Netflix’s share price plunged nearly 40% after its Q1 results when it shocked investors with a double whammy of news – subscribers fell for the first time in a decade and the streaming service said it is ready to show ads.
The advertising industry previously had mixed feelings about Netflix’s long-time insistence on staying ad-free because many consumers liked the viewing experience but it undermined the case for TV advertising – widely regarded as the most effective and emotional medium for brands.
While some investors may regard Netflix’s planned introduction of an ad-supported tier – probably in around 12 months’ time – as a sign of weakness, the prospect of advertisers being able to use Netflix’s rich audience data to target some of its 200 million subscribers is potentially exciting.
However, established ad-funded broadcasters and streamers may have reason to worry about a powerful, new entrant taking share.
So, what do top media buyers and analysts think? The Campaign team asked industry leaders across Asia, Europe and the United States.
Global president of business intelligence, Group M
Almost reflexively, marketers are excited by the prospects of an ad-supported Netflix. Many might presume it will help them reach vast numbers of elusive consumers with impactful messages on zeitgeist-influencing programming in relatively short order.
However, such presumptions would almost surely fall short of reality in the near-term. It remains unclear when an offering might be available, which countries ads will run in, who will subscribe, how will the company avoid cannibalizing its existing revenue base and whether or not the ad products will meet marketer expectations. There is also the matter of who will sell the ads, how campaigns will be managed among other details. Everything will surely be sorted out with time, but until then, any specific impact on Netflix and the advertising market is difficult to divine with precision.
On balance, the news is likely mixed for conventional broadcasters. On one hand, Netflix may sell billions of dollars in advertising that might otherwise have been sold to traditional TV networks. As well, other streaming services are likely to become more aggressive in the use of advertising on their offerings as well if they do not feel curtailed competitively by Netflix.
However, broadcasters will benefit if a significant share of subscribers don’t otherwise access conventional ad-supported TV and are exposed to ads via streaming services, because the incremental campaign reach the streamers would offer may help the broadly-defined medium to better satisfy reach and frequency goals advertisers set for themselves, at least relative to the alternatives.
There is bound to be huge excitement among advertisers and agencies at the thought of an ad-funded Netflix model, but there are many questions to be answered before we get ahead of ourselves. What format will this new model take? How will it be measured? Will pricing be competitive?
The market keeps getting increasingly competitive with ITVX, Amazon and more, all out to shake things up. I would hazard a guess that if you’re used to the ad-free version you probably won’t change your subscription, but this may be a great way to encourage new sign-ups and stem the decline in 16-34s reachable through advertising. From a consumer perspective, from where our thinking should always start, it will bring more choice, which is always a good thing.
But when it comes to Netflix, (and having spent Easter weekend binge watching two series of Bridgerton), there is really only one question with which so many of us are wrestling: Team Simon or Team Anthony?
Chief investment officer, Havas Media Group
The potential for an ad-funded lower entry cost VOD service from Netflix would be welcomed by most advertisers. As the migration of younger demographics’ viewing into AVOD and SVOD services continues unabated and there are continued advertiser challenges in modelling price elasticity in linear TV, the opportunity to tap into a new commercial supply to reach 16-34 audiences at a cost-effective price point alongside linear and established AVOD services is very attractive.
This potential move will undoubtedly make ripples in the UK TV market as the global streaming platforms will continue to exert pressure on the price of premium content and have a model to go head-to-head with established broadcaster VOD models.
The streaming subs market is always going to be the first area to be tested by the biting winds of economic uncertainty, so having a commercial model that can grow consumers from lower entry into an ad-free premium market makes sense and one that is well established in the audio market already.
With a potential change in the Netflix model a couple of years in the making it gives the industry enough time to engage in the right conversations to align on robust measurement of video audiences and effectiveness across both the linear and streaming ecosystem.
EVP, creative & media solutions, Kantar
An ad-funded Netflix would undoubtedly entice advertisers, who always like to try new channels and platforms. Key to their success will be achieving scale quickly – there will be an expectation of high reach.
There will also be new audiences to understand and target, whose profile will emerge over time. The other unknown is how effective Netflix will be as an ad platform, and that will rely on a test and learn approach. Advertisers will want full insights to justify their continued investment.
Client president, Media Group, Dentsu Singapore
Netflix is most likely going to have ad-free tiers (the existing ones) while adding on ad-supported ones. This will help it chart the next stage of its growth by unlocking mainstream audiences who are more price-conscious and might need to be more dynamic market-to-market, as we have seen with their India operations. This is somewhat similar to Spotify but will involve a high level of complexity given the nature of the streaming content.
VP & research director, Forrester
Consumer behaviour and preference has forced Netflix to reverse its long-time stance on advertising. The company can’t keep raising its subscription prices to solve its revenue challenges. In December, Forrester found 43% percent of US online adults who use a streaming service are concerned with how much they’re paying for all of the streaming services they subscribe to.
Netflix’s subscriber losses are a major wake-up call for Netflix which has previously held firm on subscriptions as its core business model. Simply put, subscription revenue alone is no longer a sure bet. Offering a lower-cost ad-supported tier as an option to consumers should have happened a year ago. But now Netflix is playing catch up to its competition.
Thematic analyst, GlobalData
Netflix is clearly losing dominance in the SVOD market. According to GlobalData, the streaming company’s market share in the US was 25%, and this will fall to 16% by 2026. It is clear that we are now post-peak stream as life goes back to normal.
Streaming services are either throwing money at the problem, chasing a dwindling number of subscribers, or (in Netflix’s case) cutting back on content spend, which was its USP. Streaming services need to adjust expectations, and improve their offerings to prevent further haemorrhaging of subscribers and to compete in an increasingly fragmented SVOD market.
UK & Ireland chief executive, IPG Mediabrands
In principle we would welcome the opportunity to advertise on Netflix, or indeed any other scaled, high quality streaming service. Increasing the supply of quality viewing to advertising should be welcomed if it meaningfully impacts the inflationary pressures we are currently experiencing in AV. This does assume only limited compromise to the viewing experience, the ability to target with precision and the availability of robust audience data.
Some of these comments were first published on Campaign Asia