Netflix and Disney+ have launched ad-supported services to expand their appeal and revenue opportunities amid softening subscriber growth. And as the top streamers draw Madison Avenue closer, industry experts believe their appetites for new projects and shows could change over time to satisfy advertisers that are targeting certain audiences and measurements.
Hollywood should pay close attention to what this may mean for selling shows and movies to the entertainment industry's dominant players.
"I don't think you can bring in the complex notion of an advertising income stream into a system that didn't have it before and not have change on the product — and the product is the content," Robert Thompson, a professor at Syracuse University's Newhouse School of Public Communications and director of its Bleier Center for Television and Popular Culture, told Insider ahead of the new services' debuts.
One top equity research analyst focused on media companies told Insider last fall that he'd been asking Netflix repeatedly about how its push into ad-supported streaming will impact its content development strategy. (The analyst requested anonymity to speak freely about his discussions with the streaming giant.)
Insider spoke to 10 media stakeholders and experts — from analysts to marketing execs — about how the streamers' embrace of advertising stands to impact Hollywood creators and producers. Speaking a few weeks ahead of Netflix's ad launch, no one who commented expected dramatic change overnight, but experts agreed, with some expressing concern, that the streamers' efforts to make ad-supported tiers successful will have a trickle-down effect for the content side of the business and will likely become a factor in determining which shows and films they develop.
As Netflix and Disney+ develop their ad-based tiers, they'll be balancing a need for content that has broad-based viewer appeal to generate big impressions while also keeping up the content mix that has drawn hundreds of millions of current premium subscribers.
Eyes on the prize: Eyeballs, eyeballs, eyeballs
Advertisers' need for guaranteed impressions could push streamers to seek more programming with broader appeal, said Paul Hardart, a clinical professor of marketing at New York University's Stern School of Business.
Other forces have already pushed Netflix in a less edgy direction as it contends with growing competition and setbacks in subscriber growth — headaches that incentivized the streamer to announce its cheaper ad-supported tier in the first place. It's been looking for more lighthearted fare and reality shows.
Disney+, meanwhile, has been adding general-interest entertainment content to complement its kids programming and emphasized to advertisers that it's not just for kids as it prepared its own ad-supported tier.
Netflix's move to add advertising — a reversal of its longtime stance against ads — has been the subject of widespread research. Netflix predicted its ad tier could bring in 40 million users worldwide by the third quarter of 2023, with two-thirds of them coming from outside the US, The Wall Street Journal reported. That's a fraction of its 220 million subscribers worldwide but could be a big draw for advertisers. Netflix's ad tier could generate some $3.5 billion in revenue by 2027, according to projections by Michael Nathanson, an equity research analyst at the firm MoffettNathanson.
Experts predicted the streamers will adjust their content strategies slowly to avoid jarring subscribers, but Hollywood development stakeholders will likely feel the impact first. "The managers and the agents and the writers are going to have to just keep their ears to the ground and see how advertisers interact with production firms and with these distributors," said Joseph Turow, a professor of media systems and industries at the University of Pennsylvania's Annenberg School for Communication.
A spokesperson for Netflix declined to comment. Representatives for Disney did not respond to requests for comment.
Netflix's ad tier, called Basic with Ads, saw early growing pains, Insider reported — and Wall Street analysts and industry observers will be listening closely for updates on its progress during the company's earnings report January 19.
Advertisers are set to regain some of their lost power
After the decline of network television and rise of ad-free streaming in recent years made it harder for advertisers to reach certain audiences, ad-supported streaming services could restore some control and influence to Madison Avenue to help determine, even if indirectly, which shows and films get greenlit in Hollywood.
These streamers will have to factor in the values of advertisers, who want to reach certain demographics and avoid content they deem ill-suited to their brands.
"The advertising slice will allow or encourage selling particular demographics and lifestyles to advertisers, and it may push certain kinds of programs to the forefront of thinking on the part of the people in the streaming services who greenlight material," Turow said.
Kevin Krim, the president and CEO of TV data and analytics measurement firm EDO, said it'll be hard for Netflix to maintain its long-tail, differentiated programming in an ad-driven model. "If you're pricing on impression and genres, you're going to feel pressure over time to produce very popular content."
Digital advertising is increasingly being measured based on actions people take after seeing an ad, like searching for the product, Krim said, which could incentivize certain kinds of content being made.
EDO, which measures ads' performance by looking at lifts in search and site visits for advertisers after their ads air, found that along with broadly popular shows, the kind of programming people like to watch in groups — like sports and reality shows — score the best in ad engagement.
What it all means for Hollywood
Producers and writers who've already felt a change in the creative atmosphere at Netflix might be wise to keep their antennae up regarding further content mandates and shifts stemming from the advent of ads. Content and sales teams at Disney have decades of experience with the ads business, and the top shows on Disney+ already stem from the company's most popular franchises (Marvel, Star Wars), so the addition of ads to Disney+ may not drive as dramatic a content shift.
Some Netflix watchers pointed to the company's history of innovation and reliance on viewer data, speculating that it may develop new ways of valuing its audience for advertisers that don't lead to programming tension. They also see the potential for Netflix to take a creative and disruptive approach to ads as it has with content — consider its interactive, choose-your-own-adventure-style shows. Netflix could find fresh ways to make its programming amenable to product placement, for example.
Ultimately, experts predicted, it will take at least a year or two for the influence of advertisers to be felt in the streamers' content mix.
"I think they're going to go slowly into this advertising world," Hardart, the marketing professor at NYU, said. "I think it'll be '23, '24, maybe even later before it really starts to have impact."
This article was originally published October 11 and has been updated.
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