Why 2023 Upfronts Mean More for Disney+ Than Netflix

Upfronts is set to become a new front (not to be confused with NewFronts) in the streaming wars.

With all the major streaming players now competing for advertiser dollars, the stage is set for a clash of the SVOD titans at next week’s upfront presentations. Netflix is gearing up to make its first big public pitch to Madison Avenue, while Disney will mark its first upfront since launching ads on Disney+ in December, and as such will likely push the service aggressively to ad buyers.

However, it’s frankly difficult to forecast what to expect from upfront commitments this year, given the uncertainties hanging over negotiations — from the ongoing writers strike that could hamper the fall TV season to the still-rocky economic environment and tightened budgets — and the additional uncertainties brought to the table by the streamers themselves.

Both Netflix and Disney+’s AVOD platforms are in early stages and very much still works in progress. Both services’ ad tiers launched with limited targeting capabilities and audience data, and they are currently expanding on these fronts. Disney’s president of advertising sales, Rita Ferro, said in January that Hulu’s “full suite of ad products and services” will be available on Disney+ later this year.

Meanwhile, advertisers have expressed frustration with Netflix’s AVOD operations, with one buyer telling AdAge the streamer’s ad tech “wasn’t ready” upon its entrance into the market last year. Netflix’s task at its inaugural upfront will be to counter this narrative and win skeptical agencies back over, with not just a splashy presentation but improved targeting and more robust consumer data.

Then again, it won’t be a huge problem for Netflix if it doesn’t win back the skeptics. The streamer’s ad-supported tier is already doing what it was designed to do, bringing in new customers and users who had previously canceled, according to a Bloomberg report. (Netflix has not reported subscriber totals for the ad-supported tier.) And as the company’s Q1 earnings report noted, average revenue per user for the AVOD tier has already surpassed that of the ad-free Standard plan in the U.S.

Netflix is also no longer facing the intense financial pressures and scrutiny from Wall Street it was undergoing at this time last year, armed with a solid balance sheet and a return to (albeit slowed) subscriber growth. In short, when it comes to ads, Netflix is running a marathon, not a sprint, as its executives have repeatedly emphasized.

Disney, on the other hand, is not. The pressures on the Mouse House are far greater at this moment than those on Netflix. Disney has promised Wall Street its direct-to-consumer division can turn a profit next year, which is also when CEO Bob Iger will need to decide what to do with the company’s streaming albatross, Hulu.

Upfronts may actually provide something of a roadmap for how Iger should proceed on that front. The CEO is currently mulling whether to buy out Comcast’s remaining 33% stake in Hulu or sell off the service, which would likely result in the bulk of its Disney-owned content migrating to Disney+.

There’s a long and complicated debate to be had about those options (likely ongoing in Burbank conference rooms at this very moment), but the key point to note here is Hulu’s robust ad business, which generates around $3 billion per year in revenue, according to multiple estimates. Insider Intelligence projects Disney+ to generate less than a third of that amount in U.S. ad revenue this year. (Like Hulu, the ad-supported version of Disney+ is only available domestically, though an international expansion is planned for later this year.)

This could change, of course. Per Antenna data, Disney+’s AVOD plan already accounted for nearly a third of U.S. sign-ups in February — only its third month on the market — and that share will likely continue to grow.

But it’s also likely Disney+ won’t be able to match the scale of Hulu’s ad business for a while, especially considering its share of U.S. TV viewing time consistently trails behind Hulu, per Nielsen.

As such, the amount that Disney+ secures in upfront ad commitments this year could be an indicator of how fast its own ad business can build scale, whether ad buys vastly improve upon last year’s totals, vastly underwhelm relative to Hulu or fall somewhere in the middle.

This will give Disney leadership a better idea of whether jettisoning Hulu’s lucrative ad machine is a good idea at this critical juncture, when the Mouse House, like its fellow legacy media companies, is aggressively trimming costs in the name of improving its margins on streaming.

Those margins, incidentally, look much better for Hulu than Disney+, with a recent Wells Fargo report estimating Hulu will hit a positive profit margin of about 2% this year. Disney+, by contrast, had a margin of -42% in 2022. (That same report advocates Disney keeping Hulu, stating it would be “foolish” to sell the service to a rival.)

Advertising will be a crucial method for improving Disney+’s financials, of course, but that won’t happen overnight, even if upfront ad buys far surpass expectations. Nevertheless, this is set to be a crucial upfront for Disney, one that could help shape its entire streaming strategy going forward.