Advertisers have eagerly awaited the ability to peddle their wares to previously unreachable streaming audiences as platforms including Disney+, HBO Max and Netflix introduce ad-supported tiers. But scrutinizing the ROI of these investments has caused some of the initial allure to fade, according to media buyers from some of the largest U.S. agencies.
Blue chip brands have signed up as launch partners for the new ad offerings: Disney said it secured more than 100 advertisers for the launch of Disney+ Basic last week, while Budweiser and L’Oréal were among the brands spotted on Netflix’s Basic with Ads tier.
But so far, investment is small. One media buyer who has brokered deals with both Disney+ and Netflix said clients are spending less than 1% of their annual ad budgets on these new platforms.
“Our clients are looking to invest, but they're not going to be breaking the bank at this point. It’s going to be pretty minimal for the near future,” said another media buyer.
While the new ad offerings were never expected to be sizable straight out of the gate, slower-than-expected user uptake of ad-supported tiers over the past 18 months has led to more cautious spending among advertisers.
Buyers who spoke to Campaign US on the condition of anonymity due to the sensitivity of budget discussions said they are finding the cost of new advertising video-on-demand (AVOD) platforms difficult to justify.
The cost per one thousand impressions (CPMs) on Disney+ Basic is said to be between $40 and $45, while Netflix’s CPM is up to $55. This is lower than the $65 CPM Netflix was reportedly pitching a few months back, which was roughly the cost of a Super Bowl spot in 2022 — one of the most premium events in the ad calendar.
Yet where the Super Bowl offers a guaranteed audience of millions of live sports fans and a long-established measurement framework, few assurances currently exist within new ad-supported streaming offerings.
Lagging user growth
In briefings with agencies prior to its November launch, Netflix promised to sign up 500,000 ad-supported subscribers by the end of the year. Representing a fraction of its 223 million total subscribers, it didn’t seem to be an unrealistic goal.
But as December approached, the streaming service began warning advertisers that user growth was lagging behind projections. It hasn’t provided specifics, but some expect the current subscriber figure to be closer to 200,000.
HBO Max was also slow to build ad-supported subscribers, who represented 1% of total subscribers in the first three months after its launch in June 2021, growing to 12% one year later, according to data from Antenna.
Scale is the largest factor influencing AVOD investments, buyers said. Some have recommended clients wait one year for the new platforms to build sizable enough audiences to warrant the premium ad costs.
Disney could mitigate these concerns with its pricing strategy — rather than require users to downgrade their subscriptions, it has maintained the same subscription costs for its ad-supported tier and hiked prices for the ad-free experience. This means Disney offers a much clearer incentive to watch ads than its competitors, buyers said.
Netflix, on the other hand, has put “very little” marketing support behind its ad tier, two buyers said.
Disney also has the benefit of owning multiple media properties, offering a mixture of linear and streaming buys, sports and entertainment, as well as entrenched relationships with the ad industry.
"Where Netflix is a one stop shop, Disney allows for more fluidity and flexibility to move money to different channels as you see consumers shift their viewing habits. It is a much larger corporate commitment,” saidJason Kafensky, managing partner of marketplace intelligence for Havas Media.
For Netflix, which is new to the ad industry, pricing over market expectations could be a strategic decision to “soft launch” its ad offering while it works out the kinks. Multiple buyers characterized the launch of Netflix’s ad tier, which is powered by Microsoft’s ad tools, as “rushed.”
“Premium pricing creates a sense of exclusivity while also deliberately throttling down demand. It is smart to put the entire business through its paces for a bit before flooding the system with demand,” suggested Travis Lusk, group director of digital and tech advisory, North America at Ebiquity.
Disney, HBO Max and Netflix have all said they want to maintain a good consumer experience within their ad tiers with light ad loads — four to five minutes of ads per hour — and strict frequency caps.
But some initial rules have been relaxed — as Netflix rushed to fill empty ad slots in Q4, advertisers were apparently asked to increase frequency caps, according to buyers. The streaming giant also scrapped a limit on sales per advertiser.
“Trying to keep the frequency at which we're running our creatives to a minimum is one of the biggest issues when you're getting these platforms off the ground,” said a media buyer.
Figuring out the right balance of frequency caps can be a challenge as different vendors and media owners are often able to sell certain slices of inventory within the same ad pod. If this isn’t carefully managed by the streaming platform, viewers can be bombarded with the same ad multiple times — diminishing the return for advertisers.
For more risk-averse brands, brand safety has factored into investment decisions. Since Disney’s content is targeted to children and families, it is considered a safer bet than some of the more “risqué” programming on Netflix.
Tools are also rudimentary: Advertisers can exclude broad genres on Netflix but they can’t create program-specific exclusion lists. While Netflix said it won’t run ads on kids programming, since it doesn’t follow age ratings, brands under heavy restrictions, such as alcohol makers, are worried about falling foul of the law.
“The guardrails are limited, causing some clients to be hesitant,” said a media buyer.
Targeting and measurement
Limited targeting and measurement capabilities make it difficult to prove the effectiveness of AVOD investments, a sharper focus now as businesses contend with macroeconomic challenges.
Netflix offers broad targeting options by country and content categories. Disney has said it plans to allow demographic targeting within Disney+ using Nielsen data and its own analytics by April.
Third-party measurement is coming — Netflix said it would use Nielsen’s ratings system “sometime in 2023” — but for now, performance is not being validated.
“You do continue to see these walled gardens from a targeting perspective continuing to close, making it harder to utilize cross publisher third-party data and targeting,” said Mike Fisher, VP of advanced TV and audio at Essence.
Unable to tie investment back to outcomes like sales uplift, the sheen of these new AVOD platforms is “wearing off,” said a media buyer.
“It's great to be that innovative brand that's launching on a platform that feels really high profile, but those clients are also smart enough to know that effectiveness matters. We can only run untargeted and unmeasured for so long,” they said.
Another media buyer categorized new platform launch partners as “vanity clients” who place value on being first. Travel, telecommunications, pharmaceuticals and quick service restaurants were cited as clients willing to take a gamble for a high-profile spot.
AVOD will steal linear dollars — eventually
Buyers unanimously agree that new ad-supported streaming platforms will capture meaningful budgets eventually, but it will take at least a year to reach adequate scale.
“If Netflix can get to 10 million subscribers, then 2024 will be a magical year. Based on password sharing numbers, it is not unachievable,” said Kafensky.
Ad dollars that are being allocated to new streaming platforms are being carved out of existing TV budgets for linear and streaming, rather than incrementally growing TV’s share of spend.
Linear TV still represents a sizable portion of TV ad sales — up to 70% for some media buyers. Since returns from linear are declining, advertisers have less available budget to shift into fast-growing streaming channels.
IPG Mediabrands’ media investment firm Magna expects long-form video sales in the U.S. to decline 1% in 2022, dragged by a 4% decline in linear national TV and partially offset by 18% growth in AVOD ad sales.
GroupM said in its December ad forecast it did not expect Disney+ and Netflix’s new ad tiers to be a “significant factor” on TV advertising figures in 2022.
Average CPM costs across the global TV ad market, inclusive of linear and streaming, rose 10% in 2022, according to Magna’s forecast, and are expected to continue similar growth levels in 2023.