MoffettNathanson analyst Michael Nathanson has weighed in on the opportunities for Netflix and Disney Plus in the advertising world, estimating Netflix could see $1.2 billion in ad revenue by 2025 and Disney Plus could generate $1.8 billion in the same time frame. 

“Netflix has the potential for much larger global ad growth, yet the domestic advertising opportunity for Disney,” Nathanson said, adding that Disney Plus can take advantage of a more-developed advertising infrastructure, demand for Disney content and Disney’s ownership of a large share of that content.

For both companies, a big share of ad revenue will drop to the bottom line, with margins for Netflix increasing by 200 basis points and Disney Plus gaining 300 basis points.

Also: Analyst: Adding Commercials Will Boost Netflix Subscribers by 6% and Earnings by 20% in 2025

“While we are excited by the opportunity that advertising creates at those two streaming giants, the devil will be in the details of how each company prices these new offerings and how much of the available content impressions will be available and suitable for advertising. In general, we feel that the growth of these ad offerings will be mainly sourced by non-sports and news linear cable and broadcast network dollars,” Nathanson said. 

In making his calculations, Nathanson said he expects Netflix to price its ad tier at $6 per month, or $4 less than its lowest-cost ad-free tier. He expects that by 2025, Netflix will have 15 million subscribers for its ad-supported tier in the US. and 75.6 million subs overall. Netflix subs opting for ads will get six 30-second commercials per hour.

Nathanson predicts Disney Plus will charge $7.99 per month for its ad-supported tier at the outset, raising its ad-free price to $11.99 a month. (The unbundled ad-free version now costs $7.99.) By 2025, he sees Disney Plus having 37.1 million ad-supported subs out of 53 million total. Those subs will see five 30-second spots per hour. 

Nathanson compared the advertising newcomers to the ad-supported versions of streaming services that already exist. He estimates that Hulu (excluding its vMVPD service) will be the leader in 2025 with ad revenue of $4.1 billion, up from $2.7 billion this year. By 2025, Comcast’s Peacock could be generating $1.8 billion in ad revenue, Paramount Plus slightly more than $1 billion, HBO Max $724 million and Discovery Plus $654 million.

In terms of profitability, Netflix will have to invest in its ad business, while Disney is more ready to go right away.

“We see the launch of Netflix’s domestic ad-supported tier having no impact on earnings per share in 2023 and 2024 before providing a benefit beginning in 2025, with our hypothetical 2027 EPS reaching $22.55, 12% or $2.50 higher than our current forecast,” Nathanson said. “For Disney, we expect the launch of a domestic ad-supported tier will have a meaningful positive impact on calendar years 2023 EPS (up 8% or 44 cents), with that impact waning through 2025 down to 3%.” ■

As earnings season for content providers rapidly approaches — most are scheduled to release their quarterly financial results in the first two weeks of November — investors are increasingly wondering if programmers, who have for years exerted their dominance over distributors, are beginning to lose their grip.

Already, two high-profile carriage renewals are in the books — The Walt Disney Co.’s renewal with Altice USA in the New York market and Viacom’s carriage pact with the second largest cable operator in the country, Charter Communications.

Related: Viacom’s Schireson Says Charter Deal Could Be Blueprint

While most analysts had seen those two programmers as prime examples of how quickly the fortunes of once-dominant content providers could change — each were facing shrinking subscriber bases due to cord-cutting and skinny bundles — both were able to hammer out deals without going dark. That seemed especially surprising for Viacom, which already had seen its channels go dark on systems owned by Cable One and Suddenlink (since renewed). Viacom has struggled with ratings declines and was said to be ripe for getting dropped by Charter.

But instead of testing those waters, Charter, according to reports, agreed to carry eight Viacom channels on its most popular tiers, relegating the rest to pricier packages. And perhaps more importantly, Charter extracted a reduction in affiliate-fee pricing some analysts estimated could be between 10% and 15%. That could have been sweetener enough to discourage Charter from experimenting with dropping the channels.

Related: The Pendulum Swings Back

With the Charter deal, Viacom has basically completed the latest round of renewals — MoffettNathanson media analyst Michael Nathanson estimated that Verizon Communications, the National Cable Television Cooperative and one smaller operator are likely next on the renewal calendar for the programmer over the coming three years.

Distributors Gaining Ground
Pivotal Research Group senior research analyst- advertising Brian Wieser said that while it depends on the network, programmers are increasingly getting pushback on carriage of their least popular channels. And unlike in past years, the distributors appear to be gaining ground.

“The writing is on the wall,” Wieser said. “ ‘VH1 Classics for Women, Jazz Version’ as a digital network does not have a future.”

Wieser was joking, but the gist of what he said rings true. The current cast of cable networks was created during a period when distributors wanted more inventory to fill up their 150-plus channel lineups. Also at that time, consumers saw real value in larger channel offerings and were willing to pay for it. Today, less is more as consumers are seeking out smaller bundles of programming.

“I think the future is worse now than what everyone thought it would be a few years ago,” Wieser said.

That shift will likely translate into lower affiliate fee increases and carriage for fewer networks, he said.

“The Discoverys and Viacoms of the world will end up negotiating lower price increases and end up with lower carriage,” Wieser said. He added that fewer channels also means lower costs for the programmer, so they should “end up in the same place.”

Wieser is not alone. Credit Suisse media analyst Omar Sheikh estimated annual subscriber declines for major domestic cable networks of about 2%, while affiliate fee growth would fall from 9% in 2018 to 7% in 2019 and 5% by 2020.

The affiliate-fee erosion comes as the years-long ad market decline continues. In a note earlier this month, Nathanson estimated national TV ad growth will be -10%, with cable down 4% and broadcast down 19% (+1% ex-Olympics).

Wieser predicted a 2% decline in national television advertising, while Sheikh estimated that ad growth would shrink from 4.3% in 2018 to between 2.4% and 2.5% by 2019-20.

Some analysts have predicted that distributors could use this newfound clout to finally break the bundle, or at least cease carrying networks they no longer feel are worth the trouble, but Wieser doesn’t see that happening on a wide-scale basis yet. He pointed to the recent Charter-Viacom and Disney-Altice deals, which allowed the distributors some carriage flexibility.

No Wholesale Exodus
Sources familiar with the Altice-Disney deal have confirmed reports that Altice won’t carry ESPN Classic as part of its Disney deal, in return for raising the minimum carriage bar for its other networks.

Other analysts such as Sanford Bernstein’s Todd Juenger have worked out the math to justify dropping channels. But even Juenger, who has believed the content business has been in structural decline for years, doesn’t predict a wholesale exodus from ESPN, whether the math works or not.

The economics look better as the fees increase. In a recent note Juenger estimated that dropping ESPN and its $11.44 per month per customer in affiliate fees would make sense even if Charter lost 42.5% of its customers. But he didn’t think any distributor was likely to drop bigger content owners.

“The problem, of course, is no [multichannel video programming distributor] wants to risk (yet) touching Disney (or Fox, Turner, CBS),” Juenger wrote. “Rightly or wrongly, the fear is that too many subscribers care too passionately about certain networks in those families.”