On Disney’s last quarterly earnings call on August 9, CEO Bob Iger announced that the company’s streaming business would be introducing significant price increases. The monthly cost of Disney+ and Hulu’s ad-free tiers would be rising by almost 30%, or $3. This move marked a critical strategic shift for Disney as it aimed to turn its money-losing streaming business into a profitable venture. However, Iger specified that the pricing for the stand-alone ad-supported Disney+ and Hulu offerings would remain unchanged to maintain access to content for as broad an audience as possible.
Disney is not the only company in the streaming space that has raised prices to encourage consumers towards its advertising-supported tier. In July, NBCUniversal raised the price of its Peacock plans, increasing the cost of its ad tier by $1 per month and its ad-free tier by $2. Similarly, Paramount+ dropped its $9.99 ad-free tier in June in favor of an $11.99 tier that includes Showtime content, making it $2 more expensive to avoid ads. Even Netflix, which did not raise prices this year, dropped its $10-per-month “Basic” plan in July, leaving the $6.99-per-month ad tier and $15.49 standard tier as entry options for new subscribers.
Despite the price hikes, the ad-supported tiers have demonstrated their appeal to consumers. Iger revealed that 40% of new Disney+ subscribers were choosing the ad tier. Netflix also reported that its ad-supported user base doubled since the first quarter, reaching over 10 million active users. This trend highlights the fact that ad-supported plans can be more lucrative for streaming companies. Executives from Disney, Netflix, Paramount, Warner Bros. Discovery, and NBCUniversal have all stated that the total revenue per user is higher on the ad-supported plan compared to the ad-free plan.
Furthermore, a report from Hub Research showed that 60% of respondents would choose to watch content on an ad-supported platform if it saved them $4 to $5 per month or more. Respondents also appreciated services that offered tiered options, allowing them to choose between ad-free or ad-supported tiers. This research suggests that offering multiple tiers, including a lower-cost ad-supported option, is a smart strategy for streaming companies.
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Mark Loughney, senior consultant to Hub, emphasized the benefits of advertising in video content. He stated that advertising allows consumers to choose their preferred video tiers at a lower cost and enhances the viewing experience when presented effectively. Moreover, streaming companies believe there is room for the ad-supported model to grow. Streaming advertising and live sports were the only bright spots in the TV upfront market, with Disney reporting that more than 40% of upfront dollars committed this year were for its streaming properties. Paramount’s digital video ad business doubled from 2020, and commitments to Peacock increased by 30% from the previous year, according to NBCUniversal.
David Cohen, CEO of the Interactive Advertising Bureau, highlighted the evolving dynamic of the streaming industry. While subscription-video-on-demand platforms historically delivered stronger profit margins, the growth of ad-supported streaming is changing this landscape. Ad-supported streaming provides consumers with more options and offers streamers additional levers to pull in pursuit of profitability.
However, some observers caution that the pricing adjustments may have limitations. Ken Suh, chief strategy officer of CTV ad tech firm Nexxen, points out that media companies initially set low monthly fees to capture audiences amidst the shift from linear distribution revenue to streaming. The rise of ad-supported customers suggests that people are willing to watch ads to lower their monthly costs. However, Suh raises the question of what subscribers will do if pricing adjustments drive ad-supported levels to the original ad-free prices.
Ultimately, the pricing changes made by streaming companies like Disney and NBCUniversal reflect their desire to leverage the advertising business’s potential within the streaming industry. While streaming video has proven challenging to operate profitably, the appeal and profitability of advertising cannot be overlooked. Despite being new to streaming, companies like Disney and NBCUniversal have years of advertising experience, making them well-equipped to navigate this evolving landscape. However, the future implications of pricing adjustments remain uncertain.
