong advertising demand that we’ve had, that translates into…the industry-leading CPM rates at the most recent upfront for Disney+,” she said over the summer.

By lowering the number and length of commercial breaks, Disney anticipates its inventory to command a premium price.

“It’s a different product and a different market,” McCarthy said over the summer, regarding Disney+. “We do expect there to be a premium from [Disney+] advertising that we think will enhance the ARPU.”

With only a few weeks since Disney+ introduced ads, the amount of traction with consumers hasn’t been disclosed. But based on research from Kantar, one in four of its existing Disney+ subscribers could trade down from commercial-free tiers.

Disney’s push into the ad-supported space also comes as the company is working to build a profitable streaming business and dealing with leadership shakeups. Having invested heavily  in streaming in 2022, Disney recorded nearly $1.5 billion in DTC operating losses in the third quarter, though advised investors it believes peak DTC losses are now behind it. Disney also saw an abrupt leadership change as long-time former CEO Bob Iger returned in November to helm the company once again, replacing embattled CEO Bob Chapek.

It’s still the early days for both Netflix and Disney+ subscription AVOD plans, and 2023 is poised to see more activity as details on uptake and experience are bound to emerge alongside the evolution of the ad-supported products, roadmaps and advertiser capabilities.