What would be Netflix's advertising model of choice?

With news Netflix is now entertaining an advertising model for its streaming services platform, industry thought leaders weigh in on the viability of the idea, how to successfully execute it and what it means for brands

News Netflix may introduce advertising on its streaming platform following its first subscriber decline in 10 years has surprised no one in the wider advertising and technology industry ecosystem. But how the streaming services does it successfully has certainly raised fervent speculation.  

Earlier this week, the streaming giant confirmed it had lost more than 200,000 subscribers globally in the first quarter of the year. It’s the first subscriber decline for Netflix in 10 years and a figure lying in stark contrast to investor expectations of 250,000 new subscribers over the same period. Not surprisingly, the news sent the company’s stock prices declining by 20 per cent. Netflix has also revealed it expects it could lose 2 million subscribers globally in this current quarter.

Several macro-forces and trends were blamed for the fall, including increased streaming competition, the war in Ukraine and decision to close up shop in Russia, and the significant number of subscribers sharing logins with non-paying households. Netflix has already begun cracking down on the latter in several markets, and more action on this front is expected globally in coming months.

In addition, Netflix executives said they are now considering opening up the streaming platform to advertising in return for a lower-priced subscription. This goes against the long-held views of its co-founder and chairman, Reed Hastings, who has historically opposed adding commercials or sponsorship deals to the service.

But as Innocean chief strategy officer, Gual Barwell, told CMO, with organic growth topping out, increasingly complex market dynamics and a large portion of actual viewers not paying for the service, it’s commercially imperative Netflix look to diversify sources of revenue. 

“Netflix needs to either get non-payers to start paying somehow, stabilise penetration in established markets where it’s starting to see slowing growth, as well as increase penetration in emerging markets where the business has struggled to get a foothold at all,” he said. “Like Spotify globally and Hulu in the United States, it seems like an obvious move for Netflix to start to tier its service, allowing consumers that are tolerable to advertising to get access to a cheaper service.”

Barwell argued the consumer landscape around on-demand content, plus familiarity with different types of ‘cost’, provided a path for Netflix to tap into emerging markets as well as capture un-realised latent revenue.

With the likes of Disney+ already planning to bring ad-supported streaming services to Australia, it was only a matter of time before other providers follow suit, Criteo video specialist for APAC, Heath Irving, said.

“By introducing advertising-based video on-demand [AVOD] options, these global streaming giants are looking to capitalise on streaming fatigue and engage new audiences who may be considering less time on the couch or looking to save money by reducing their subscriptions,” he said. “New additions of ad-supported streaming services are welcomed by all sides of the industry. For marketers, it opens up more premium supply to speak to their consumers via first-party data strategies. At the same time, it unlocks new revenue opportunities for the established streaming services that are starting to see new subscriber numbers plateau.”

Enigma managing director, Justin Ladmore, is another who’s unsurprised by Netflix’s decision to entertain advertising.

“Content is expensive to buy and expensive to make. Couple that with the price of entry at $10.99 a month and your margins are starting to look a bit skinny,” he said. “Ad-supported models do make sense. HBO Max had success launching its ad-supported model last June with 40 per cent of subscribers now utilising the model. Paramount+ is also seeing success and Disney+ launched its ad-funded model at the end of the year. But should Netflix do it? “As an everyday viewer, I say don’t do it. Opening up this world to the sugar hit of paid advertising brings Netflix down into the weeds. The company should think long term, stick to its guns and focus on quality content and a great user experience. Don’t follow the pack.

“But as a media buyer, I have to say I am excited. Access to more ad inventory within quality video content. Bring it on.”

Starcom Australia CEO and former Red Rooster CEO, Nick Keenan, was in no doubt Netflix had reached maturity on its growth curve and by necessity, must adapt its business model.

“Gone are the days of unrivalled growth from little to no competition in the business of subscriber-based streaming of content. Also gone are the days of pandemic-fuelled over-consumption of content, as well as ignoring missed revenue opportunities by allowing account and password sharing,” he said. “When you’re growing consistently at high double digits – no business leadership will intervene or make changes that could stop the growth tune from playing.

“The new reality, however, is that the growth has suddenly stopped. With the launch of streaming platforms from the more traditional content creators, subscriber-based streaming of entertainment content is now a highly competitive landscape. Disney, HBO, Paramount and locally, Stan, have all successfully launched and built a subscriber base. Consumers are now as spoilt for choice for streaming platforms as they were for content in the all-you-can-eat, no ads content buffet on Netflix. Being cut off from content supply from these news streaming providers, content that was once blended with their own adds to the complexity of this competition. Then there is the macro-economic environment and the increase in cost of living.

“Any marketer will tell you the first sacrificial lamb in that scenario is discretionary spending. The pandemic is all but over with respect to lockdowns and being stuck at home subscribing to everything, over-indulging on content across multiple devices. Consumers with more choice and household budget concerns are now optimising their streaming stack to what matters most.”  

What advertising on Netflix could look like

So if it’s a fait accompli, what advertising model is going to work for Netflix? A number of thought leaders speaking to CMO pointed to approaches applied by HBO, Disney, Hula and Spotify as guides.

“Either by showing ads pre-content, in the middle of content, or by simply reducing subscription costs to show some ads but not all ads, or no cost to show all ads – Netflix has options,” Keenan said. “Netflix can activate these subscription advertising models that are ready-made without too much disruption to existing subscribers. For the account-sharing freeloaders, perhaps a Spotify-style free subscription approach, but with full advertising exposure is a way of keeping one-third of the Netflix audience on their platform.

“Whichever model Netflix implements, expect it to come soon. Loss of customers and a falling share price will ensure the action is swift.”

Half Dome managing partner and head of growth, Joe Frazer, was also excited to see how Netflix navigated the rollout of ads.

“Will they follow the Hulu model of offering a lower priced subscription supported by ads? Or will they look to offer a fully ad supported model? Or something else entirely? You would suspect the Hulu blueprint would be the most likely,” he commented.

As a way of protecting positive user experiences, Ladmore advised limiting ad content, integrating smart targeting tech and data so ads are relevant and allowing accurate frequency capping. This is to avoid viewers seeing the same ad over and over again - a big frustration from BVOD viewers in Australia.

“Netflix should take the time to understand how we currently buy video in Australia, complement what the TV networks and BVOD platforms we buy from are doing and work closely with the IAB for standardisation and Oztam for consistent measurement,” Ladmore added.  

Likewise, Impress!ve CEO and founder, Robert Tadro, said Netflix’s first consideration should be its audience.  

“Netflix-Chill may one day be advertisement-Netflix-advertisement-chill. Protecting the Netflix experience is crucial to retaining subscribers and growing its base,” he commented. “As a subscriber platform, there is an expectation to create an ‘uninterrupted experience.’ Just like pay TV providers such as Foxtel blew us away back in the day – ad free. BMW’s takeover of Foxtel’s Game of Thrones series was a clean and effective pre- and post-roll example of how a brand can add to a viewing experience.”

UM chief strategy officer, Raj Gupta, urged caution on bringing advertising into the Netflix mix. "Netflix will need to be careful in the way the ad experience is integrated to maintain the value in the experience – its focus on consumer experience and volume of content has been something that has allowed the company to maintain a price premium in market," he said. "Any degradation of that experience will affect subscriptions negatively."

Brand demands

As to advertisers tapping into Netflix offerings should the opportunity arise, industry thought leaders were quick to highlight the importance of data and understanding the Netflix audience and customer base.

According to Gupta, the SVOD market has created a fragmentation of eyeballs and attention away from ad-funded content. “Advertising opportunities on Netflix would clearly allow our clients to recapture some of those lost eyeballs extending the option to build reach against high value audiences,” he said.

“Netflix at the end of Q3 2021 was estimated to have 33 per cent of the 19.4 million SVOD market in Australia, which is approx. 6.4 million subscriptions, meaning there is a question to how many eyeballs will be available in the advertiser funded platform in Australian if they make these changes. The value of these subscribers will be judged on their volume and the value of the attention generated in the experience Netflix creates with this option versus other video options open to advertisers.”

With "great power comes great responsibility", Tadro continued. "What access will advertisers have to tailor their message and communications?” he asked.

“Advertisers expect transparency when it comes to potential reach to justify their investment. Although streaming is far more advanced than its terrestrial predecessor, commercial television has had to up its game when it comes to providing viewing numbers for its streaming alternatives such as 9Now, 7Plus and so on.

“I expect any streaming platform, such as Netflix, looking to commercialise its offering to provide a level of insight or face poor uptake.” 

The ability to better understand the Netflix customer base will be invaluable to brands if they’re given access to the wealth of data that sits behind the platform, Barwell agreed.

“This will allow brands to be not only more contextually relevant but potentially explore new formats of brand storytelling,” he said. “Furthermore, the benefit of a premium platform, with a high attention audience, is a really attractive proposition for advertisers. Netflix needs to protect its space and ensure that it maintains its brand equity, by being selective about the partnerships and advertising opportunities it allows to emerge on the platform.”

Houston Group head of strategy, Allison Sims, pointed to Spotify’s approach as a solid marker for a streaming services provider to follow.

“Obviously, one of the risks is that more people than expected move to the ad-funded experience and advertising premiums can’t close the gap. This is a hard thing to wind back. So I understand the trepidation from a commercial standpoint,” she commented.

“Advertising absolutely changes the experience, which brings a number of considerations. If Netflix is to go down this path, it’s useful to implement a ‘premium’ ad model – custom, ownable formats. No ‘promotional junk’ just high-end cinematic ads, like the Superbowl. It could be a place for people to run their 60-second ads.”

There also needs to be ‘a quality lens’ over the content, Sims said, which may require approval from a panel. “Like when you go to the cinema, it’s on another level and becomes part of the experience itself,” she said.  

Alternatively, like her agency counterparts, Sims saw a partnership/sponsorship model as an attractive option, where presenting partners sponsor sections or series, for example. Tadro also advocated for going “beyond the spot”.

“Put your brand where users expect to see it. Push the boundaries. Sponsor a program, take over a night, follow an actor. Own a genre. Match your brand and products to similar content,” he said.  

“Netflix is a huge producer of content, so let’s weave a brand's message in and around the content. Streaming series these days have beautiful story arcs and I’d like to see brands create these arcs for themselves and align them to some of the world's greatest streaming content on offer from Netflix.”

Sims would also like to see Netflix doing a better job across its full content catalogue.

“People are fatigued by search – the ‘play me something’ is a great product innovation – but I do think that Netflix does need to explore how to promote the full catalogue / inspire people to try new things,” she said. “Find hidden gems. There is definitely an echo chamber that adds to the fatigue.”

This could well provide a further revenue diversification opportunity as well as fresh membership benefits. “Film and TV marketing needs to go deeper with narrative and creative development. Create new worlds that people can experience in different ways. Dive deeper into character backgrounds, diaries, text messages, TikTok/social profiles,” Sims added.

“With Bridgerton, for example: Imagine if you could go to a ball, dress up or watch parties. Create a more collective social experience around Netflix.

“I think Amazon has done a good job of building a multi-pronged offer that goes beyond the ‘show of the season’.”

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