Prediction: Ads Could Make Disney and Netflix Investors a Ton of Money

Not every Walt Disney (NYSE: DIS) investor is stoked about the upcoming launch of an ad-supported version of Disney+, just as some Netflix (NASDAQ: NFLX) shareholders fear the recent launch of its lower-cost, ad-supported streaming service could tarnish the brand's premium image. And these worries aren't entirely without merit.

Fresh data from Parks Associates, however, suggests ad-supported streaming platforms are more palatable -- and probably going to be more profitable -- than most people might think. As it turns out, a bunch of digital video viewers are already clicking on a good number of the TV ads they're seeing.

Surprisingly responsive

Between television, the web, and print media, consumers in North America see thousands of advertisements every single day. Most of them go ignored, if not completely unnoticed.

The captive, immersive experience that only digital television can deliver, though, is translating into surprisingly successful ad efforts. Consumer-technology market research outfit Parks Associates reports that 23% of ad-supported streaming video watchers "often" click on a video ad they see injected into their programming, with the same proportion indicating they actually buy goods and services being promoted within those advertisements. These figures jibe with a similar report published by TiVo last month, indicating roughly 22% of consumers engaged with a digital video ad during the second quarter of this year, up from roughly 21% in the same quarter a year earlier.

The numbers still don't offer complete clarity as to how much traction these TV ads are getting on a per-impression basis; it's likely these consumers see dozens of ads per day without clicking on the majority of them. In a world that has largely trained itself to tune out advertisements of all sorts, though, it's an impressive metric all the same.

It's also not the only metric suggesting consumers are more amenable to ads than one might believe. In TiVo's aforementioned report, 58.3% of North American consumers concede they're ad-tolerant in exchange for lower-cost (or free) streaming services, while 19.1% of them indicate they're outright ad-favorable.

There are a couple of noteworthy nuances to the business, though.

The little things matter

One of the keys to success with this relatively young business model is the balance between price and ad load.

A survey performed by video entertainment research house Hub Entertainment last year suggests consumers expect to pay around $5 less per month for an ad-supported version of a streaming service than its ad-free version costs, and then only in exchange for watching a tolerable number of advertisements. That's not necessarily a downside for streaming players or their advertisers, however. Hub's report adds that regular users of ad-supported platforms report paying attention to more commercials when there are fewer of them. This is an opportunity for advertisers and their platforms to actually achieve more proverbial bang for their buck, if handled wisely.

An ad-supported streaming consumer clicking on a TV ad.

Image source: Getty Images.

In this vein, another key to running a successful ad-supported streaming venture is ensuring the ads viewers are seeing matter. Other research from Hub Entertainment indicates 69% of ad-supported streaming customers enjoy their overall experience when the ads they're seeing are relevant. When those ads don't pertain to them, only 48% of consumers say they enjoyed the program.

To this end, expect both Walt Disney and Netflix to do well in terms delivering the right TV commercials at the optimal cadence. Netflix is working with software giant Microsoft to manage the technical aspects of its advertising operation, and Disney has tapped The Trade Desk for similar assistance with its advertising framework.

An underestimated opportunity for Disney and Netflix

The eventual upside of either ad-supported streaming service is still anybody's guess, although several analytical firms have chimed in with estimates. MoffettNathanson believes Netflix's annual ad business could be near $3 billion by 2027, while JPMorgan and Oppenheimer both peg the annual figure at more than $4 billion by 2026. Meanwhile, most guesses as to the annual advertising revenue Disney+ will be able to generate in the foreseeable future are on the order of just under $2 billion. Both are respectable figures, yet both are still far less than either streaming platform is driving now with subscription revenue alone.

Largely lost in this line of thinking, however, is the less-calculable benefit of customer attraction and then customer retention. Both services desperately need to revitalize subscriber growth. A more affordable means of signing up for and then sticking with such a service is by bringing it below the $10/month mark, as both of these ad-supported options do.

In this light, Walt Disney's aim of serving between 135 million and 165 million core Disney+ subscribers by the end of 2024 versus its current headcount of just under 103 million is not only achievable, but arguably conservative. Netflix presently boasts 223 million worldwide users, but the company reportedly believes as many as 40 million consumers could embrace a lower-cost, ad-supported option as soon as the end of the coming year.

The leaked document was prepared for Netflix's potential advertisers, which suggests this figure didn't indicate how many current Netflix subscribers would likely be switching from the ad-free offering. But it doesn't entirely matter. In light of Parks Associates' data on the growing acceptance of -- and clicks on -- streaming ads, the company may well be underestimating the potential of this endeavor. Ditto for its shareholders, as well as Walt Disney shareholders' expectations of ad-supported Disney+.

While both stocks are compelling prospects based on the potential of their ad-supported streaming ventures, Netflix is arguably the more attractive of the two. It's not saddled with as much cost-baggage or a cable television business that's fighting an uphill battle. It also doesn't own a bunch of theme parks that could soon suffer the impact of prolonged economic weakness.

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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase, Microsoft, Netflix, The Trade Desk, and Walt Disney. The Motley Fool recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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