Netflix, Disney+, and Trade Desk—How Streaming Could Upend Advertising

Data is everywhere. When orchestrated properly, it sings. At Morningstar, we analyze and enrich data, making it actionable and powerful for you. Morningstar, where data speaks.

So there's this war, this civil war going on that very few people are aware of around who's going to control identity. Enter stage left, connected television. Connected television is what will bring down the walls of walled gardens.

Hello and welcome to the Barron's Streetwise Podcast. I'm Jack Howe, and the voice you just heard is Jeff Green. He's the founder and CEO of a company called Trade Desk, and if you've never heard of it, it's time to get to know it. When Jeff says connected television can bring down the walled gardens, He means that ad-supported streaming, like the new plans coming soon from Netflix and Disney+, can help reclaim power that has shifted to Google and Facebook. But there are also risks for Hollywood. It's the subject of this week's cover story in Barron's. In a moment, we'll hear from Jeff about Trade Desk's role, and we'll talk with streaming analysts and experts about which companies are best positioned. Listening in is our audio producer Jackson. Hi Jackson. Hey Jack. Have I already shared on this podcast about the time I almost cried during a Maxi Pad commercial? Not enough. When I say almost cried, I mean there was a a feeling of fullness in the throat and a bit of a runny nose, some elevated ocular moistening, but I don't recall any falling or flowing tears. And you know, a base level of eye moisture is perfectly normal. That's what lacrimal glands are there for. So I don't think it counts as a full cry, but I'm not a doctor. I'm just a guy who watched the Super Bowl in 2015 when my daughter was preschool age. And this commercial came on by a company called Always, where a woman asked teenage girls and boys to throw and run and fight like a girl. Show me what it looks like to run like a girl.

My hair.

Some whined, some adjusted their hair, and then the woman asked Dakota, age 10, and some other young girls And they threw and punched and ran with the wholeheartedness of champions. Throw like a girl. Fight like a girl. And since seeing that commercial, I haven't spent one dime on Maxi Pads, which speaks to the limited ability of traditional television to accurately target viewers, which we'll come to. Although in this specific case, Running the ad during the Super Bowl seems to have been part of the point. But I think about that commercial from time to time, and I've made darn sure to sign my daughter up for every sport she'll play, just like my son. And we never use the phrase "throw like a girl." Maybe once or twice I've said "throw like a European." Now, we love our European friends. It's just that Europeans play soccer, not baseball. And if you haven't grown up throwing a baseball, It's tempting to think that it's a catapult motion where all the action happens at the elbow, but it's really more of a whip motion that gets the whole body involved. But now that I think about it, stereotyping about throwing ability by geography feels wrong too. I'm not going to do it anymore. And stereotyping medieval siege weapons feels wrong. There's a specialized catapult called a counterweight trebuchet that uses more of a whipping motion and It's a pretty good model for throwing a baseball. I'm off topic again, Jackson, aren't I? What's better for chucking pumpkins? I'd go trebuchet all the way. Now, the point I was making is that we talk about TV commercials as being annoying and intrusive, which they often are, but they can also be powerful. Here's Jeff Green, the founder and CEO of Trade Desk, which is a buying platform for all types of ads.

You think about ads that make you cry. Well, a banner ad has never made you cry. A mobile ad has only made you cry because you're like, I didn't mean to click on it. But a TV ad will make you cry in that 30 or 60 seconds of moving picture. And if you believe like I do that we've wrongly given credit for Google advertising when in fact what they've done is navigation and that what advertising really is at its core is the process of winning hearts and minds. And if that's the case, then the most effective is both audio and especially video. That now if you have personalization on all of those, the efficacy goes through the roof.

I think of the advertising business as being enormously complicated. And I'm a guy who spent last week writing and talking about fertilizer arbitrage. Jeff says advertising used to be simple. The data has made it complicated.

If you think about advertising in 1965, you call up the New York Times, you're like, what's page 2? They're like, $500 for the whole thing, $250 for half. Or you call up Clear Channel and say, how much for the billboard on I-15? Same thing. It's not complicated. And then in television, everything's done with handshakes and martini lunches because it's the same sort of thing where and you were buying Monday Night Football because that's where the beer drinker, you know, people who watch football tend to be beer drinkers, so you advertise for beer there, and the show was a proxy for audience.

The internet changed all that, of course, because of its ability to track and target.

And partly because of technologies that me and others created more than a decade ago. When you land on a webpage, like let's say you go to Yahoo, or you go to Hulu, or you go to your New York Times app, in there, there are ads, and we run an auction as an industry in 1/10 of 1 second for every single ad. And that's what gives us the opportunity to show you the shoes that you were looking at, but you didn't buy, or the trip that you looked into that you're researching that you're going to go on in a month. That enables retargeting and personalization.

Retargeting is a term for going after someone who appears to have been thinking about buying, but walked away. Digitally speaking. All of this data science, Jeff says, is what makes advertising today so complicated, but also massive and lucrative.

Also means that we run 11 million auctions every second for the internet. You know, we do it in a day what MasterCard and Visa do together in a year.

Okay, at the start of this episode, you heard Jeff mention a civil war around the control of identity. The data that powers online advertising comes from tracking technology like cookies, which raise privacy concerns. Some powerful companies are taking a stand. Alphabet says it will phase out third-party cookies in its Chrome web browser, and Apple has made it so that iPhone users have to opt in to allowing cookies for apps like Facebook and others. In Jeff's opinion, these actions are not just about protecting customers.

They put up these warnings that are concerning, and you as a consumer are like, yeah, I'll just say no because it doesn't seem like there's any upside in it. Meanwhile, Apple offers you something that's like, uh, would you like Apple personalization? It has all these bells and whistles. It's the exact same thing. On this prompt, they're telling you don't do it. On this one, they're like, we can make your life so much easier here at Apple. That's a land grab for them that makes it so that they will control some amount of personalization, and that effort has really hurt Facebook for For instance, Facebook depends on companies like Apple who stand between it and its mobile users.

Alphabet has a stronger hand because it controls the Android operating system for phones and because so many of us go directly to Google with our questions. But Alphabet is what's called a walled garden. It controls the data. Ad buyers have to take Alphabet's word for it that their dollars are being spent effectively. Alphabet also runs a big ad buying platform, which is a bit awkward seeing as how it's a key destination for those ad dollars. Trade Desk's pitch has long been that it offers the ad buying expertise without having a stake in where the dollars are spent. Revenues have doubled over the past 4 years to an estimated $1.6 billion this year, and they're expected to double again over the next 3 years. The stock is up more than 900% over the past 5 years, which has made a fortune for Jeff and has left Trade Desk valued at an ambitious $31 billion. But Jeff points out that the worldwide advertising market is approaching a trillion dollars a year in spending. He says, I want as much of that as possible. He also says that at a time when the walled gardens are struggling to maintain power in a post-cookie world, connected TV or streaming is becoming the most effective way to advertise on the planet.

And it's all because of identity. When you watch Netflix or Disney Plus, anything— Peacock, Paramount Plus— you have to log in with an email address. That is a perfect way to create an identifier. So what that means is that if you're an advertiser and you're looking for personalization and you're finding that it's harder to provide personalized ads via Facebook. Right at the moment when Facebook has their troubles, connected television enters the scene and has identity on 100% of the inventory, 'cause every user is logged into Disney+ in order to see anything. Never did we have 100% on anything else.

That's one reason why streaming advertising is a big deal now. Another is that Netflix is about to get in. It's difficult to overstate how much that could shift the market. During the most recent television ratings season, which ran from roughly late last September to early May, Netflix users took in nearly 1.3 trillion minutes of content. That's double the attention paid to CBS, the longtime ratings leader on traditional TV. And it's 5 times the viewing on the next biggest streaming service, Disney+. So what happens when all that ad space suddenly opens up? That's next, and I'll decode some TV jargon from CPMs to scatter. We'll be right back after this quick break for, fittingly enough, advertising. It's probably a data science-driven spot for trebuchet pumpkin chuckers. Jackson's in the market.

Data is everywhere, but is it ready for consumption? Morningstar developed the language of global investment data so you have the right ingredients to help you shine. Morningstar, where data speaks.

Welcome back. There's a lot to get to about television, especially because I try to keep these episodes to around 22 minutes. Mostly because that's the traditional non-advertising content in a half-hour TV show, and I just assume that TV people know a thing or two about optimal show length. Disney says its ad-supported Disney+ tier will launch on December 8th and cost $7.99 a month. That's the cost now of its ad-free service, but the price on that one will go up to $10.99. Netflix hasn't disclosed its ad-supported streaming price, but Forecasts typically run from $7 to $9 a month. Netflix, keep in mind, has lost subscribers in each of its past 2 quarters, so it needs to return to growth in a hurry to satisfy investors. Disney has a different problem. Its Disney+ service is still growing, but Disney is a big player in traditional TV, including cable, and cable subscriptions are falling quickly. Across the industry, there were more than 100 million traditional pay-TV subscribers in 2015. Now, there are around 82 million. And cord cutting, as it's called, accelerated over the past year. So, how many ads are we talking about? Netflix is expected to start with an ad load of 4 minutes, which would mean that shows that have ads will have 4 minutes of them per content hour. The experience of cable TV, which started decades ago with few ads and quickly came to carry as many ads as broadcast, suggests that ad loads across the streaming industry could increase in a hurry.

There will be silent price hikes and increased, you know, ad loads. There's no way it's going to stay at 3, 4, 5 minutes. Just look at Hulu. I mean, Hulu's 8 to 10 to 12 minutes depending on the show. So we do think there'll be an advertising creep. Hopefully it won't be what, what we see on linear, which is like unbearable.

That's Jessica Reif Erlich, a media analyst at BofA Securities. One important thing to note about Hulu is that most of its subscribers opt for the cheaper tier of service with ads, even with those relatively high ad loads. You heard Jessica mention linear TV. This might be a good point to run quickly through some key TV business jargon that investors should know. This won't hurt any more than a flu shot, I hope. Linear means the shows run at scheduled times, and when people say linear, they're often talking about traditional TV, although technically there are some free streaming services that run cheap linear content. Many of the flagship services offer video on demand with or without ads. I won't get into all the acronyms because the differences aren't especially well defined, and all of these services compete for the same ad dollars. But let's spend a moment on 4 money-making terms. Ad load, you've already heard, that's minutes of advertising per hour. CPM is how ads are priced. People think it stands for cost per minute, but it's actually cost per mil, which is Latin for thousand. So it means price per thousand ad impressions. If you know the ad load and average CPMs, All you need is the size of the audience to estimate ad revenue. Lastly, TV ads are sold in two main ways. One is during what are called the upfronts, or negotiations that generally wrap up in late spring and early summer. The other is last-minute buying in what's called the scatter market. The appeal of buying ads during the upfronts is that you can get choice slots and sometimes pay less than in the scatter market. Now, if I were to sum up the health of the advertising market today, I'd say that this year's upfronts were solid, but the scatter market has turned choppy. Across the U.S. advertising industry, spending fell an estimated 12% in July from a year ago. That's the biggest decline in 2 years. It reflects economic concerns, and it affects all types of companies that make money from ads. Not just TV. And if I were to sum up the success to date of streaming's efforts to sell advertising, I'd say it has mostly made inroads in the scatter market. Traditional TV still rules the upfronts, although companies can make deals for both at the same time. And streaming is expected to become a bigger force in upfronts as the ad dollars follow the viewers. That's it. Flu shot over. Put a Band-Aid on that. Let's move on to a question TV is abuzz over. What will CPMs look like for Netflix? Here's Jessica.

Netflix and Disney+ will be premium, premium CPMs for their content, along with Warner Bros. Discovery. HBO Max is high quality, so if the industry is getting $15 or $20 CPMs, HBO Max is probably closer to $35 or $40 CPMs. Supposedly Disney+ is in that zone. I mean, there have been numbers out there for Netflix that they're asking for $65, which seems unachievable. They don't have the rights to have ads in all their content. They have to go back and negotiate with some of the content owners, and they, they're going to have to pay a fee to get those rights. So the industry speculation is they'll pay 15 to 20% or more just to get the rights to sell advertising. So it's It's not clear initially how much inventory they will have.

If Netflix's CPMs are high, it could boost its stock and provide cover for the whole industry. The stock has already rebounded 28% since the end of June in anticipation. If CPMs are low, Netflix could have to quickly increase its ad load or risk losing revenue as customers trade down from its ad-free tiers. Jessica's colleague, Nat Schindler, is the B of A analyst on Netflix, and he has an underperform rating. He thinks the company will get CPMs in the $20 to $40 range, far below the $65 it is said to be looking for, and he thinks that won't be enough to make up for lost subscription revenue in the years ahead. Tim Nolan, who covers Netflix for Macquarie Research, thinks its CPMs will hit $50 by next year and $60 by 2025. He recently went from bearish to neutral on the stock.

The market opportunity for Netflix could be $3.5 billion in advertising in 2025. And globally, it could be an $8 billion ad revenue opportunity for Netflix. If you factor in an assumption that existing subscribers will transition to the cheaper ad-supported tier and factor in the subscription rates on two services, the ad-free and the ad-supported, we come to an overall incremental incremental revenue figure to Netflix, potential of $1 billion in the US and $2 billion globally in 2025.

So Netflix in a few years could bring in $2 billion more with ads than it would have without them. It could also stem subscriber losses, maybe even reverse them. Evercore ISI just upgraded the stock to outperform. It cited its own survey that suggested that 20% of Netflix customers who churned out, as they say, or canceled, would return for a cheaper tier. So there are obviously widely differing views on Netflix. One reason risk seems high is that unlike legacy TV companies, Netflix doesn't yet generate steady or meaningful free cash. It's expected to in several years, but its stock market value of close to $100 billion could make investors antsy. For comparison, Warner Bros. Discovery, which owns HBO Max and is one of the industry's biggest cash cows, has a market value of just over $30 billion, and it brings in more than $3 billion in free cash per year, which is seen more than doubling over the next 2 to 3 years. One last thing to know about Netflix: one factor that could hold down its CPMs initially is that it's expected to offer very little targeting data. And that might have less to do with privacy than with technology. They've only just recently announced the partnership with Microsoft to power their advertising business. So the ink isn't even dry on the agreement, and it's going to take a while for them to spin up the new advertising infrastructure that's going to allow them to offer more sophisticated targeting. That's Radko Vidakovic, founder of AdProfs, an ad technology consultant. And the infrastructure he's talking about is more complicated than you might think. Streaming services have plenty of data, but they don't want to leak individual information about their customers, and they don't want to give advertisers a way to track their customers to other sites where they could potentially advertise to them at lower rates. What they need is software that can allow the streaming service and advertisers to collaborate on data while preserving privacy. That's called a data clean room. Trade Desk has partnered with Disney+ to provide a data clean room. Microsoft, which bought an ad tech company from AT&T late last year to boost its capabilities, is widely believed to be doing something similar for Netflix. It's also believed to have offered a minimum revenue guarantee of, say, $500 million to $1 billion per year early on to help win Netflix's business. That's speculation. Microsoft has declined to comment, but it means that Netflix could earn higher CPMs as its targeting ability rises, and it could have some downside support as it gets started. And now I'm at risk of breaking my 22-minute episode rule from TV by a lot. I'm no Alf. Let me just say that Jessica from BofA and Tim from Macquarie are both bullish on Disney and WarnerMedia. And if it seems like Disney's streaming price hike is a dare to trade down to its cheaper tier with ads, Jessica thinks there's good reason. It could make more money on the ad-supported streaming than the full-price streaming. Tim is also quite bullish on Trade Desk.

So because they're neutral, because they've got great scale, great relationships, great ability to tie in very targeted ads into all of these services, we think they're going to be one of the winners in this transition.

Alicia Reese, a media analyst at Wedbush, is bullish on Roku, which is interesting because it's a former high flyer whose stock has collapsed by more than 75% over the past year. Right now, their stock got hit really hard after Q2 because of the weakness in the scatter market. And because, you know, I don't think it was understood quite as much the extent to which streamers, including Roku, were beholden to the scatter market versus the upfront. Roku makes money from a connected TV operating system and from its own streaming service called Roku TV. Its market value is down to $9 billion and change. There are plenty of smaller players in streaming, leading to frequent speculation about dealmaking. Paramount has big viewership, but its market value is under $15 billion. Already this year, Amazon closed its purchase of TV and movie studio MGM, and Discovery bought WarnerMedia from AT&T. Next, that company plans to combine its HBO Max and Discovery streaming services. Paramount this past week was reported to be considering the same for Showtime and Paramount Plus. We'll see. Thank you for listening. Jackson Cantrell is our producer. Jackson, any parting words? I'm glad you got through all that without crying.

Barely.

What are the CPMs like for this podcast? I want you to tell me using the sound effect of your choice. Easy. Leave some money for Netflix. Subscribe to the podcast. Rate it. Review it. Don't you dare follow me on Twitter. I've been too busy and lazy to tweet for weeks. If you won't listen to reason, it's @JackHough, H-O-U-G-H. See you next week.

Data is everywhere. When orchestrated properly, it sings. At Morningstar, we analyze and enrich data, making it actionable and powerful for you. Morningstar, where data speaks.