Squaring the Circle: Mirriad and advertising on the streaming services

The past few months have seen significant steps in the rollout of advertising to the SVOD services. Disney+ launches its product in the United States later this year while Netflix also confirmed it was introducing advertising. Both have recruited powerful partners to help them with their offering with Disney selecting The Trade Desk and Netflix Xandr). Disney+ has also confirmed its pricing (at least for the United States) when it comes to the ad-supported option – keep the existing $7.99 per month price for Basic and take adverts or take a $3 per month price rise for no ads. Netflix has gone down a different route, offering a new lower-tier offering at $6.99 per month for those willing to take adverts.

The launch of advertising makes sense strategically. It offers a new source of revenue growth as opposed to a SVOD model, which depends on growing subscriber numbers and / or ARPU. That is critical because SVOD penetration is already slowing down, as witnessed by the results this year of Netflix, Comcast’s Peacock, and Warner Bros Discovery. Meanwhile, growing pressure on households makes raising ARPU difficult and there is a natural trade off between subscriber and ARPU growth.

However, I do think there is an opportunity for all the streamers to expand their revenue offering beyond a traditional advertising play. I act as an advisor to Mirriad Plc, which is the leader in advertising insertion into content. What I would argue below in public is what I have stated in private. There are several very good reasons why the streamers should take up such technology.

The first is that it would expand the reach of advertising. Both Disney+ and Netflix are taking a Black and White approach when it comes to advertising i.e., either subscribers see adverts or none. Yet, as in life, having a shade of grey approach is perhaps more appropriate. By inserting adverts into content, without the need to interrupt the programming, both streamers could reach the entirety of their subscriber bases, not just the proportion that takes advertising.

That leads onto a second point. Even for those subscribers who will take the advertising-funded options, there will be a limited advertising ad load. Part of this reflects a desire by the companies to ensure customers are not inundated by adverts and part (probably) because it creates a scarcity of supply which helps maintain a premium price level and / or exclusivity when it comes to the advertising slots. Both those reasons make sense from the streamers’ standpoint. However, they also limit the maximum upside from advertising. Inserted adverts can get round that problem.

Thirdly, the technology can address possible weaknesses in the ‘traditional’ approach to advertising both Disney and Netflix have taken. The most obvious one is whether the streaming subscribers reached with adverts are necessarily the optimal ones. The with-advertising packages for both Disney+ and Netflix are naturally cheaper than the without ads version. That increases the chances that a disproportionate percentage of those who choose the advertising option are doing so because of economic reasons, which may not be the ones that advertisers want to attract. Having an advertising solution that reaches all subscribers, regardless of economic conditions, is probably a more attractive option for advertisers.

Finally, there is the financial – and shareholder - angle. As mentioned above, advertising offers a new source of revenues for streamers. More importantly, it is a source that should be very high margin because virtually all of if it should drop through to the bottom line (I think the potential net revenue drop through i.e. post-payment of fees to partners could be 90%+. This would not only be a gamechanger in terms of profits and cashflow, but also investor perceptions to the companies, which has been badly damaged over the past 12 months. Any offering that can help maximise that revenue stream helps substantially.

I have used Netflix and Disney+ here because of their high-profile announcements on advertising in their streaming services. Yet the arguments above could easily apply to a variety of streaming (and other) services. Given we are offering a period of greater economic uncertainty and, perhaps more to the point, rising concerns over TV price inflation, platforms need to engage in maximising revenue opportunities. This seems like one area where it is a no-brainer.

As usual, this is not investment advice.