Why Streaming Services Are Pushing Subscribers to Ad Tiers

On Disney’s last quarterly earnings call Aug. 9, CEO Bob Iger waited until the end of his opening remarks to drop the hammer: His company’s streaming business was introducing price increases. Big ones. The monthly cost of the Disney+ and Hulu ad-free tiers would be rising by nearly 30 percent, or $3.

For a company desperately trying to turn its money-losing streaming business into a moneymaker, the pivot marked a critical strategic shift in its path to profitability. However, Iger added that “maintaining access to our content for as broad an audience as possible is top of mind for us, which is why pricing for our stand-alone ad-supported Disney+ and Hulu offerings will remain unchanged.”

Price hikes are never subtle, but the move by Disney was the latest from a company in the streaming space to try and nudge consumers ever so slightly toward its advertising-supported tier.

In July, NBCUniversal raised the price of its Peacock plans, increasing the cost of its ad tier by $1 per month and its ad-free tier by $2. In June, Paramount+ dropped its $9.99 ad-free tier in favor of an $11.99 tier that includes Showtime content, making it $2 more expensive to avoid ads. Like Peacock, its base plan rose by only $1.

Even Netflix, which hasn’t raised prices at all this year, made a move designed to ever so gently push new subscribers to its ad tier. In July, the company dropped its $10-per-month “Basic” plan, meaning the entry points for consumers are now its $6.99-per-month ad tier and its $15.49 standard tier.

The changes, put together, serve to make the ad-supported tiers more appealing to consumers. Even in the cases where ad tiers’ prices rose, the bigger hikes at their ad-free counterparts are meant to make the cheaper option look like an even better deal.

“Streaming is the future of content access, and platforms are trying to create a clearer choice for consumers with their ad-supported and ad-free offerings,” says Julie Clark, senior vp at TransUnion’s media and entertainment vertical. “Economic pressures make it impossible for consumers to subscribe to multiple platforms, and streaming platforms understand the value exchange of advertising with quality content is a logical next step.”

Even before the pricing changes, the ad tiers were having an impact. Iger said that 40 percent of new Disney+ subs were choosing the ad tier. A Netflix source, meanwhile, says that its ad-supported user base has doubled since the first quarter and now has more than 10 million active users, up from the 5 million it announced at its upfront in May.

So why push users to a less expensive subscription tier? Because they are actually more lucrative. Executives at every streaming giant with both an ad-supported and an ad-free tier (including Disney, Netflix, Paramount, Warner Bros. Discovery and NBCUniversal) say that total revenue per user is higher on the ad-supported plan than it is on the ad-free plan.

And that is the key point: With better margins on the ad-supported plan and the streaming ad business still on the rise, the companies now find themselves incentivized to push subscribers to the ad tiers, be they new subs, existing subs, or those caught in password-sharing crackdowns.

According to an Aug. 1 report from Hub Research, some 60 percent of respondents said they would choose to watch content on an ad-supported platform rather than ad-free platform, if it saved them $4 to $5 per month or more. A plurality of respondents also said they valued services that had tiered options, letting them choose whether they could get an ad-free or ad-supported tier. The research suggests that having multiple tiers, including a lower-cost ad-supported option, is the smart play.

“Consumers don’t just tolerate advertising in video content — in most cases, they actually see benefits from it,” says Mark Loughney, senior consultant to Hub. “It allows them to choose their preferred video tiers at lower cost, and when presented right, advertising results in a more engaging viewing experience.”

Engaging experiences being a critical piece of that puzzle.

“Streaming viewers are motivated by their mood and mindset in the moment and are sensitive to disruptive, irrelevant, and unsuitable ad experiences,” says Rohan Castelino, CMO of IRIS.TV. “You can’t blame them; they’ve become accustomed to binging every season of their favorite show ad-free for over a decade. It’s not lost on streaming services to follow the trend of enticing their ad-supported tiers to consumers. But consumers have high expectations, and if streamers want to retain and grow their audience, they must prioritize creating relevant content and ad experiences that allow brands to reach viewers in the moments that matter.”

And the streaming companies believe there is room to grow. In a TV upfront market besieged by a difficult advertising environment, companies reported only two bright spots: streaming advertising and live sports.

Disney reported that “more than 40 percent of the total upfront dollars committed this year” were for its streaming properties Hulu, Disney+ and ESPN+. Paramount reported that its digital video ad business had doubled from 2020, and NBCUniversal said commitments to Peacock were up 30 percent from last year.

“As advertisers continue to look for high-quality content environments for their brands, they will inevitably be driven to these streaming services, which are aggregating larger and larger audiences with personalized content and ad experiences,” says David Cohen, CEO of the Interactive Advertising Bureau. “Historically, subscription-video-on-demand platforms have delivered stronger profit margins. However, as the ad-supported streaming business grows, that dynamic is evolving. Ad-supported streaming provides consumers more options, and provides streamers more levers to pull in the quest for profitability.”

That is ultimately at the heart of the pricing changes. Streaming video has proven to be a difficult model to operate profitably (save for the Ted Sarandos- and Greg Peters-run Netflix), and the appeal of advertising (which the traditional TV companies already know well) is too strong to ignore. Companies like Disney and NBCUniversal might be new to streaming, but they’ve been in the advertising business for decades.

Some observers note, however, that the pricing mind games can go on for only so long. “Context is key when considering these price hikes. Most media companies are struggling with the shift of linear distribution revenue to streaming due to consumer behavior, so to capture audiences, initial monthly fees were low,” says Ken Suh, chief strategy officer of the CTV ad tech firm Nexxen. “The recent rise of ad-supported customers supports the theory that people are willing to watch ads to lower their monthly costs, but the future-looking question is: What will subscribers do if pricing adjusts so much that the ad-supported levels rise to the original ad-free prices for the initial service launches?” 

This story first appeared in the Aug. 23 issue of The Hollywood Reporter magazine. Click here to subscribe.