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Why Netflix shouldn't be so down on an ad-funded subscriber model

Streaming companies need to start looking at alternatives like ad-funded subscription models to safeguard their futures from dwindling user growth.

Hidden away in Netflix’s quarterly earnings was a sobering figure for the company and others in the media streaming market. Despite being on-track with operating margins and closing in on the headline-grabbing 100 million subscribers, Netflix fell short of its targeted number of new US subscribers – 104,000 short – as well as internationally – 170,000 short.

Although small at this stage, the data suggests subscriber growth is slowing and Netflix will soon be hitting saturation point for the number of users willing to pay for its service. Though the company’s shares have previously soared on the back of impressive user growth figures, how will the streaming giant and others in the sector respond when those numbers start to slow?

While some suggest that a new hit show is needed to drive new sign-ups, the problem really lies with the subscription-only business model. All streaming companies need to start exploring ad-funded options sooner rather than later to safeguard their futures.

After years of aggressive marketing of flagship original content like Stranger Things, House of Cards or Orange is the New Black, the majority of customers willing to pay a monthly fee are already on board.

The big players don’t have an awareness problem, they have a saturation problem.

When there are a limited number of potential customers in a certain space, it becomes a wary battle to keep growing that user-base once it has been exhausted. Although subscriptions may initially display fast growth, they will eventually reach a point of depletion and plateau.

Becoming more accessible

“Our focus is on on-demand, commercial free viewing rather than live, ad-supported programming," Netflix chief executive, Reed Hastings, affirmed in a letter to shareholders in April. But streaming companies like Netflix should not be assuming that each person who wants to access its services would be interested in paid subscription.

They need to look beyond their loyal followers, to see the large consumer base that would sign up to their services, if only they were offered was another way to gain access without paying either any, or the full rate.

Enter an ad-based model. On top of the current pay-for-subscription models, this would make streaming providers more accessible and compelling to a great deal of new and willing audiences. Remaining ignorant to this would be limiting the company, denying a potentially hugely profitable source of revenue. Such results have been realized by MTV Trax, the media giant’s music playing app, which offers an ad-funded model through Unlockd, whereby consumers are offered access to the premium version of the application for viewing relevant ads, content or offers when they unlock their smartphone, for no cost.

As Netflix and others hike their prices, when will users start switching off?

Costs to produce content as well as retain and grow the user base are soaring. The race for the next big binge-watching blockbuster series is sending costs through the roof whilst user numbers plateau. Netflix is burning cash fast with its ever-increasing spend both on original and acquired programming – it lost $423m in free cash flow in the first quarter of this year, a 62% increase from the same period last year.

This is a perfect example of the competitive dynamics that streaming services are witnessing to ‘win’ the content rights – much like advertisers that have always competed for the illustrious Super Bowl half time ad-placements, which has increased exponentially over the years to a jaw dropping price point today of $5m for 30 seconds. Competition drives up price points and eventually those which run out of deep pockets lose out – a situation Netflix must be wary of.

But there are only a number of times that companies like Netflix can put prices up before users switch off.

An ad-funded alternative would not only attract new audiences onto the platform, but is proven to increase the value of each subscriber over time. It’s a matter of helping media streaming providers succeed in periods of declining growth and increased competition from a host of providers.

What’s stopping brands from adopting ad-based models?

Brands like Netflix are adamant they want to keep their distance from ad-based revenue models. And yet, consumers are interested in being able to make the choice, as highlighted by a recent Nielsen Media Labs report which showed 54% of consumers would be open to watching ads as a gateway to accessing premium digital content.

Netflix will be investing $1bn into acquisition marketing over the next year – a huge vote of confidence that it believes in alternative funding and customer acquisition models which may fall outside of its typical business model.

By offering an ad-based model, Netflix could reduce additional investments into acquisition marketing – saving millions of dollars, while acquiring customers and introducing a new revenue stream – which would bring about a profitable return much more quickly. Monetising content with advertising far outweighs the growth opportunities from a subscription model, and as such leads businesses to start thinking about this avenue as a way to get ahead of competition and break through their subscription ceilings.

Matt Von der Muhll is chief revenue officer at Unlockd