Amazon, Disney and Other Streamers Are Embracing Ads

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The two titans of the video streaming wars — Netflix and Disney+ — have long resisted commercials, showing a reluctance to have premium series like “Stranger Things” or “The Mandalorian” run alongside commercials hawking dish soap, soda and medications.

“No advertising coming onto Netflix — period,” Reed Hastings, one of Netflix’s co-chief executives, said several years ago, a point of view he repeated for some time. “We don’t believe that the consumer experience would be a particularly good one if we had advertising on Disney+,” Christine McCarthy, Disney’s chief financial officer, said in late 2020.

But now, the streamers are starting to come around on Madison Avenue.

After announcing financial results for a difficult quarter, in which Netflix lost subscribers for the first time in a decade, Mr. Hastings told investors on Tuesday that the company planned to look into a lower-priced tier supported by ads “over the next year or two.”

“Those who have followed Netflix know that I have been against the complexity of advertising, and a big fan of the simplicity of subscription,” he said on the company’s earnings call. “But as much as I am a fan of that, I am a bigger fan of consumer choice. And allowing consumers who would like to have a lower price, and are advertising-tolerant, get what they want makes a lot of sense.”

With inflation high and the pandemic-induced surge of subscriptions showing signs of waning, more major media and tech streaming companies are offering viewers a deal: exposure to ads in exchange for lower prices.

Last week, Amazon doubled down on its free, advertising-supported streaming service, renaming it Freevee from IMDb TV and announcing plans to expand its programming budget. HBO Max began showing ads over the summer and, since January, has had the same number of people subscribe to the commercial version as to its ad-free tier.

But the re-evaluation of advertising has been even more surprising at Netflix and Disney.

“It’s pretty clear that it’s working for Hulu. Disney’s doing it. HBO did it,” Mr. Hastings said on Tuesday. “I don’t think we have a lot of doubt that it works. All those companies have figured it out. I’m sure we’ll just get in and figure it out as opposed to just test it and maybe do it or not do it.”

Disney also had a change of heart. In March, Disney the company announced that it would introduce a lower-price advertising tier to Disney+ this year, explaining that it would be a “building block in the company’s path to achieving” its subscription targets.

“When the streaming businesses started and the pricing was in the midsingle digits, there was no room or need because pricing was competitive and low enough,” said JB Perrette, the president of global streaming at Warner Bros. Discovery, the new parent company of HBO Max. “But content is expensive, and as the pricing for ad-free tiers has gone up — in the high-teens level on some of these packages, and even Netflix moving up — it has to be paid for.”

The number of subscribers for the ad-supported services has soared. By the end of last year, 129 million people used an advertising video-on-demand service, according to Insider Intelligence, a market research firm. By 2025, the firm projects, that figure will rise to 165 million users. Likewise, video advertising revenue shot up 51 percent last year to $39.5 billion, according to the Interactive Advertising Bureau, a trade organization.

“Free, ad-driven TV isn’t sitting at the kids’ table anymore,” said Jennifer Salke, the head of Amazon Studios, which supplies programming to Freevee.

Some executives said advertising’s arrival was inevitable, as the streaming industry’s offerings increasingly mirror what has been available on television for decades: a mix of broadcast, basic cable with commercials and premium ad-free services.

“In many ways, we are seeing reincarnation of the last half a century of television for the streaming age,” said Mr. Perrette, the streaming executive at Warner Bros. Discovery, whose portfolio also includes Discovery+.

Some streaming platforms have run ads for years; Hulu has had ads since 2007, adding a commercial-free tier in 2015. The company, which Disney owns, reaches nearly half of all connected television households in the United States, Comscore found last year.

“The streaming services that are essential are on a very short list, and those that are essential and ad-supported — even shorter,” said Josh Mattison, vice president of business operations for Disney Advertising. “You do have some pretty rarefied air at the top.”

For years, brands have wanted to advertise on platforms like Netflix. Instead, Madison Avenue often settled for product placement and the occasional brand partnership. But with Netflix’s growth slowing, many people inside the streaming industry say the company’s turn to advertising seems inevitable.

“I suspect the religion that they currently have about not having ads will change in time,” said Jason Kilar, a former chief executive of WarnerMedia, on the podcast “The Town” this month. “I say that because offering consumers lower prices is a really, really good strategy.”

The idea of ads breaking up “Bridgerton” or “Severance” may be anathema to some viewers, but it is thrilling to many advertisers.

Andrew Essex, a longtime advertising executive who runs the consulting firm GoingConcern, said the “streaming industry is maturing, becoming much more realpolitik, where they’re saying to hell with the user experience — we need revenue, we will explore additional forms of monetization.’

“It’s basically game on,” he added.

Many companies are trying to expand their reach beyond traditional television, where a shrinking number of must-watch events are drawing softer ratings and an aging audience.

The financial implications mean that the presence of streaming commercials is “fantastic news for anyone in advertising, and ultimately, fantastic news for the U.S. consumer, who cannot sustain 15 paid subscriptions,” said Kelly Metz, the managing director of advanced TV activation at the Omnicom Media Group.

“They need advertising-supported models so that they can balance their bank accounts at the end of the month,” she said. “There’s a ceiling on what the U.S. consumer can practically afford, just like what we saw back in the day with cable television.”

As more of the services have added commercials, they have become a playground for experimentation with ad formats. In some cases, ads appear based on whether viewers are bingeing or pausing shows. Hulu asks viewers whether they are willing to watch longer ads earlier in their viewing session in exchange for fewer ads later, or whether they are open to sequential messaging across multiple ad breaks. The company is looking into interactive trivia-type ads to run during movies.

Peacock worked with several major companies to promote its “Fresh Prince” adaptation, “Bel-Air,” which had its premiere in February. State Farm and Unilever created custom commercials that featured Jabari Banks, the star of the show, and aired across NBCUniversal’s digital and linear channels.

With so many streaming options to choose from, advertisers must play “a game of mindshare and saliency,” fighting to capture viewers’ attention, said Juliana Wurzburger, the senior director of paid media of Anheuser-Busch InBev. This season, roughly 30 percent of the company’s video spending was in streaming.

“We are absolutely trying to increase that year over year, trying to follow where the consumer is,” she said.