As Netflix subscribers plunge, here’s what its new advertising model could look like
The Netflix empire is shrinking after 10 years of successive growth – a sign that competition is heating up in the streaming space. In response chief executive officer Reed Hastings ripped up the script to announce that it will introduce an ad-supported tier in the next two years. The Drum asks advertisers to envision what this model could look like.
Netflix has just suffered what Hollywood Reporter’s Alex Weprin has dubbed “its most consequential quarter in years.” Netflix lost 200,000 subscribers in the first quarter of 2022 – bringing it to 221.6 million. It anticipates a further 2 million gone in the next. Shares dropped 20% in response to the news.
As subscribers plunge, can Netflix bridge its way into advertising?
Hastings blamed several factors, including suspending 700,000 accounts in Russia where he claims it was blooming. The supposed end of the pandemic’s TV bingeing and password-sharing were other cited factors.
Not mentioned was the growing competition. Traditional broadcasters are gaining a foothold online and are holding back their beloved IPs from the streamer. Them and Disney alike are unlocking huge archives that arguably represent better value for money.
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Meanwhile, the ’cost-of-living crisis’ is seeing consumers drop many TV services deemed surplus to requirements, according to Kantar data launched earlier this week.
This trend is why we’re seeing the subscription video services introduce advertising tiers. Disney was the latest big addition to the AVOD space, but in the gaming space Insider revealed that such models are being investigated at Microsoft – likely for its Game Pass streaming service.
Advertisers are rubbing their hands in glee at thought of Netflix offering inventory. Zenith’s Rich Kirk tweets: “I always said the unit economics of SVOD without ads were unsustainable. Netflix and D+ announcements are start of a new era of ‘TV’ ad buying. Hugely exciting times.”
When Netflix dragged video viewers from ad-funded TV, advertisers had to find new ways to reach these people. They’ve long anticipated having that access again. But was the shrinkage caused by content quality and the pandemic lull? MediaMonk’s Myles Younger has noticed that Netflix’s content approach seems to have prioritized quantity over quality. He says it “might be entirely the right strategy for them ... as long as they have an AVOD tier for the mass market.”
Meanwhile, prominent TV buyer Mihir Haria-Shah says he has “never understood Netflix’s reluctance to have a free/lower-priced ad-funded model. The success of the Spotify ‘freemium’ model has been there for all to see for so long.”
So what could advertising on Netflix look like?
Patrick Morrell is director of partnerships EMEA at The Trade Desk, an organization that predicted Netflix would offer an ad-supported option more than two years ago. Morrell believes this “would mark the biggest disruption to the European TV market since the arrival of Sky.”
It would be the “envy of other broadcasters” due to its wealth of first-party data from logged-in users. As an over-the-top streamer, it’s also not currently beholden to Clearcast rules. He says it doesn’t currently have a large advertising sales team – hiring comes first. Morrell believes it could learn from Discovery+'s ‘Ad-lite’ product [Check out The Drum’s TV Talks podcast for more on that model].
As for formats, it must keep its market-leading user experience (UX) “clean,” which Morrell believes means leaves out display ads flanking the app and webpage. Instead he sees pre-roll video slotting in easy enough. “It could gain a lot from looking at others like Amazon, for example, which has been successfully running adverts on live sports for some years.”
He adds: “Netflix should consider working with programmatic, data-driven technology to make the most of the flexibility and immediacy it offers.”
However, it’s important to remember that Netflix has always accepted advertising via more integrated means such as product placement and brand partnerships. It does not interrupt its content with ads.
Omnicom Media Group’s Danny Hopwood says the shift to ads will help “depressurize” Netflix, which has been “burning cash” in pursuit of users.
“Netflix is data-rich. From day one it has had cloud storage, rich audience insights and email addresses to pin it to.” He points out that it would be introducing ads to one of the best user interfaces (UIs) in the business, which is a strong starting point.
But he thinks Netflix has the time to be “smart” about its ads pivot, and build upon its product placement operations.
“Netflix has the data and infrastructure, some prior experience, great understanding of UI, recommendation and integration. It has been testing dynamic product placement. The appetite for this is certainly there.”
He says it needs to be “something totally unique, just like it did when they launched back in 2007.” Just don’t overload it with ads, he says – advice many of the broadcaster VODs are ignoring, to their folly.
But it can be more than a media platform. Advertisers can use it to learn more about the consumers they need to reach. “Many advertisers value what they have seen from CTV and broadcast in terms of insights. Netflix could bring to them a whole different curve of information on what users are watching and when, and find optimal ways to tie viewings to ad opportunities, just like they have with viewers to a recommended show.”
This will be the app’s bread and butter, he suggests.
What we’ve learned from Spotify is that the dual-tier model is a balancing game. The ad-funded tier has to be unintrusive enough to keep users on the app, but have enough friction to encourage them into the higher-profit subscription tier in the long-term.
Christian Taylor, head of planning at The Kite Factory, points out that the lower tier may help keep users keen to “pause” their subscription for a few months.
“The aim is to give consumers more choice and increase the volume of potential consumers using the service, as well as increase their lifetime value to mitigate pausing and switching to competitor services.”
He wonders how many of the 220 million subscribers would switch to an ad-funded model – and how many more it would attract into the ecosystem. Netflix may worry that a majority of users would prefer the ad model, which would bite into the bottom line severely.
From the data perspective, Netflix will have to confidently ensure advertisers are reaching who they believe they are, which might be another motive behind the account-sharing purge that is coming down the line. Taylor adds: “It will be expected to untangle the households sharing accounts using their first-party data to rival the capabilities of CTV in the US, where programmatic traders can overlay first- and third-party data to reach the perfect audiences.”
Finally, Darren Savage, chief strategy officer of Tribal Worldwide, suggests that consumers trust Netflix and are happy to provide it with data.
“Instead of first-party data, Netflix should consider collecting zero-party data. Ask users about their preferences, moods, habits and choices, and then use that to supplement the algorithm. It may find that a lot of people want to tune into Netflix and only get one option.”
As part of The Drum’s ramped-up TV coverage, media editor John McCarthy and TV reporter Hannah Bowler have launched a podcast series, TV Talks. In the third episode, our special guest is Kristina Shepard, head of agency partnerships and national brand team lead at Roku.