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Netflix leaves advertisers with unanswered questions

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By Hannah Bowler | Journalist

May 10, 2022 | 8 min read

Last month Netflix finally answered advertisers’ prayers by saying it would introduce ads to its platform after a decade of resisting. Although the news was met with excitement, it’s clear Netflix has a task on its hands with complex barriers to overcome. We catch up with The Drum’s Future of TV advisory panel, which has a few questions for Netflix.

Netflix has so far revealed little on its plan for introducing ads. In the face of rising subscription costs, it said within the next one to two years it wanted to offer users a less expensive plan that would be supported by brands.

Barriers to Netflix's adoption of ads

What are the barriers to Netflix’s adoption of ads?

“This [ads on Netflix] is going to be phenomenal and exciting,” says Brad Stockton, Dentsu’s senior vice-president, US national video innovation. But he has questions.

“Who is leading this? What’s the adtech? What are the targeting capabilities? What will the consumer experience look like? And what will its pricing models be?”

And, fundamentally, can all this really be achieved in such a short timescale?

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Stockton echoes the sentiments of many on The Drum’s advisory panel. Head of customer value at Direct Line Group Sam Taylor says: “The TV broadcast space has already evolved so much in the past 24 months and will continue to do so. The position Netflix will be in then will be very different than today. That makes it tricky, as it is planning to deliver a product in a landscape that will be very different to what the landscape looks like today.”

GroupM’s global director Simon Thomas says Netflix is taking a big risk on the new strategy, but it could result in a massive pay-out.

“It has a revenue deficit from subscriptions, so initially it needs ad revenue to replace it and then incrementally build the business on it. If it is too aggressive on it, it risks upsetting part subscribers or it will deprecate the level of quality so much that it will be a tipping point for people to move away,” says Thomas. “That’s a balance Reed [Hastings, Netflix chief executive] has got to make.”

Here are the barriers facing Netflix that it would need to answer before introducing ads.

It has no adtech

Firstly, Netflix doesn’t have any existing adtech, meaning it will either have to build solutions from scratch, partner up or do some M&A activity. In Netflix’s Q1 2022 earnings call, Hastings implied the streamer has no immediate plans to build its own adtech.

“And in terms of the profit potential, definitely, the online ad market has advanced. And now, you don’t have to incorporate all the information about people that you used to. So we can be a straight publisher and have other people do all of the fancy ad-matching and integrate all the data about people. So we can stay out of that and really be focused on our members, creating that great experience, and getting monetized in a first-class way by a range of different companies who offer that service,” Hastings said.

Does it need new data agreements?

Netflix’s current subscriber agreement allows it to view and use the data along with a group of third-party advertising communication companies. When Netflix introduces ads, it will have to go back to its users and ask them for additional data consent.

One senior TV exec says: “It is going to have to get subscribers to opt in to any addressable capability. It is going to be very privacy sensitive, it always has been, and it always should be its part of who it is.”

Similarly, do current content agreements allow it to have ads? If not, then it’s going to take Netflix time and money to go back through all existing content agreements and reagree to run ads. “It won’t have interstitial rights to enough of its content straight out of the gate,” the exec adds.

Local regulation

Netflix is a global streamer, meaning no top-down decision can be made and rolled out globally. For instance, in the UK if Netflix introduces ads, it will have to go through the Clear Cast approval system.

According to Thomas, Netflix might be able to help restore trust in advertising. He says: “The trust in media has reduced dramatically in the last 10 years, and that’s what Netflix could bring back. It’s a very trusted brand, so if it’s done responsibly then I think we are on to a winner. If it goes all out and goes mass market then it’ll kill the golden goose.”

Brand safety

The group also questioned what brand safety could look like wrapped around a Netflix show like Squid Game. The violent series gripped viewers, but resulted in criticism as children began copying some scenes in their own playground versions.

Freed from advertisers, Netflix has had the freedom to buy and commission content that pushes the boundaries. But with a reliance on brand backing, could it avoid contentious content?

“As an advertiser, I still need to be in a brand-safe environment. How is it going to ring-fence children’s content? How do I get more transparency in this space?” Stockton says.

“Brand safety in the digital video streaming space from a show transparency perspective is a problem. It’s not a technical limitation or a legal one, but it’s more of an enablement that needs to be happening across the board.”

Product placement isn’t scalable

Netflix has a long history of using product placement in its original series, with Stranger Things, Sex Education and Love among the top shows with placement deals. A simple answer to Netflix’s finical woes could be to up its product placement deals, but it seems unlikely it would make any significant dent in its revenues. “Product placement isn’t a long-term scalable solution for Netflix because it takes so long to produce content and we are living in a much more short-term mindset,” says Taylor.

Taylor’s comments are echoed by Accenture’s managing director of R&D Alex Naressi, who separately told The Drum that product placement can be too complex for the reward.

“It’s important to get [product placement] right because we are touching the viewing experience so it’s much riskier than ad interruption,” Naressi said. He also said country-specific regulations will need to be taken into account by Netflix when rolling out global shows.

In 2017, Naressi attempted to build dynamic product placement tech, which had Netflix and Amazon in its sights, but he was forced to shift the project after finding automated TV product placement too challenging to execute.

“We are still far from a world where real-time bidding will be possible with dynamic insertion – this is still very much a manual experience,” he warned.

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