Following poor Q1 results, Netflix announced that it will be introducing an ad-supported tier to its streaming platform. So what does Netflix advertising mean for the rest of the industry?
When the so-called ‘streaming wars’ kicked off, no one imagined that just around the corner was a global pandemic. A global event that would change the face of the world, the economy and consumer behavior. At first, Netflix, Disney Plus and their competitors reaped the benefits of lockdowns across the world. Bored consumers, unable to find entertainment or spend their money elsewhere, signed up to the streamers in their millions. Disney Plus reached 90 million subscribers three years ahead of schedule at the end of 2020. Netflix added an additional 37 million subscribers in 2020, bringing its total to over 200 million. Indeed, this huge increase in subscriptions helped to bring Netflix into the black for the first time in 2021.
More than two years on, the world has largely learned to live with Covid-19. Normal life has more or less resumed, so where does that leave the streamers?
Netflix – boom, bust and boom again?
The new normal has certainly had an impact on Netflix, along with the higher cost of living and other factors. Netflix announced in April that it had lost 200,000 subscribers in Q1 2022 – its first-ever decrease in subscribers. The company blamed the loss on several factors, including high penetration, economic factors, the war in Ukraine (Netflix has pulled out of Russia), and the high number of customers who share their passwords with non-paying households. But whatever you blame it on, it was a bad quarter for Netflix, particularly in comparison to Disney, who announced that they had added nearly 8 million subscribers in the same quarter.
It was against this backdrop that Netflix CEO Reed Hastings made his big announcement: Netflix would introduce an ad-supported tier. This was in stark contrast to the platform’s long-standing opposition to ads. Netflix has since announced that the new, lower-priced tier could launch as early as the end of this year.
What Netflix advertising means for the rest of the streaming industry…
In recent years, a belief that 1 billion households were willing to pay for streaming services led to huge investment in the streaming sector. Much of the money from this investment was poured into content creation. The theory was that better content equals more subscribers. Netflix invested so much into content creation that it only became profitable for the first time in 2021. However, it is becoming clear that the market is likely much smaller than originally believed, especially given that high penetration was partly blamed for Netflix’s weak Q1 results. The streaming platforms need to find new ways to deliver growth – and that’s where advertising steps in.
Many assumed that Netflix’s lost subscribers were lost to competitors. However, research revealed that in the two weeks after cancelling a Netflix subscription, 87% of subscribers had not signed up to a rival service. This suggests that cost is the key factor. That makes a lower-cost, ad-supported version more appealing – although Netflix will be keen to avoid cannibalising subscriptions to its top tier.
Although Disney’s subscribership is healthier than Netflix’s, it is also watching its outgoings carefully; Bob Chapek announced that the company would be cutting its overall film and TV spending by $1 billion this year. It is also launching an ad-supported tier for Disney Plus, which it is in a good position to do thanks to its experience in the space with Hulu.
…and for advertisers?
For a long time, TV advertising has, slowly but surely, been losing its sheen, compared to more measurable and targetable formats such as online channels, and more exciting ones like podcasts. With increasing numbers of consumers cutting the cord on cable and ‘going dark’ to ad-free environments such as Netflix and Disney Plus, advertisers have had to fight it out for live sports programming in order to reach large audiences. But, thanks in no small part to the news from Netflix, it’s back with a bang. Advertisers will be excited about reaching Netflix’s binge-watching audiences and – as a newcomer to the advertising scene – it is hoped that Netflix’s ad offering will be high-quality, prompting many advertisers to truly embrace non-linear channels. That said, viewers who have higher incomes and are therefore more attractive to many advertisers will likely remain on the ad-free version, out of reach to the advertisers who are so keen to reach them. It will be interesting to see if they choose to advertise on Netflix anyway.
Netflix’s announcement meant it was to late for the streamer to join the US Upfronts this year, but many advertisers will be excited about its anticipated arrival at next year’s Upfronts.
What will Netflix advertising look like?
It is currently unclear how Netflix will approach selling advertising – it could use an outside company, develop an in-house ad sales team (which will require significant hiring), or it could acquire an ad company or a company that already has an ad offering – such as Roku. But no matter which direction it goes in, it will benefit from being immensely data-rich, thanks to its cloud storage, audience insights and email addresses. If it approaches advertising carefully and intelligently, it could potentially set a new standard for advertising on TV, creating an experience which is both enjoyable for the viewer and rich with benefits for the advertiser. It will be undoubtedly keen to keep its user experience as clean as possible, so will likely seek to avoid banners on its homepage. It could also use pre-rolls rather than interrupt shows with ads.
An article on AdExchanger recommends that it combines content, commerce and commercials into a seamless experience. Gamification, for example through ‘choose your own adventure’ ads, would allow brands to generate more data as well as to build engaging CTV experiences. One-click shopping would enable brands to ‘capitalize on a seamless and closed loop’ to drive conversions and revenue, as well as to collect valuable data. Finally, if Netflix plays its cards right, it could own a vast wealth of extremely attractive first-party data with which it could build and sell audiences. Its existing contextual recommendation platform could be repurposed to handle ad optimizations and outcomes, similar to a walled garden.
The future of advertising on streaming platforms
Netflix’s announcement that it will introduce an ad-supported, lower-cost tier has sent ripples of excitement across the industry. This is the company that almost single-handedly created the streaming category, pioneering a model that has been replicated by many, from the entertainment conglomerates to smaller, specialist streaming platforms. Its move into advertising, after so many years of refusing to even consider it, will be eagerly watched and could – if executed well – create a new standard for ads in both the streaming industry and the wider TV industry.