Disney+ enters the AVOD space with big advantages over Netflix, but Netflix has a global advantage that will help it in the long run.
Ads will play a key role in Netflix’s recovery from a disastrous first quarter, as well as the streaming giant’s warning that the second quarter will lead to more subscriber losses. But a new report from media analysts MoffettNathanson also suggests that an ad-supported future for Netflix cannot be a magic wand, and that Netflix’s main competitor, Disney, will benefit the most from ads.
Netflix could generate $1.2 billion in U.S. ad revenue by 2025, researchers estimate, accounting for just 4 percent of the company’s global revenue last year. For the Disney+ ad-supported tier, MoffettNathanson sees more revenue, more opportunities to monetize content, and a higher share of subscribers who choose AVOD.
Analysts predict that Disney+ will earn $1.8 billion from ads in 2025. Disney-controlled Hulu, the industry leader in ad-supported streaming revenue, is projected to make $4.1 billion from ads this year. Combine the respective projections for HBO Max and Discovery+ — which seems reasonable given their anticipated arrival — and Netflix’s projected domestic ad revenue in 2025 is only surpassed by Paramount+ (just over $1 billion) among mainstream streamers.
Penultimate place isn’t the best idea for Netflix, but according to another key metric, its top spot in the streaming industry remains solid. Netflix is already generating more average revenue per user (ARPU) than its competitors, and Moffett-Nathanson expects this to continue into 2025, but in other words, that means Netflix is expensive.
Analysts expect Netflix to bring in $19 per ad-free user this year, compared to $15 per ad-enabled subscriber, in the US this year. Compare that to the predictions for Disney+: $12 for ad-free users versus $11 for AVOD subscribers.
This is based on estimates of future prices. Netflix currently costs between $9.99 and $19.99 per month; Of course, ad-supported tiers will cost less than corresponding ad-free tiers. Disney+ costs $7.99 per month, and MoffettNathanson expects that when Disney+ introduces ads later this year, it will charge the current price for the ad-supported tier and a higher price for the ad-free version.
“Netflix has already set a really high level of repetitive [ARPU] and they don’t need to create opportunities for their customers,” MoffettNathanson’s Michael Nathanson told IndieWire. “In contrast, other platforms need ads to lower the cost of streaming for customers.”
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Netflix remains the most viewed major streaming platform, accounting for 47 percent of the ecosystem’s total domestic streaming minutes. MoffettNathanson expects it to lose several significant positions to competitors over the next few years.
“Due to projected faster subscriber growth across other services, we forecast Netflix’s share of [total streaming minutes] will drop to 40, while each of the other services modestly increase their shares,” the group said in a June 14 report.
Tuesday’s analysis came on the same day that more bad news arrived for Netflix. Benchmark analyst Matthew Harrigan downgraded his rating on Netflix stock from Hold to Sell, admitting he made a mistake when he upgraded the NFLX “prematurely” in January. Harrigan’s new price target is a downbeat $157, below the company’s 52-week low of $162.71. The stock opened on Wednesday at $169.26.
Even Bela Bajaria, Netflix’s global television executive, called the previously untouchable king of streaming a “loser” during an appearance at the Banff Media Festival on Tuesday. Ah, to rewind. Last October, Netflix shares briefly traded at $700, and this year its share price has fallen by more than 70 percent. Goldman Sachs also downgraded Netflix last week, citing concerns about slowing consumer spending and increased competition from Amazon and Disney.
Perhaps an underdog in some ways, the house of Stranger Things is still the streaming leader with 221.64 million subscribers worldwide (Disney has 205.6 million subscribers on Disney+, Hulu and ESPN+). On the same day that MoffettNathanson released its report, Bajaria made its remark, and Harrigan downgraded the NFLX, the company announced a new all-time record for Stranger Things 4’s views. So it’s not all bad, but something is definitely wrong.
Another major issue is that Netflix isn’t really AVOD ready, while Disney is. Home to Disney+, Hotstar and Hulu will be able to monetize ads in the US faster thanks to an end-to-end sales approach with line networks and a robust in-house ad infrastructure that Netflix currently lacks. Whether it’s an internal or third party solution, it’s expensive. Netflix may also not be allowed to insert ads into some third-party programs, limiting its ability to specifically monetize anything other than the originals.
According to Nathanson’s group, Netflix’s strength lies in its “potential for much greater global advertising growth.” Another recent report from Wells Fargoit is estimated that in 2025, Netflix could generate $7.09 billion from advertising worldwide, representing 15% of its $44.8 billion in total revenue.
Going into 2025, Moffet Nathanson expects 70 percent of Disney+’s 53 million domestic subscribers to be ad-supported. Netflix analysts expect just under 20% of its roughly 75.6 million subscribers to watch ads.