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What If They Launched an Ad-Supported Streaming Service and No One Came? (Wolk)

Lonely party
(Image credit: D. Anschutz/Getty Images)

What is the ideal percentage of ad-supported versus ad-free subscribers for a streaming TV service?

It’s a question that is going to be asked a lot once Netflix and Disney launch their ad-supported options.

Alan Wolk

(Image credit: Alan Wolk)

The answer will likely be critical to both services' ultimate success.

The easiest place to start looking for that answer is with Hulu, the OG ad-supported subscription service. 

While Hulu has never officially announced any actual ad-supported subscriber numbers, most estimates have it at around 60% of their 46.2 million subscribers, that being the number then-president Randy Freer offered up in a 2019 interview. 

It’s a solid, believable number, and if you’re a brand marketer who wants to run ads on Hulu, it’s reassuring to know that the majority of subscribers could conceivably see your ads.

But here’s the thing: Hulu has had an ad-supported option from the day it launched back in 2007. It only added the ad-free option later on, in 2015. Meaning they were starting from 100 percent ad supported and working their way down.

Netflix and Disney, on the other hand, are starting at zero and working their way up. They are going to have to convince people to either come on board for the ad-supported service or to switch.

Neither will be an easy task

Let’s start with switching. Netflix is rumored to be considering a $7-$9 price point for its ad-supported service, which is considerably less than the $15.49/month people currently pay for ad-free. 

Their hope, no doubt, is that the lower price point will convince all of those “freeloaders” — the recent graduates, grandparents, old boyfriends — who are still on someone else’s plan to sign up for one of their own. Maybe, but that is going to be a tough sell, depending on how much (or in some cases, how little) Netflix that cohort watches.

Another, and perhaps more realistic hope, is to retain all of those people who have been thinking about getting rid of Netflix because they no longer watch it that much. 

Yes, Netflix was essential when there were only three streaming services available. But there are now nine of them and most have programming that is very similar to Netflix, not to mention deeper libraries. All of this might make spending $15/month for Netflix, whose program quality has been uneven at best, seem like a waste of money.

So the hope there seems to be that at $7/month, people who are “occasional” Netflix viewers and sort of “meh” on the service overall can be convinced to stay on.

New subscribers are going to be tougher, at least in the U.S., where Netflix has around 66% penetration. (Compare that to smartphones, which have around 80% penetration.)  I’m thinking that just about anyone who has ever wanted a Netflix subscription now has one and that the lower price point is not going to move a lot of additional hearts, minds or credit card numbers.

Disney has chosen an even tougher road. 

They’re upping the price of their original ad-free subscription from $7 to $11 and rolling out the ad-supported version at the old ad-free price ($7).

The question then becomes, if someone wasn’t subscribing to ad-free Disney when it was $7, why would they then subscribe to the ad-supported version at the same price point?

It’s a valid question, too, as Disney’s programming has remained fairly consistent in terms of what it is, and it seems to very much fall into the “you or your kids either like it or you don’t” category. So, unless they start rolling out something very different from their current IP-heavy fare (or a killer live sports package), it’s unclear who they are hoping to attract.

One possibility is users who thought Disney Plus was worth $7/month but who find the new $11 price point excessive and, given that they mostly watch kids programming on it (kid profiles will remain ad-free) switching to the ad-supported version is an easy decision.

But again, how many people fall into that category, and if they are switching precisely because they are only watching the ad-free kids programming anyway, is that really a win?

From Zero To 60?

When they launch their ad-supported options, the industry will be looking to see how long it takes Netflix and Disney to reach a viable ad-supported base.

In talking to a number of ad buyers, the consensus seemed to be that while Hulu’s 60% ad-supported was ideal, the services would need to get to around 40% to make them attractive options. The theory being that if only one-third of their subscribers were on the ad-supported plan, the buyers would worry that those subscribers were not representative of the subscriber base as a whole and would want to know more about both their demographics and viewing habits.

That said, there were some counterarguments that even just 20% of Netflix’s 72 million subscribers still gave you a potential audience of 14.4 million viewers, which is not nothing, and given the context of running the ads against high profile originals, would still make an ad buy worth it.

So there’s that.

The issue really comes down to which shows those ad-supported viewers are watching and what sort of guarantees Netflix and Disney will make as to the number of eyeballs watching ads on their originals.

While most streaming TV is sold programmatically, there’s a strong assumption that the ad slots on both services' high profile originals will be sold directly, given how desirable those slots are likely to be.

Which again brings us back to the question of how many ad-supported viewers will be watching those shows and what their demographics will look like.

That then raises the even more pressing question of how desirable will Netflix’s or DIsney’s ad inventory continue to be if their ad-supported base never rises beyond thirty to forty percent, and how will that affect the financials and long term plans of both companies in particular and the streaming industry in general?

Something to keep an eye on in the months ahead.

Alan Wolk is the co-founder and lead analyst for media consultancy TV[R]EV