Subscription-Only Streaming: The Beginning of the End

When Bob Iger said “linear TV and satellite is marching towards a great precipice and it will be pushed off,” he probably didn’t expect to be CEO of Disney again. Linear networks generated $28.3 billion for Disney in FY2022—34% of its total revenue—yielding $8.5 billion in operating income. Meanwhile, its streaming platforms generated $19.5 billion in revenue yet lost $4 billion.  

Iger knows that Disney is marching toward that precipice without a fully functioning parachute. On Nov. 28, he reportedly told employees during a town-hall meeting that “Instead of chasing (subscribers) with aggressive marketing and aggressive spend on content, we have to start chasing profitability.”  

By most accounts, that is why Disney launched Disney+ Basic with ads—marking the beginning of the end of subscription-only streaming services. To illustrate why, we need to look at how Disney and its main rivals—Amazon and Netflix—are positioned to compete in 2023.   

“Ad-Supported” Without Ads 

I’ve argued previously that a subscription isn’t a business model—it is a means to build a Triangular Business composed of experiences, advertising and commerce. Exhibit A: Amazon. I doubt Amazon spent $715 million for eight episodes of “Lords of the Rings: The Rings of Power” thinking that mostly unknown actors with elf ears and dwarf beards would attract or preserve more than $715 million worth of Prime subscriptions.  

No, Tolkien’s legacy is to fuel the Amazon ad machine. In 2021, Amazon controlled 77.7% of the $31 billion U.S. retail media advertising market according to eMarketer. Yes, those “Sponsored” products and “products related to this item” ads are that valuable. Consulting firm BCG estimates Amazon generated 68% of its profits from advertising in 2021 with operating margins of 75%. The retail media market will almost double to $61 billion by 2024 with Amazon far in the lead.  

Amazon may not run ads against its streaming content (except on Freevee), but retail media ads clearly funded the $15 billion the company spent on video content in 2022. As former CEO Jeff Bezos famously said in 2016, “When we win a Golden Globe, it helps us sell more shoes.” Although Prime isn’t an “ad-supported” service by the standard definition, it is very much ad-supported.   

The CTV Option 

Disney and Netflix don’t have an obvious way to copy Amazon’s model. Connected TV (CTV) ads are their best bet, and consumers don’t seem put off (yet). Kantar estimates that a quarter of Disney+’s 164 million subscribers will drop to the ad-supported tier. 

Here’s the issue: whereas Amazon dominates retail media, CTV advertising is fragmented. According to eMarketer, CTV ad spending will reach almost $27 billion in 2023 and exceed $43 billion by 2026. They expect Disney+ ad revenue to reach $835 million in 2023 and Netflix to hit $666 million—only 3.1% and 2.5% of the total, respectively. Meanwhile, Disney-owned Hulu will dominate CTV ad spend in 2023 with 13.8% of the total, followed by YouTube with 11.7%, Roku with 9.5%, and Pluto TV with 4.1%. YouTube, Roku, and Pluto TV are best known for free ad-supported content.  

Disney+ and Netflix must convince consumers to pay up and watch ads, just as Hulu has. They must also convince advertisers to place ads, and no one is that impressed with their offerings yet. Netflix allegedly charges $60 to $65 for a thousand impressions without demographic targeting or third-party audience verification (for now) and is even refunding money back to advertisers for missing reach targets. Disney+, according to its ad sales deck shared with Business Insider, won’t do targeting initially, but Disney has honed that capability at Hulu and ESPN+. 

Netflix, the OG of personalization, could probably correlate content viewing choices with brand affinities and spending behavior (if it acquires or partners with the right data provider). Disney, meanwhile, has integrated the measurement platform VideoAmp into its data clean room (i.e., trove of anonymized user information) in an effort to make first-party data the basis for audience matching, targeting, measurement, and optimization across all of Disney’s platforms. Still, Disney and Netflix have a long way to go before CTV ads amount to anything like Amazon’s retail media war chest. 

The Content Conundrum  

How might advertising affect content strategy at Disney and Netflix? When Disney+ and Netflix were purely subscription platforms, they needed to add subscribers and minimize churn. Arguably, the volume of content available mattered less than releasing premium hits no one would dare miss. But the more that ads support these platforms, the more that screen time matters. Apparently, screen time has little to do with how “premium” content is. Just look at YouTube and TikTok. 

This is a dicey situation. Without enough premium content, Disney and Netflix become vulnerable to Amazon Prime on one end and the free ad-supported services on the other. However, without enough bingeable, ad-optimized content, their new ad business might not contribute to profitability as hoped. Perhaps live streaming channels could support ad revenue by removing the friction inherent to choosing 30-minute blocks of content in a massive library. A return to “our regularly scheduled programming” might just be what CTV ads need.        

Assuming Amazon intends to keep Prime streaming ad-free, Netflix and Disney need to make their ad-supported streaming subscriptions more valuable without degrading their content. To get there, Disney could divest from ESPN to reduce its linear exposure. It could then put the cash towards acquiring Netflix (assuming regulatory approval) and creating the dominant CTV advertising network. Either way, Disney should experiment with introducing theme park tickets, FastPass+ benefits, hotel deals, food and drink discounts, etc., to top-tier Disney+ subscriptions for the trifecta of experiences, advertising and commerce.  

Got a Better Idea?   

If that sounds farfetched, put yourself in Iger’s shoes. One of your rivals, Amazon, can produce premium content without running ads on it. Your other rival, Netflix, is going after CTV advertising at the same time as you. You believe that one-third of your revenue will fall off a precipice, and you’re not sure when.  

If Iger is really chasing profitability, new ad revenues alone won’t cut it. This is the beginning of the end for subscription-only services. And this is the beginning of a very expensive experiment for Disney.